Half Yearly Report

RNS Number : 3035M

JPMorgan US Smaller Co. IT

22 August 2013

 



LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN US SMALLER COMPANIES INVESTMENT TRUST PLC

UNAUDITED HALF YEAR RESULTS

FOR THE SIX MONTHS ENDED 30TH JUNE 2013

Chairman's Statement

Performance

I am very pleased to report that US smaller companies provided strong returns to investors in the first six months of 2013. The Company generated a total return on net assets of 25.0% including dividends, which compares with an increase of 24.0% in the Russell 2000 Index in sterling terms. It has also been particularly pleasing to see a rise in the share price of 29.7% reflecting growing recognition of the investment manager's consistent investment performance.

Discount and premium management

At the recent AGM the authority to repurchase up to 14.99% of the Company's issued share capital was renewed, however, I am pleased to report that over the past six months to 30th June 2013 the Company did not have to resort to using this authority. In recent years I have commented about the daily management of the discount proving difficult and whilst that will always be the case, for the first time in many years the Company is seeing new shareholders on the register and the share price has more than matched the returns being achieved in the portfolio. Since the end of the reporting period the shares have moved to a premium to NAV and there has been sufficient demand for 144,877 new shares to be issued. Given the volatile nature of US smaller companies as an asset class, the Board will keep under constant review its discount and premium management policy.

Alternative Investment Fund Managers Directive ('AIFMD' or the 'Directive')

The final regulations for the AIFMD have now been published and as we move towards compliance we expect to enter into arrangements with our Manager, JPMAM, such that it will act as our Alternative Investment Fund Manager, at no additional cost. The process of appointing a Depositary, as required by the Directive, is underway.

Outlook

After such a strong start to the year it is inevitable to expect some setback in markets, especially as the Federal Reserve would seem to be pulling back on liquidity to markets following on from the comments made by Bernanke, Chairman of the Federal Reserve, on 22nd May. We do, however, believe that the investment manager's focus on balance sheet strength and intrinsic value will provide some protection to the portfolio and, on a positive note, there are growing signs that the economic recovery is on track. Longer term we believe Don and his team, through their disciplined investment process, will be able to exploit opportunities that arise out of these markets.

Davina Walter

Chairman                                                                                                                                    

22nd August 2013

Investment Manager's Report

Market Review

During the first half of 2013, the Russell 2000 Index increased 15.8% in US dollar terms. The increase occurred in fits and starts and could be characterised by a first quarter sprint and a second quarter grind. In the first three months of the year, the market dashed 12.4% higher as investors grew more confident in the sustainability of the economic recovery, underpinned by signs of healing in the housing sector, continued low interest rates, modest job growth and manageable inflation levels. In the second quarter, however the market showed some signs of fatigue, but nevertheless ground 3.1% higher and built on strong first quarter gains. The trajectory of the increase was not linear in the second quarter, however, as Federal Reserve Chairman Ben Bernanke introduced some volatility into the financial markets by signalling that monetary policy would soon become less accommodative, given a potential reduction in quantitative easing. This resulted in some equity market indigestion as investors had their confidence tested in the sustainability of the economic recovery and questioned whether the housing sector could continue to strengthen in light of rising interest rates.

After three solid years for equities, and with the Russell 2000 hitting fresh highs and trading at around 18 times earnings, we think investors' fears from 2009 have clearly subsided. While equities are hardly the screaming buy they were in 2009, the risk-rewards still seem preferable to other asset classes. In fact, the earnings yield on the Russell 2000 is around 5.5% (reflecting a P/E ratio of 18x), which continues to compare favourably to the return on other assets, as illustrated by the 2.5% yield on the 10-year US Treasury. Thus, investors, who are overweight cash and fixed income assets, appear to be re-risking their portfolios at the margins, anxious to participate in potential future upside.

Investment Performance

For the six months ended 30th June 2013, the total return on net assets was +25.0% in sterling terms, representing 100 basis points of outperformance relative to the benchmark index, the Russell 2000, which rose 24.0% in sterling terms. The Company's outperformance was primarily due to superior stock selection in the financial services and technology sectors, which was partially offset by sector underperformance in consumer discretionary and producer durables.

Portfolio Highlights

The significant contributors to performance over the reporting period were Zillow Inc. and Monotype Holdings. Zillow provides e-commerce services, including information about homes, real estate listings, and mortgages through a website and mobile applications. Zillow outperformed due to better than expected earnings results, as well as constructive economic data points on the US housing recovery. The management team continues to execute at a very high level, resulting in continued momentum in all of Zillow's important operating metrics. Management continues to thoughtfully build out their marketplace businesses, including mortgages, rentals, and home improvement, all of which should strengthen Zillow's brand over time. Monotype Holdings is a leading provider of text imaging solutions that enable the display and printing of high quality digital content. The stock was a strong performer in the period due to impressive earnings results and a strong 2013 revenue and EBITDA outlook. The company has been successfully expanding its footprint into markets adjacent to its core Printer OEM market, including imaging solutions for consumer electronic devices, as well as web font offerings for creative professionals. While the growth outlook for Monotype is strong, we are confident in the management team who remain committed to maintaining its prodigious 43% EBITDA margin and demonstrate a shareholder friendly approach to capital allocation, as evidenced by recent increases to the quarterly dividend.

Over the six months to 30th June 2013, the significant detractors to performance were Joy Global ('JOY') and American Eagle Outfitters ('AEO'). AEO retails men's and women's casual apparel, footwear, outerwear and accessories. The stock fell 9% during the first quarter, as it reported in-line 4Q12 financial results, but issued softer 1Q13 guidance and higher capital spending levels for 2013. We believe that AEO has a high quality management team, and that there was some negative impact from one-time weather issues this quarter that resulted in a higher level of store closures versus last year, and partially explains the weaker 1Q guidance. Moreover, AEO has a strong balance sheet, an active share repurchase program, and a relatively low valuation of 6x EBITDA, which provides a layer of downside protection. JOY manufactures and markets underground mining equipment and surface mining equipment. Though the company reported better than expected results in its first quarter, driven by modestly better revenue growth and solid cost controls, the stock fell 6% during the quarter and continued its slide in the second quarter. Despite management's willingness to return capital to shareholders in the intermediate term, the market seemed to shrug off the positives and focus on JOY's risks, namely the potential for its revenue/orders to be pressured by reduced capex spending by coal customers, particularly in the US and China markets. In mid-March, a few weeks after the earnings release, JOY announced the retirement of CEO Mike Sutherlin and named President Ted Doheny as Sutherlin's successor. We think this dampened the markets hopes that JOY would be acquired in the near-term and contributed negatively to the stock's performance. Currently, JOY trades at less than 6x EBITDA, so we are sticking with this position as we believe the company is undervalued at these levels.

Market Outlook

As always, economic growth is a key ingredient for a rising US equity market. In that regard, we would note that US employment is improving at a relatively steady clip, with the current unemployment rate now around 7.6%, down from 7.8% at the start of the year and 9.9% at the end of 2009. Similarly, the ISM index rebounded in June to 50.9 (indicating an expansion), bouncing back from the 49.0 reading in May and has generally been flashing positive/expansionary readings in five out of the last six months this year. Corporate balance sheets remain solid with cash at record levels, and management teams have been amenable to shareholder friendly actions such as share buybacks and dividend increases. With market valuations relatively full, we will stick to our investment process and continue to judge the investment merits of each individual company and stock. We believe stock selection remains critical at this juncture and we plan to be disciplined with regards to our investment strategy: identifying companies with a sustainable competitive advantage, durable business models, and solid management teams who have a track record of value creation. We will buy stakes in these 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.

Don San Jose

Investment Manager                                                                                                                          

22nd August 2013

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; discount; market; political and economic; 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 2012.

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. 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                                                                                                                                              

22nd August 2013

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 2013

	(Unaudited)			(Unaudited)			(Audited)
	Six months ended			Six months ended			Year ended
	30th June 2013			30th June 2012			31st December 2012
	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	-	15,560	15,560	-	4,307	4,307	-	6,306	6,306
Net foreign currency (losses)/gains	-	(470)	(470)	-	72	72	-	255	255
Income from investments	481	-	481	331	-	331	1,254	-	1,254
Other interest receivable and
similar income	-	-	-	-	-	-	1	-	1
Gross return	481	15,090	15,571	331	4,379	4,710	1,255	6,561	7,816
Management fee	(45)	(407)	(452)	(31)	(282)	(313)	(63)	(569)	(632)
Performance fee writeback	-	-	-	-	96	96	-	35	35
Other administrative expenses	(188)	-	(188)	(149)	-	(149)	(341)	-	(341)
Net return on ordinary activities
before finance costs and
taxation	248	14,683	14,931	151	4,193	4,344	851	6,027	6,878
Finance costs	(4)	(36)	(40)	(6)	(55)	(61)	(11)	(95)	(106)
Net return on ordinary activities
before taxation	244	14,647	14,891	145	4,138	4,283	840	5,932	6,772
Taxation	(76)	-	(76)	(49)	-	(49)	(187)	-	(187)
Net return on ordinary activities
after taxation	168	14,647	14,815	96	4,138	4,234	653	5,932	6,585
Return per share (note 4)	3.25p	283.66p	286.91p	1.86p	80.14p	82.00p	12.64p	114.88p	127.52p

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 2013	capital	reserve	reserves	reserve	Total
(Unaudited)	£'000	£'000	£'000	£'000	£'000
At 31st December 2012	1,291	1,851	59,579	(3,507)	59,214
Net return on ordinary activities	-	-	14,647	168	14,815
Dividends appropriated in the period	-	-	-	(470)	(470)
At 30th June 2013	1,291	1,851	74,226	(3,809)	73,559
	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
Year ended	share	redemption	Capital	Revenue
31st December 2012	capital	reserve	reserves	reserve	Total
(Audited)	£'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	-	-	5,932	653	6,585
At 31st December 2012	1,291	1,851	59,579	(3,507)	59,214

Balance Sheet

at 30th June 2013

	(Unaudited)	(Unaudited)	(Audited)
	30th June 2013	30th June 2012	31st December 2012
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	78,822	59,070	61,685
Investments in liquidity funds held at fair value
through profit or loss	655	2,789	2,803
Total investments	79,477	61,859	64,488
Current assets
Debtors	795	1,152	50
Cash and short term deposits	-	516	1,541
	795	1,668	1,591
Creditors: amounts falling due within one year1	(6,713)	(6,547)	(6,865)
Net current liabilities	(5,918)	(4,879)	(5,274)
Total assets less current liabilities	73,559	56,980	59,214
Provisions for liabilities and charges	-	(117)	-
Net assets	73,559	56,863	59,214
Capital and reserves
Called up share capital	1,291	1,291	1,291
Capital redemption reserve	1,851	1,851	1,851
Capital reserves	74,226	57,785	59,579
Revenue reserve	(3,809)	(4,064)	(3,507)
Shareholders' funds	73,559	56,863	59,214
Net asset value per share (note 5)	1,424.6p	1,101.2p	1,146.7p

¹At 30th June 2013, the Company had drawn down US$10 million on its loan facility with Scotiabank.

Cash Flow Statement

for the six months ended 30th June 2013

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th June 2013	30th June 2012	31st December 2012
	£'000	£'000	£'000
Net cash outflow from operating
activities (note 6)	(564)	(417)	(69)
Net cash outflow from returns on investments
and servicing of finance	(42)	(60)	(106)
Total tax recovered	5	-	-
Net cash (outflow)/inflow from capital expenditure
and financial investment	(441)	(675)	89
Dividend paid	(470)	-	-
Net cash outflow from financing	-	(1)	(1)
Decrease in cash for the period	(1,512)	(1,153)	(87)
Reconciliation of net cash flow to movement in
net debt
Net cash movement	(1,512)	(1,153)	(87)
Exchange movements	(470)	72	255
Changes in net debt arising from cash flows	(1,982)	(1,081)	168
Net debt at the beginning of the period	(4,611)	(4,779)	(4,779)
Net debt at the end of the period	(6,593)	(5,860)	(4,611)
Represented by:
Cash and short term deposits	-	516	1,541
Debt falling due within one year	(6,593)	(6,376)	(6,152)
	(6,593)	(5,860)	(4,611)

Notes to the Accounts

for the six months ended 30th June 2013

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 2012 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 2012.

3.   Dividend

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th June 2013	30th June 2012	31st December 2012
	£'000	£'000	£'000
Final dividend in respect of the year ended
31st December 2012	470	-	-

No interim dividend has been declared in respect of the six months ended 30th June 2013.

4.   Return per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th June 2013	30th June 2012	31st December 2012
	£'000	£'000	£'000
Return per share is based on the following:
Revenue return	168	96	653
Capital return	14,647	4,138	5,932
Total return	14,815	4,234	6,585
Weighted average number of shares in issue	5,163,623	5,163,623	5,163,623
Revenue return per share	3.25p	1.86p	12.64p
Capital return per share	283.66p	80.14p	114.88p
Total return per share	286.91p	82.00p	127.52p

5.   Net asset value per share

      Net asset value per share is based on the net assets attributable to ordinary shareholders of £73,559,000 (30th June 2012: £56,863,000 and 31st December 2012: £59,214,000) and on the 5,163,623 (30th June 2012: 5,163,623 and 31st December 2012: 5,163,623) shares in issue at the period end.

6.   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 2013	30th June 2012	31st December 2012
	£'000	£'000	£'000
Total return on ordinary activities before finance
costs and taxation	14,931	4,344	6,878
Less capital return on ordinary activities before finance
costs and taxation	(14,683)	(4,193)	(6,027)
(Increase)/decrease in net debtors and accrued income	(64)	(23)	50
Decrease in accrued expenses	(31)	-	-
Management fee charged to capital	(407)	(282)	(569)
Overseas withholding tax	(81)	(49)	(187)
Performance fee paid	(229)	(214)	(214)
Net cash outflow from operating activities	(564)	(417)	(69)

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.morningstar.co.uk/uk/NSM

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

 

 

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