Half Year Results

RNS Number : 7653K

JPMorgan US Smaller Co. IT

24 August 2012

 



LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN US SMALLER COMPANIES INVESTMENT TRUST PLC

UNAUDITED HALF YEAR RESULTS

FOR THE SIX MONTHS ENDED 30TH JUNE 2012

Chairman's Statement

Performance

The strong start to 2012, as investors focussed on market fundamentals, soon gave way to more concerns in relation to the Eurozone and the lack of growth in some major economies. Given this background, I am pleased to report that the Investment Manager has performed well, producing positive returns over the period under review. In the six months to 30th June 2012 the Company's Net Asset Value ('NAV') rose by 8.0% which compares with a rise of 7.4% in our benchmark, the Russell 2000 in sterling terms. Frustratingly, the Company's share price failed to move in line with the NAV, as investors sat on the side-lines, which resulted in the discount to NAV widening.

Looking back over the reports for this stage of the year, to quote Sam Goldwyn it is 'déjà vu all over again' as US investors yet again worry about growth in the US, sovereign debt defaults and uncertainties surrounding Europe and the Euro.

Share Buybacks and Discount

At the AGM held in April 2012 the authority to repurchase up to 14.99% of the Company's issued share capital was renewed. Over the past six months to 30th June 2012 the Company did not repurchase any shares.

As I mentioned above, our discount to NAV drifted outside our long term target reaching 13.0% as at 30th June 2012. The daily management of the discount has proved challenging in the face of volatile markets, especially as our shares lack liquidity, and by actively buying in shares we will exacerbate the problem over the long term. Against the liquidity concern, however, the Board is keen that the return to shareholders should match the returns that are being achieved in the portfolio. Therefore, the Board will continue to monitor the discount to NAV closely and take action when appropriate.

Gearing

In April 2012 our revolving credit facility of $10 million with Scotiabank was renewed. As at 30th June 2012 it was fully drawn and the portfolio was 4% geared.

Regulatory Issues

As ever there are a number of regulatory changes on the horizon (AIFM, FATCA), and we are yet to know what impact any of these will have on the Company. However, the Board, together with JPMorgan Asset Management, will continue to monitor developments closely.

Board Succession Planning

In order to provide an orderly succession over time, the Board has decided to recruit an additional director. An executive search firm has been retained by the Company and the process is now well underway with a view to making an appointment before the end of the year.

Outlook

Over the short term, even the most optimistic of investors would have to concede that markets face strong headwinds. However, we consider that our Investment Manager's focus on balance sheet strength and intrinsic value should provide some protection in this environment. Longer term we believe that Glenn Gawronski and his team, through their disciplined investment process, will be able to exploit opportunities successfully that arise out of these markets.

Davina Walter

Chairman                                                                                                                                24th August 2012

Investment Manager's Report

Market Review

The first half of 2012 has passed, bearing a strangely similar path to those halves of 2010 and 2011. The Russell 2000 Index was up 7.4% in sterling terms for the six months to 30th June 2012, despite persisting worries that seem to have lingered for the past few years. The index peaked this year in late March, before diving 13% over the next two months. A strong 8% surge during June helped the index finish with a healthy gain for the first half. In both 2010 and 2011, the Russell 2000 Index peaked in late April, followed by declines that lasted through the mid-late summer months. The question now becomes whether the year to 31st December 2012 will mimic 2010's 27% gain, or 2011's 4% drop.

The macro economic environment continues to be dominated by negative headlines from Europe, ranging from sovereign debt issues to declining demand. The emerging markets and China, which had led the global economy for so long, have been slowing to more muted growth rates. The US economy, while a relative bright spot in recent times, is beginning to show signs that it is not immune from troubles in today's inter-connected world. The US presidential election and pending 'fiscal cliff' bring uncertainty to future tax rates and government spending levels. Despite facing all these risks, market participants managed to climb the wall of worry and drive the indices higher.

Investment Performance

For the six months ended 30th June 2012, the total return on net assets was +8.0%, representing roughly 60 basis points of outperformance relative to the benchmark index, the Russell 2000 Index, which rose 7.4% in sterling terms. The Company's outperformance was primarily due to superior stock selection in the consumer discretionary and materials & processing sectors, which was partially offset by sector underperformance in health care and producer durables.

Portfolio Positioning

Since the start of the year, we have increased our exposure to the financial services and producer durables sectors, adding to our pre-existing overweight positions in both sectors. We continue to reduce our exposure to consumer discretionary stocks, but remain overweight in the sector. Our health care weighting, where we have been underweight for some time, declined in the period. Likewise, 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 disciplined approach to portfolio construction. We adhere to a consistent investment strategy, 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 significant contributors to performance over the reporting period were Jarden Corporation, MWI Veterinary Supply and Interline Brands. Jarden, which provides a broad range of consumer products, contributed positively with a return of 41% in the period. The robust share appreciation reflects a shareholder-friendly decision to complete a $435 million tender offer for 12.3 million of its common shares, or 13% of outstanding shares. The tender price of $36 per share was 17% above the closing price on the day prior to announcement of the offer. MWI Veterinary Supply, which distributes animal products to veterinarians across the US, also produced a positive return of 55%. It continues to execute well, posting strong organic growth and raising its full year outlook twice during the first half of 2012. Finally, Interline Brands contributed positively with a return of 60% during the period. It distributes speciality maintenance, repair and operations products across the US. On 29th May 2012, the company announced it would be going private through a buyout by GS Capital Partners. The deal valued the company at $1.0 billion, or a 35% premium to the prior day's share price.

Over the six months to 30th June 2012, the significant detractors to performance were Patterson-UTI Energy and Allision Transmission. Patterson-UTI fell by 27% during the period. It provides land-based drilling operations in the Southwest US and western Canada and the decline reflects concerns over falling gas rig count and the company's exposure to pressure pumping, where margins are likely to decline, given supply/demand imbalances. Moreover, investors feared the company would not be able to generate an adequate return on invested capital given the aforementioned supply/demand imbalances and a robust capital expenditure programme. Allison Transmission, which manufactures fully-automatic transmissions for medium and heavy-duty commercial vehicles, medium and heavy tactical US military vehicles, and transit buses. completed its initial public offering at $23 per share on 14th March 2012, but ended the period down 24%. It reported solid results in its first quarter as a public company, but the shares drifted downwards over concerns about the global economy and the future industrywide production rate of heavy trucks.

Market Outlook

Notwithstanding a strong finish to the first half of 2012, investor sentiment remains subdued. The market has acknowledged a slowdown in economic activity around the world and a lack of clarity regarding European sovereign debt issues, but these unwelcome developments do not appear to be fully played out. It is unclear if the preference for stocks with stable earnings and dividends will remain in favour, or if the market will shift to a 'risk-on' posture. Treasury yields are at almost unimaginably low levels, suggesting that stocks look more attractive versus bonds. The pace of the US expansion has slowed, but cyclical areas of the US economy such as vehicle sales and housing starts appear to be lifting off trough levels. Furthermore, lower oil prices act as a tax cut for US consumers, which can help alleviate recessionary pressures. Corporate balance sheets remain strong, with management teams optimistic about the long-term and willing to invest once the macro economic and political headwinds subside.

As such, we believe that stock selection and patient investing will be rewarded. We plan to remain disciplined with regards to our investment strategy and will continue to buy stakes in companies at valuations that we believe are below their intrinsic value. Our sector weights will continue to reflect our bottom-up investment analysis and disciplined approach to portfolio construction.

Glenn Gawronski

Don San Jose

Investment Managers                                                                                                             24th August 2012

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 fall into the following broad categories: investment and strategy; market; accounting, legal and regulatory; corporate governance and shareholder relations; operational; foreign currency; 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 2011.

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 during the period.

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. 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 year financial report has been prepared in accordance with the Accounting Standards Board's Statement 'Half Yearly Financial Reports'; 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.

For and on behalf of the Board

Davina Walter

Chairman                                                                                                                                24th August 2012

For further information, please contact:

Lucy Dina

For and on behalf of

JPMorgan Asset Management (UK) 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

Income Statement

for the six months ended 30th June 2012

	(Unaudited)			(Unaudited)			(Audited)
	Six months ended			Six months ended			Year ended
	30th June 2012			30th June 2011			31st December 2011
	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	-	4,307	4,307	-	3,210	3,210	-	1,493	1,493
Net foreign currency gains/(losses)	-	72	72	-	(8)	(8)	-	(194)	(194)
Income from investments	331	-	331	280	-	280	719	-	719
Gross return	331	4,379	4,710	280	3,202	3,482	719	1,299	2,018
Management fee	(31)	(282)	(313)	(30)	(266)	(296)	(58)	(522)	(580)
Performance fee writeback/ (charge)	-	96	96	-	(39)	(39)	-	(348)	(348)
Other administrative expenses	(149)	-	(149)	(166)	-	(166)	(357)	-	(357)
Net return on ordinary activities
before finance costs and
taxation	151	4,193	4,344	84	2,897	2,981	304	429	733
Finance costs	(6)	(55)	(61)	(6)	(53)	(59)	(10)	(92)	(102)
Net return on ordinary activities
before taxation	145	4,138	4,283	78	2,844	2,922	294	337	631
Taxation	(49)	-	(49)	(41)	-	(41)	(107)	-	(107)
Net return on ordinary activities
after taxation	96	4,138	4,234	37	2,844	2,881	187	337	524
Return per share (note 3)	1.86p	80.14p	82.00p	0.70p	54.02p	54.72p	3.57p	6.42p	9.99p

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the period.

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
Six months ended	share	redemption	Capital	Revenue
30th June 2012	capital	reserve	reserves	reserve	Total
(Unaudited)	£'000	£'000	£'000	£'000	£'000
At 31st December 2011	1,291	1,851	53,648	(4,160)	52,630
Repurchase and cancellation of the Company's
own shares	-	-	(1)	-	(1)*
Net return on ordinary activities	-	-	4,138	96	4,234
At 30th June 2012	1,291	1,851	57,785	(4,064)	56,863
	Called up	Capital
Six months ended	share	redemption	Capital	Revenue
30th June 2011	capital	reserve	reserves	reserve	Total
(Unaudited)	£'000	£'000	£'000	£'000	£'000
At 31st December 2010	1,316	1,826	54,155	(4,347)	52,950
Net return on ordinary activities	-	-	2,844	37	2,881
At 30th June 2011	1,316	1,826	56,999	(4,310)	55,831
	Called up	Capital
Year ended	share	redemption	Capital	Revenue
31st December 2011	capital	reserve	reserves	reserve	Total
(Audited)	£'000	£'000	£'000	£'000	£'000
At 31st 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 31st December 2011	1,291	1,851	53,648	(4,160)	52,630

*Stamp duty of £885 (rounded up) for a share buyback on 16th December 2011.

Balance Sheet

at 30th June 2012

	(Unaudited)	(Unaudited)	(Audited)
	30th June 2012	30th June 2011	31st December 2011
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	59,070	60,348	55,241
Investments in liquidity funds held at fair value
through profit or loss	2,789	2,120	2,700
Total investments	61,859	62,468	57,941
Current assets
Debtors	1,152	272	126
Cash and short term deposits	516	1	1,655
	1,668	273	1,781
Creditors: amounts falling due within one year1	(6,547)	(6,852)	(6,828)
Net current liabilities	(4,879)	(6,579)	(5,047)
Total assets less current liabilities	56,980	55,889	52,894
Provisions for liabilities and charges	(117)	(58)	(264)
Net assets	56,863	55,831	52,630
Capital and reserves
Called up share capital	1,291	1,316	1,291
Capital redemption reserve	1,851	1,826	1,851
Capital reserves	57,785	56,999	53,648
Revenue reserve	(4,064)	(4,310)	(4,160)
Shareholders' funds	56,863	55,831	52,630
Net asset value per share (note 4)	1,101.2p	1,060.5p	1,019.2p

¹At 30th June 2012, the Company had drawn down US$10 million on its loan facility with Scotiabank.

Cash Flow Statement

for the six months ended 30th June 2012

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th June 2012	30th June 2011	31st December 2011
	£'000	£'000	£'000
Net cash outflow from operating
activities (note 5)	(417)	(379)	(497)
Net cash outflow from returns on investments
and servicing of finance	(60)	(53)	(94)
Net cash (outflow)/inflow from capital expenditure
and financial investment	(675)	(2,542)	96
Net cash (outflow)/inflow from financing	(1)	1,835	991
(Decrease)/increase in cash for the period	(1,153)	(1,139)	496
Reconciliation of net cash flow to movement in
net debt
Net cash movement	(1,153)	(1,139)	496
Loans drawn down in the period	-	(1,835)	(1,835)
Exchange movements	72	(8)	(194)
Changes in net debt arising from cash flows	(1,081)	(2,982)	(1,533)
Net debt at the beginning of the period	(4,779)	(3,246)	(3,246)
Net debt at the end of the period	(5,860)	(6,228)	(4,779)
Represented by:
Cash and short term deposits	516	1	1,655
Debt falling due within one year	(6,376)	(6,229)	(6,434)
	(5,860)	(6,228)	(4,779)

Notes to the Accounts

for the six months ended 30th June 2012

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 Auditor.

The figures and financial information for the year ended 31st December 2011 are extracted from the latest published accounts of the Company and do not constitute statutory accounts for that year. Those accounts have been delivered to the Registrar of Companies and included the report of the Auditor 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 accounts have been prepared in accordance with 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 in January 2009.

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

The accounting policies applied to these half year accounts are consistent with those applied in the accounts for the year ended 31st December 2011.

3.      Return per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th June 2012	30th June 2011	31st December 2011
	£'000	£'000	£'000
Return per share is based on the following:
Revenue return	96	37	187
Capital return	4,138	2,844	337
Total return	4,234	2,881	524
Weighted average number of shares in issue	5,163,623	5,264,610	5,245,193
Revenue return per share	1.86p	0.70p	3.57p
Capital return per share	80.14p	54.02p	6.42p
Total return per share	82.00p	54.72p	9.99p

4.      Net asset value per share

Net asset value per share is based on the net assets attributable to ordinary shareholders of £56,863,000 (30th June 2011: £55,831,000 and 31st December 2011: £52,630,000) and on the 5,163,623 (30th June 2011: 5,264,610 and 31st December 2011: 5,163,623) shares in issue at the period end.

5.      Reconciliation of total return on ordinary activities before finance costs and taxation to net cash outflow from operating activities

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th June 2012	30th June 2011	31st December 2011
	£'000	£'000	£'000
Total return on ordinary activities before finance
costs and taxation	4,344	2,981	733
Add back capital return before finance costs and taxation	(4,193)	(2,897)	(429)
Increase in net debtors and accrued income	(23)	(58)	(74)
Management fee charged to capital	(282)	(266)	(522)
Overseas withholding tax	(49)	(41)	(107)
Performance fee paid	(214)	(98)	(98)
Net cash outflow from operating activities	(417)	(379)	(497)

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

ENDS

A copy of the half year has been submitted to the National Storage Mechanism and will shortly be available for inspection at www.hemscott.com/nsm.do

The half year 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

 

 

IR FMGZRMDKGZZM