Half-year Report

RNS Number : 7670W

JPMorgan US Smaller Co. IT

22 August 2022

 

LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMorgan US Smaller Companies Investment Trust plc

Half Year Report & FINANCIAL STATEMENTS

for the six months ended 30th June 2022

Legal Entity Identifier: 549300MDD7SOXDMBN667

Information disclosed in accordance with the DTR 4.2.2

The Directors of JPMorgan US Smaller Companies Investment Trust plc announce the Company's results for the six months ended 30 June 2022.

CHAIRMAN'S STATEMENT

Performance

US stockmarkets, not unlike the vast majority of world markets, saw declines in the first six months of the year. Your company's benchmark, the Russell 2000 index, fell by 23.5% (in US dollar terms). However, as a result of the dollar's appreciation against sterling, this decline represented a fall of 14.7% in sterling terms. This compares with a fall of 14.2% in the Net Asset Value of your Company. The share price fell by 25.4%, resulting in a widening of the discount.

A fuller explanation of the performance is set out in the Investment Managers' report in the Half Year Report.

Premium and Discount to Net Asset Value

Having begun the half-year trading at a premium to Net Asset Value (NAV) of 1.1%, the Company's shares traded at a discount for much of the period, averaging a discount of 6.2% over the six months.

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.

Share Issuance and Repurchases

The Company's move from premium to discount is reflected in its share issuance and buyback behaviour over the six months period. In January 2022 the Company resold 125,000 shares from Treasury and issued 75,000 new ordinary shares when the Company was trading at a premium. In subsequent months, with the widening of the discount, the Company repurchased a total of 480,526 shares into Treasury. The Company has purchased an additional 55,000 shares into Treasury since the period end.

The Company's policy remains one of issuing shares at a premium to NAV, if demand is present, as such issuance enhances the NAV to shareholders as a whole, improves secondary market liquidity and prevents the emergence of an excessive short term spike in premium levels. At the same time, the Company remains willing to acquire shares when it is felt to be in the long term interests of shareholders.

Board Succession Planning

Mandy Donald was appointed on 2nd January 2022 and became Chairman of the Audit Committee following the retirement of Julia Le Blan at the Annual General Meeting in April. The Board now consists of five non-executive directors with a range of tenures from 7 months to 7 years. We believe the Board has good diversity and the correct balance of skills. The Board has set in place a well-structured succession plan.

Gearing

Having renewed the Company's $30 million gearing facility (with an accordion facility of $10 million) in October 2021 for two years, the Company continued to utilise its revolving credit facility to maintain a meaningful but modest level of gearing. $30 million is currently drawn down on the facility. The Company closed the six month period with a gearing level of 7.1% having averaged approximately 7.0% throughout the reporting period.

Outlook

Over the first six months of the year large cap stocks outperformed small cap, with value continuing to outperform growth. This was reflected in the Company's NAV and share price performance during the period.  Difficult conditions for small cap stocks are likely to be ongoing, with rising recession fears on the back of increasing interest rates. However, valuations relative to large cap stocks are attractive and the Investment Managers' conviction in the longer terms prospects of US small caps remains.

Therefore, notwithstanding the current headwinds, we continue to remain optimistic about the outlook for the Company and the Investment Managers' ability to find a wide range of innovative, fast growing and resilient companies at attractive valuations.

David Ross

Chairman    22nd August 2022

INVESTMENT MANAGERS' REPORT

Market Review

The US equity market saw its worst first half of the year since 1962, as sharp declines pushed the indices into bear market territory. In the first six months of 2022, the S&P 500 Index declined by 20% (in US dollar terms) as supply chain and COVID-19 worries eventually gave way to greater fears that as the Federal Reserve ('Fed') fights inflation, the economy will tip into recession.

A confluence of high inflation, fast-paced monetary tightening, elevated input costs and other supply chain constraints pressured the markets through several ups and downs throughout the period. Equity markets lost ground at the start of the year due to the war in Ukraine and high headline inflation. While heightened anticipation of a hawkish Fed action added to the market volatility, robust labor markets, promising consumer spending and healthy business activity even in a tough business environment provided a brief respite to the investors in March.

The markets resumed the sell-off in April as the first quarter GDP reading showed that the economy had contracted as a result of unceasing supply chain constraints and rising input prices and wage costs. Continued headwinds to corporate manufacturing and retail sales powered a volatile market in May, ultimately resulting in slow growth and the fall in manufacturing production by the end of June. While increased spending in pandemic affected areas is promising, the ability of the Fed to lead the economy into a soft landing combined with continued supply chain constraints and the highest inflation in over forty years has brought uncertainty to equity markets.

Large cap stocks, as represented by the S&P 500 Index, returned -20.0% (in US dollar terms), outperforming the small cap Russell 2000 Index, which returned -23.5%. Overall, value continued to outperform growth, as the Russell 3000 Value Index declined by 13.1%, while the Russell 3000 Growth Index declined by 28.2%.

Performance

The Portfolio's net asset value decreased by -14.2% in the first half of 2022. The Trust outperformed its benchmark, the Russell 2000 Index (Net), which fell by -14.7% in sterling terms in the face of a steep market decline. Stock selection was the primary driver of performance.

With regard to relative performance, the consumer discretionary and health care sectors contributed the most. Within health care, our overweight position in HealthEquity was one of the largest contributors to performance. HealthEquity provides technology that helps consumers and employers manage Health Savings Accounts (HSAs) and other consumer-directed benefits. The shares rallied as the company reported a better finish to FY22 with record HSA member growth. The company also provided FY23 guidance, which was in-line with expectations, and viewed by management as conservative. More recently, with the Fed commencing rate hikes for the first time in years, HealthEquity is poised to see a benefit as the company places custodial assets at higher yields. We took some profits on strength, but continue to like the stock.

Within consumer discretionary, our exposure to Driven Brands proved beneficial. Driven Brands is one of the largest operators of auto services in the US. The company reported a solid first quarter and beat consensus estimates, followed by a full year guidance increase on their second quarter call. Driven Brands benefitted from double-digit comps, and management noted that higher gas prices have not had an impact on consumer demand and pricing power. We continue to like the company due to its attractive valuations relative to other auto part retailers and the strength of the business.

Our exposure to WEX within industrials proved beneficial. WEX, a payment processing and technology solutions provider, posted solid earnings results for 4Q21 and has been benefiting from re-opening trends, as fleet and travel volumes rebounded. Moreover, WEX's fleet segment benefits from rising fuel prices, has been a positive in this macro environment. We view WEX as reasonably inexpensive with cyclical upside, so it remains a larger exposure for us despite recent outperformance.

On the other hand, our stock selection in utilities as well as sector allocation to energy detracted from performance. Energy was the best performing and only positive sector in the benchmark, up 17% (in US dollar terms) for the first half of the year. High oil prices exacerbated by geopolitical concerns and the continued lack of new supply caused a rally in the sector. We currently don't hold any energy names in our portfolio and this lack of exposure hindered our performance relative to the index. We struggle to find companies that meet our investment criteria as many small cap energy names lack financial discipline and are typically lower quality.

At the security level, our overweight in Q2 Holdings and exposure to Allegro Microsystems within the technology sector hurt performance. Q2 Holdings is a provider of digital banking software and other technology to regional/community financial institutions and fin-techs. The company performed in-line with other high-growth and low margin software stocks, which were pressured by rising rates. In mid-May, the stock surged on news that the company was evaluating alternatives after receiving takeover interest but gave back the gains in early June as offer prices were deemed too low. Allegro manufactures and markets integrated circuits for motion control and energy-efficient systems. Shares of the company fell as investors questioned the health of the global automotive market, which accounts for the majority of the company's revenue.

Portfolio Positioning

With regard to our portfolio positioning, we continue to focus on finding companies with durable franchises, good management teams and stable earnings that trade at a discount to intrinsic value. We continue to believe that smaller companies are worth investing in for long term investors as they include innovative companies that serve market niches and thereby can be a way to get in early on innovation.

This year, we have been trimming overvalued defensive names, despite the stability they have provided in a volatile market. We are also beginning to add to some cyclical names in the industrials, financials and consumer sectors, where valuations once again look attractive. We are also adding a bit to growthier names in technology and health care, as the selloff in these sectors have resulted in more reasonable valuations. Our largest absolute and relative weight remains in industrials.

On the other hand, our largest underweight remains in the energy sector. The underweight is a result of our lack of exposure to energy stocks as they do not meet our criteria for durable businesses with sustainable competitive advantages. Health care and real estate sectors are our next largest underweight sectors.

Market Outlook

We expect rising recession fears to continue to pose a challenging backdrop for US small cap stocks in the near term. However, with US small caps currently in a bear market, investor sentiment near all-time lows and valuations relative to large caps at historically attractive levels, we believe the longer term prospects for US small caps have become more compelling, and we have begun incrementally positioning for a market recovery. Inflation and other uncertainties, such as the tightening liquidity, lingering effects of COVID-19 on the continued supply chain constraints, and economic impacts of the war in Ukraine will be integral to investor sentiment moving forward.

While the economy has steadily recovered, we remain balanced and continue to monitor incremental risks that could represent headwinds for US stocks. Through the volatility, we maintain exposure to quality, focus on high conviction stocks, and take advantage of market dislocations for compelling stock selection opportunities.

Don San Jose

Jon Brachle

Dan Percella

Investment Managers    22nd August 2022

INTERIM MANAGEMENT REPORT

The Company is required to make the following disclosures in its Half Year Report:

Principal and Emerging Risks and Uncertainties

The principal risks and uncertainties faced by the Company fall into the following broad categories: underperformance; market and economic; discount control; shareholder demand; lost of investment team or portfolio manager; outsourcing; cyber crime; statutory and regulatory compliance; and climate change. In addition, the following were identified as emerging risks: political and economic; global pandemics; market risk; and ongoing shareholder demand. The Board continues to closely consider and monitor these risks. Information on each of these areas is given in the Strategic Report within the Annual Report and Financial Statements for the year ended 31st December 2021.

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

In accordance with The Financial Reporting Council's guidance on going concern and liquidity risk, including its COVID-19 guidance, the Directors have undertaken a rigorous review of the Company's ability to continue as a going concern. The Board has, in particular, considered the impact of heightened market volatility since the COVID-19 outbreak and more recently the Russian invasion of Ukraine, but does not believe the Company's going concern status is affected. The Company's assets, the vast majority of which are investments in quoted securities which are readily realisable, exceed its liabilities significantly under all stress test scenarios reviewed by the Board. Gearing levels and compliance with borrowing covenants are reviewed by the Board on a regular basis. Furthermore, the Directors are satisfied that the Company and its key third party service providers have in place appropriate business continuity plans. Accordingly, having assessed the principal and emerging risks and other matters, the Directors believe that there are no material uncertainties pertaining to the Company that would prevent its ability to continue in such operational existence for at least 12 months from the date of the approval of this half yearly financial report.

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 year 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 2022 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

David Ross

Chairman    22nd August 2022

STATEMENT OF COMPREHENSIVE INCOME

For the six months ended 30th June 2022

	(Unaudited)			(Unaudited)			(Audited)
	Six months ended			Six months ended			Year ended
	30th June 2022			30th June 2021			31st December 2021
	Revenue	Capital	Total	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
(Losses)/gains on investments
held at fair value through
profit or loss	-	(40,791)	(40,791)	-	26,175	26,175	-	44,039	44,039
Net foreign currency
(losses)/gains on cash
and loans	-	(2,028)	(2,028)	-	95	95	-	(284)	(284)
Income from investments	1,542	-	1,542	1,555	-	1,555	3,236	-	3,236
Interest receivable	14	-	14	16	-	16	30	-	30
Gross return/(loss)	1,556	(42,819)	(41,263)	1,571	26,270	27,841	3,266	43,755	47,021
Management fee	(209)	(834)	(1,043)	(222)	(888)	(1,110)	(468)	(1,873)	(2,341)
Other administrative expenses	(233)	-	(233)	(189)	-	(189)	(422)	-	(422)
Net return/(loss) before
finance costs and taxation	1,114	(43,653)	(42,539)	1,160	25,382	26,542	2,376	41,882	44,258
Finance costs	(31)	(123)	(154)	(27)	(101)	(128)	(51)	(201)	(252)
Net return/(loss) before
taxation	1,083	(43,776)	(42,693)	1,133	25,281	26,414	2,325	41,681	44,006
Taxation	(193)	-	(193)	(197)	-	(197)	(477)	-	(477)
Net return/(loss) after
taxation	890	(43,776)	(42,886)	936	25,281	26,217	1,848	41,681	43,529
Return/(loss) per share (note 3)	1.37p	(67.18)p	(65.81)p	1.48p	39.95p	41.43p	2.87p	64.81p	67.68p

STATEMENT OF CHANGES IN EQUITY

	Called up		Capital
	share	Share	redemption	Capital	Revenue
	capital	premium	reserve	reserves1	reserve1	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Six months ended 30th June 2022 (Unaudited)
At 31st December 2021	1,636	45,367	1,851	250,536	2,393	301,783
Issues of Ordinary shares	2	329	-	-	-	331
Repurchase of shares into Treasury	-	-	-	(1,880)	-	(1,880)
Shares reissued from Treasury	-	105	-	479	-	584
Block listing fees	-	-	-	(48)	-	(48)
Net (loss)/return for the period	-	-	-	(43,776)	890	(42,886)
Dividends paid in the period (note 4)	-	-	-	-	(1,626)	(1,626)
At 30th June 2022	1,638	45,801	1,851	205,311	1,657	256,258
Six months ended 30th June 2021 (Unaudited)
At 31st December 2020	1,499	21,970	1,851	209,377	2,142	236,839
Issue of Ordinary shares	137	23,354	-	-	-	23,491
Repurchase of shares into Treasury 2	-	-	-	(5)	-	(5)
Net return for the period	-	-	-	25,281	936	26,217
Dividends paid in the period (note 4)	-	-	-	-	(1,597)	(1,597)
At 30th June 2021	1,636	45,324	1,851	234,653	1,481	284,945
Year ended 31st December 2021 (Audited)
At 31st December 2020	1,499	21,970	1,851	209,377	2,142	236,839
Issue of Ordinary shares	137	23,354	-	-	-	23,491
Shares reissued from Treasury	-	43	-	417	-	460
Repurchase of shares into Treasury	-	-	-	(939)	-	(939)
Net return for the year	-	-	-	41,681	1,848	43,529
Dividends paid in the year (note 4)	-	-	-	-	(1,597)	(1,597)
At 31st December 2021	1,636	45,367	1,851	250,536	2,393	301,783

¹ These reserves form the distributable reserve of the Company and may be used to fund distributions to investors.

² This amount represents Stamp Duty Reserve Tax paid in 2021 in respect of repurchases made in 2020.

STATEMENT OF FINANCIAL POSITION

At 30th June 2022

	(Unaudited)	(Unaudited)	(Audited)
	30th June 2022	30th June 2021	31st December 2021
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	274,545	304,857	322,123
Current assets
Debtors	985	196	559
Cash and cash equivalents	6,920	2,481	3,057
	7,905	2,677	3,616
Current liabilities
Creditors: amounts falling due within one year1	(1,489)	(22,589)	(1,807)
Net current assets/( liabilities)	6,416	(19,912)	1,809
Total assets less current liabilities	280,961	284,945	323,932
Creditors: amounts falling due after one year	(24,703)	-	(22,149)
Net assets	256,258	284,945	301,783
Capital and reserves
Called up share capital	1,638	1,636	1,636
Share premium	45,801	45,324	45,367
Capital redemption reserve	1,851	1,851	1,851
Capital reserves	205,311	234,653	250,536
Revenue reserve	1,657	1,481	2,393
Total shareholders' funds	256,258	284,945	301,783
Net asset value per share (note 5)	394.1p	435.5p	462.1p

  ¹   At 30th June 2021, the Company had drawn down US$30.0m (GBP £21.7m equivalent) on its loan facility with Scotiabank which was repayable on 29th October 2021, this agreement was reviewed and renewed, with a new maturity date of 27th October 2023.

STATEMENT OF CASH FLOWS

For the six months ended 30th June 2022

	(Unaudited)	(Unaudited)	(Audited)
	30th June 2022	30th June 2021	31st December 2021
	£'000	£'000	£'000
Net cash outflow from operations before dividends and
interest	(1,349)	(1,294)	(2,710)
Dividends received	1,351	1,300	2,694
Interest received	14	16	30
Overseas tax recovered	40	50	50
Interest paid	(148)	(112)	(240)
Net cash outflow from operating activities	(92)	(40)	(176)
Purchases of investments	(41,300)	(66,028)	(105,707)
Sales of investments	47,369	36,753	77,565
Settlement of foreign currency contracts	15	1	5
Net cash inflow/(outflow) from investing activities	6,084	(29,274)	(28,137)
Dividend paid	(1,626)	(1,597)	(1,597)
Issue of Ordinary shares	331	23,891	23,891
Shares reissued from Treasury	584	-	460
Repurchase of shares into Treasury 1	(1,880)	(5)	(939)
Block listing fees	(48)	-	-
Draw down of bank loans	-	3,531	3,531
Net cash (outflow)/inflow from financing activities	(2,639)	25,820	25,346
Increase/(decrease) in cash and cash equivalents	3,353	(3,494)	(2,967)
Cash and cash equivalents at start of period/year	3,057	5,985	5,985
Exchange movements	510	(10)	39
Cash and cash equivalents at end of period/year	6,920	2,481	3,057
Increase/(decrease) in cash and cash equivalents	3,353	(3,494)	(2,967)
Cash and cash equivalents consist of:
Cash and short term deposits	7	3	27
Cash held in JPMorgan US Dollar Liquidity Fund	6,913	2,478	3,030
Total	6,920	2,481	3,057

¹   The 30th June 2021 amount represents Stamp Duty Reserve Tax paid in 2021 in respect of repurchases made in 2020.

NOTES TO THE FINANCIAL STATEMENTS

For the six months ended 30th June 2022

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 2021 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, including 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 have been prepared in accordance with the Companies Act 2006, FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' of the 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' (the revised 'SORP') issued by the Association of Investment Companies in April 2021.

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 2022.

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 2021.

3.  (Loss)/return per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th June 2022	30th June 2021	31st December 2021
	£'000	£'000	£'000
(Loss)/return per share is based on the following:
Revenue return	890	936	1,848
Capital (loss)/return	(43,776)	25,281	41,681
Total (loss)/return	(42,886)	26,217	43,529
Weighted average number of shares in issue	65,166,032	63,281,564	64,314,208
Revenue return per share	1.37p	1.48p	2.87p
Capital (loss)/return per share	(67.18)p	39.95p	64.81p
Total (loss)/return per share	(65.81)p	41.43p	67.68p

4.  Dividends paid

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th June 2022	30th June 2021	31st December 2021
	£'000	£'000	£'000
Final dividend in respect of the year ended 31st December 2021
of 2.5p (2020: 2.5p)	1,626	1,597	1,597
Total dividends paid in the period/year	1,626	1,597	1,597

The dividend paid in the period/year has been funded from the revenue earnings.

5.   Net asset value per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th June 2022	30th June 2021	31st December 2021
	£'000	£'000	£'000
Net assets (£'000)	256,258	284,945	301,783
Number of shares in issue at period/year end	65,025,739	65,431,265	65,306,265
Net asset value per share	394.1p	435.5p	462.1p

JPMORGAN FUNDS LIMITED

22nd August 2022

For further information, please contact:

Lucy Dina

For and on behalf of

JPMorgan Funds Limited

020 7742 4000

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.

ENDS

A copy of the 2022 Half Year Report will shortly be submitted to the FCA's National Storage Mechanism and will be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism

The 2022 Half Year Report will 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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