Half Yearly Report

RNS Number : 5442P

JPMorgan US Smaller Co. IT

19 August 2014

 



LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN US SMALLER COMPANIES INVESTMENT TRUST PLC

UNAUDITED HALF YEAR RESULTS FOR THE SIX MONTHS ENDED
30TH JUNE 2014

Chairman's Statement

Performance

The performance of US small caps over the first six months of 2014, on the face of it, would appear to be disappointing, however, some consolidation was inevitable following the exceptional returns of 2013. US companies have also been going through a more muted return environment as described by Don San Jose in his Investment Manager's report in the Annual Report and Accounts. The strength of Sterling against the US Dollar had a further negative impact on our returns. The Net Asset Value ('NAV') fell by 0.4% in the six months to 30th June 2014 which compares with a fall of 0.2% in the Russell 2000 in sterling terms. Meanwhile the share price fell by 8.1% as our shares moved from a small premium at the start of the year to a discount of 4%.

Discount and Premium

It is disappointing to report that the shares, which were standing above NAV at the end of 2013, have recently moved to a small discount as at 30th June 2014. US smaller companies, however, are notoriously volatile and trying to align our share price movement with the change in the NAV is always going to be a challenge. This relationship is monitored on a daily basis by the Board and our professional advisors and, in order to help with the management of the discount, the authority to repurchase up to 14.99% of the Company's issued share capital was renewed at the AGM. This authority has recently been exercised and the Company has bought in shares to be held in Treasury.

The Board recognises the importance of keeping a tight discount and, through close monitoring, will try to exercise its best judgement in response to market circumstances.

Sub-division of shares

On 6th March 2014 the Company's ordinary shares were each sub-divided into ten ordinary shares. Shareholders hold the same proportionate interest in the Company following the completion of the share split. In addition, the rights attached to the new shares remained the same including, without limitation, the same voting, dividend and other rights. The Board believes that the share split reduced the Company's share price to a level where smaller sized dealings in the shares would be more efficient, hence increasing the attractiveness of the shares to potential buyers.

Succession Planning

As part of the Board's succession planning, Alan Kemp will be stepping down as Chairman of the Audit Committee at the end of the year and will be retiring from the Board in 2015. Alan has made a strong contribution to the Company and his vast experience, knowledge and input will be much missed. The Nomination and Remuneration Committee will be meeting in September to consider his successor on the Audit Committee as well as to plan for the future.

Alternative Investment Fund Managers' Directive ('AIFMD')

We are delighted to confirm that we now have all the arrangements in place to comply with the new regulation from the AIFMD. We have appointed JPMorgan Funds Limited (a division of JPMAM) as our Alternative Investment Fund Manager and Company Secretary to the Company, and BNY Mellon has been appointed as the Depositary.

Outlook

US small cap is, by its very nature, a volatile asset class and although the primary concern for investors should be domestic economic recovery, sell-offs in these stocks are just as likely to come from outside concerns such as events that are unfolding in the Middle East or eastern Europe. As we go through these periods in the market, we would expect the investment team's focus on balance sheet strength and intrinsic value to provide some protection to the Company's portfolio. 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 especially as the US economy has demonstrated its ability to create exciting growth prospects in the small cap sector.

Davina Walter

Chairman

19th August 2014

Investment Manager's Report

Market Review

US equities marched higher for the six month period, with the S&P 500 Index and the Russell 2000 Index adding 7.1% and 3.2% respectively in US dollar terms for the period.

Grabbing most of the economic headlines was the final estimate of a 2.9% decline in Q1 GDP, though investors largely identified the slowdown as somewhat of an outlier due to harsh winter weather rather than any inflection in the economic growth rate. This was supported by signs of re-acceleration in the US economy, with both macro data points and anecdotal evidence from a host of company management teams confirming the trend. One area of recent strength has been the housing market, as both existing and new home sales for May exceeded economists' forecasts. Existing home sales have now increased in two consecutive months following an earlier slump in which sales declined in seven of the eight months reported through March.

Profit expectations didn't move much. However, deal making appears to be coming back in a big way, with global mergers & acquisitions announcements in 2014 at the highest pace in several years. Interestingly the stock prices of both the target and the acquirer have been rising of late, underscoring the earnings enhancing nature of cash financed deals in a low interest rate environment. Meanwhile, interest rates stayed very low, with Treasury yields actually inching down during the period.

However, the attractive returns for the period don't provide a complete picture of market events. The divergence in performance between the large cap S&P 500 Index and the small cap Russell 2000 Index over the period was rooted in a sharp sell-off in small cap names which occurred in early March through mid-May. During this period, the Russell 2000 Index declined 9.3% in US dollar terms. Thankfully, smaller stocks rallied from then onwards. Sector returns within the Russell 2000 Index were surprising over the period. The outliers on the upside were energy and utilities. Utility names continue to garner investor attention for those seeking higher yields, while energy names rallied as crude oil prices responded to more unrest in the Middle East. While on the downside, consumer discretionary stocks struggled as investors questioned the ability of brick and mortar retailers to respond to the online threat and the challenges to the traditional retail business model.

Performance

The Company's net asset value returned -0.4% in total return terms over the first six months of 2014. The return was slightly behind that of its benchmark, the Russell 2000 Index, which returned -0.2% in sterling. In terms of the portfolio's performance, there was a positive contribution from our stock selection, however, it was not sufficient to overcome the negative impact from our sector allocation.

The portfolio benefited from strong stock selection in the financial services and producer durables sectors.

Within financial services our exposure to HFF and Zillow proved beneficial. HFF, a provider of commercial real estate and capital markets services, announced fourth-quarter earnings that were better than expected, as the company continues to take market share through headcount growth. We continue to like management's thoughtful approach to the business, balancing investments for headcount growth and share gains against their commitment to capital return. Online real-estate information provider Zillow has enjoyed a strong year with robust growth in its core premier agent business and a rental market that is making significant progress. The company continues to execute well and widen its competitive lead over its peers.

Our performance in the producer durables sector was aided by our positions in Knight Transportation and Waste Connections. Trucking concern Knight Transportation reported strong first-quarter earnings, driven by strong price increases resulting from improved freight demand against a backdrop of capacity constraints. Shares of Waste Connections, an integrated solid waste management services company, ended the period higher due to a strong earnings report for the first quarter that showed better than expected volume growth, revenues and cash flow generation. We continue to have conviction in the company because of its powerful business model, and its ability to generate best in class margins and free cash flow, along with its attractive valuation.

On a stock specific basis, our exposure to Patterson-UTI Energy also added value. The company, which provides onshore contract drilling services, reported fourth-quarter results that surpassed analyst expectations across the board. Increases in contract drilling day rates and a sequential decline in drilling costs helped drive results.

Overall, the portfolio's consumer discretionary and health care positioning detracted. Shares of Quiksilver declined after the designer and distributor of youth lifestyle apparel reported a weak first-quarter earnings report. Sales across all of its major wholesale channels declined, leading to a shift in strategy by management that was not well received by the market. We are evaluating the position in light of management's shift in strategy around price points and distribution, which increases execution risk at Quiksilver. Meanwhile, fellow teen clothing retailer American Eagle Outfitters also reported weaker than expected earnings due to a drop in same store sales. While conditions remain difficult, management has been getting more aggressive with operational initiatives, including store closures, omni-channel development, lead time reductions, and international expansion. These initiatives will take time to work, but should position the company for better profitability in the longer term.

Our health care performance was hindered by our exposure to MWI Veterinary Supply, a veterinary supply distributor. MWIV traded down sharply following disappointing fiscal second-quarter earnings despite slightly better than expected revenues. Nevertheless, we believe the company's long-term fundamentals remain attractive as it has meaningful organic and inorganic revenue opportunities that will lead to strong earnings per share growth over time.

On a stock specific basis, our position in Imperva also detracted from performance. The provider of network security solutions lagged on the back of a disappointing earnings report for the first quarter. Revenues missed expectations due to a slowdown in large deal activity driven by sales execution issues as well as intensifying competition. The company also revised guidance downward as management expects these issues to persist in the near term. We continue to hold a position as we think management is on the correct path to fixing its issues and the stock is undervalued.

The shape of the portfolio has not changed meaningfully over the last 12 months. We remain focused on finding companies with durable franchises, good management teams and stable earnings that trade at a discount to their intrinsic value. Our sector weights remain a by-product of our bottom-up investment analysis and our disciplined approach to portfolio construction. We continue to have significant exposure to the consumer discretionary, financial services and producer durables names and have maintained overweight positions in the consumer discretionary and producer durables sectors. However, we did trim some of our financials exposure, selling out of some financial names that have appreciated in an effort to take profits, control our sector bet and prudently manage risk in light of the higher valuations in the space. Health care continues to be an underweight exposure, although it has narrowed as we have gained further conviction in our holdings and found some new ideas in the space. We still remain underweight the technology sector as we are challenged to find companies that meet our investment criteria in this area, while we are underweight energy as we have taken some profits on strength.

The Company's level of gearing, at 4.2% as of 30th June 2014, is relatively unchanged from six months ago. As always, we will look to add or trim our gearing on an opportunistic basis.

Market Outlook

We continue to believe that US stocks are a reasonable investment, with strength in corporate profits, a low rate environment, and a sustainable economic expansion in the US, the main supports for keeping a constructive view. On profits, expectations for 2014 are holding firm at an 15% gain for the Russell 2000, though we think that level of profitability is probably a little on the high side. At the time of writing this letter, the second quarter earnings season has just begun and we believe small caps will need to deliver on their earnings expectations this quarter if the rally is to continue. Additionally, the current valuation of around 21x forward earnings for the Russell 2000 Index seems slightly elevated relative to historical norms.

Of course, there are potential risks to our outlook. Given May's higher than expected inflation readings, many investors fear the Fed could raise interest rates earlier than expected. While Fed Chair Janet Yellen talked down those concerns, continued strength in economic data and corresponding higher bond yields could reignite them. Meanwhile, with control of the US Congress uncertain and mid-term elections a few months away, policy risk could reappear as a source of volatility. In fact, more volatility is a certainty at some point; however we don't believe it will bring an end to the current cycle of profits growth nor seriously undermine the case for equity investing.

With expectations that the Fed's short-term interest rates are likely to remain on hold until mid 2015, economic growth gradually improving, and continued growth in corporate profits, we believe the near-term fundamentals for US equity markets are somewhat supportive.

We believe that stock selection and patient investing will be rewarded. We plan to remain disciplined with regards to our investment strategy, seeking high-quality franchises with a sustainable competitive advantage, run by capable management teams with a track record of success. Finally, we will buy stakes in these companies when we believe the assets are trading below their intrinsic value.

Don San Jose

Investment Manager

19th August 2014

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; 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 2013.

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 yearly financial report has been prepared in accordance with the Accounting Standards Board's Statement 'Half Yearly Financial Reports' 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 2014, 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

19th August 2014

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

Income Statement

for the six months ended 30th June 2014

	(Unaudited)			(Unaudited)			(Audited)
	Six months ended			Six months ended			Year ended
	30th June 2014			30th June 2013			31st December 2013
	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	-	(184)	(184)	-	15,560	15,560	-	23,204	23,204
Net foreign currency gains/(losses)	-	209	209	-	(470)	(470)	-	178	178
Income from investments	656	-	656	481	-	481	1,172	-	1,172
Gross return	656	25	681	481	15,090	15,571	1,172	23,382	24,554
Management fee	(56)	(505)	(561)	(45)	(407)	(452)	(96)	(866)	(962)
Other administrative expenses	(170)	-	(170)	(188)	-	(188)	(368)	-	(368)
Net return/(loss) on ordinary activities   before finance costs and taxation	430	(480)	(50)	248	14,683	14,931	708	22,516	23,224
Finance costs	(4)	(29)	(33)	(4)	(36)	(40)	(8)	(72)	(80)
Net return/(loss) on ordinary activities   before taxation	426	(509)	(83)	244	14,647	14,891	700	22,444	23,144
Taxation	(99)	-	(99)	(76)	-	(76)	(174)	-	(174)
Net return/(loss) on ordinary activities   after taxation	327	(509)	(182)	168	14,647	14,815	526	22,444	22,970
Return/(loss) per share1 (note 4)	0.58p	(0.90)p	(0.32)p	0.32p	28.37p	28.69p	1.00p	42.85p	43.85p

¹Comparative figures for the six months ended 30th June 2013 and the year ended 31st December 2013 have been restated following the sub-division of each existing ordinary share of 25p into ten ordinary shares of 2.5p each on 6th March 2014.

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	Share	redemption	Capital	Revenue
30th June 2014	capital	premium	reserve	reserves	reserve	Total
(Unaudited)	£'000	£'000	£'000	£'000	£'000	£'000
At 31st December 2013	1,366	4,550	1,851	81,553	(2,981)	86,339
Shares issued	58	3,391	-	-	-	3,449
Net (loss)/return on ordinary activities	-	-	-	(509)	327	(182)
Dividends appropriated in the period	-	-	-	(398)	-	(398)
At 30th June 2014	1,424	7,941	1,851	80,646	(2,654)	89,208
	Called up		Capital
Six months ended	share	Share	redemption	Capital	Revenue
30th June 2013	capital	premium	reserve	reserves	reserve	Total
(Unaudited)	£'000	£'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	73,756	(3,339)	73,559
	Called up		Capital
Year ended	share	Share	redemption	Capital	Revenue
31st December 2013	capital	premium	reserve	reserves	reserve	Total
(Audited)	£'000	£'000	£'000	£'000	£'000	£'000
At 31st December 2012	1,291	-	1,851	59,579	(3,507)	59,214
Shares issued	75	4,550	-	-	-	4,625
Net return on ordinary activities	-	-	-	22,444	526	22,970
Dividends appropriated in the year	-	-	-	(470)	-	(470)
At 31st December 2013	1,366	4,550	1,851	81,553	(2,981)	86,339

Balance Sheet

at 30th June 2014

	(Unaudited)	(Unaudited)	(Audited)
	30th June 2014	30th June 2013	31st December 2013
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	93,814	78,822	90,867
Investments in liquidity funds held at fair value   through profit or loss	2,072	655	1,381
Total investments	95,886	79,477	92,248
Current assets
Debtors	305	795	238
Cash and short term deposits	-	-	1
	305	795	239
Creditors: amounts falling due within one year1	(6,983)	(6,713)	(6,148)
Net current liabilities	(6,678)	(5,918)	(5,909)
Total assets less current liabilities	89,208	73,559	86,339
Net assets	89,208	73,559	86,339
Capital and reserves
Called up share capital	1,424	1,291	1,366
Share premium	7,941	-	4,550
Capital redemption reserve	1,851	1,851	1,851
Capital reserves	80,646	74,226	81,553
Revenue reserve	(2,654)	(3,809)	(2,981)
Shareholders' funds	89,208	73,559	86,339
Net asset value per share2 (note 5)	156.6p	142.5p	158.0p

¹At 30th June 2014, the Company had drawn down US$10 million on its loan facility with Scotiabank.

²Comparative figures for the six months ended 30th June 2013 and the year ended 31st December 2013 have been restated following the sub-division of each existing ordinary share of 25p into ten ordinary shares of 2.5p each on 6th March 2014.

Cash Flow Statement

for the six months ended 30th June 2014

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th June 2014	30th June 2013	31st December 2013
	£'000	£'000	£'000
Net cash outflow from operating activities (note 6)	(122)	(564)	(760)
Net cash outflow from returns on investments and   servicing of finance	(41)	(42)	(83)
Overseas tax recovered	16	5	5
Net cash outflow from capital expenditure and   financial investment	(3,020)	(441)	(4,921)
Management of liquid resources	(25)	-	1,633
Dividend paid	(398)	(470)	(470)
Net cash inflow from financing	3,574	-	4,625
(Decrease)/increase in cash for the period	(16)	(1,512)	29
Reconciliation of net cash flow to movement in   net (debt)/funds
Net cash movement	(16)	(1,512)	29
Management of liquid resources	25	-	(1,633)
Exchange movements	180	(470)	178
Changes in net funds/(debt) arising from cash flows	189	(1,982)	(1,426)
Net debt at the beginning of the period	(6,037)	(4,611)	(4,611)
Net debt at the end of the period	(5,848)	(6,593)	(6,037)
Represented by:
Cash and short term deposits	-	-	1
Debt falling due within one year	(5,848)	(6,593)	(6,038)
	(5,848)	(6,593)	(6,037)

Notes to the Accounts

for the six months ended 30th June 2014

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 2013 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 2013.

3.   Dividend

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th June 2014	30th June 2013	31st December 2013
	£'000	£'000	£'000
Final dividend paid in respect of the year ended   31st December 2013 of 0.7p1	398	470	470

      ¹Dividend rate has been restated following the sub-division of each existing ordinary share of 25p into 2.5p each on 6th March 2014.

      No interim dividend has been declared in respect of the six months ended 30th June 2014 (2013: Nil).

4.   (Loss)/return per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th June 2014	30th June 2013	31st December 2013
	£'000	£'000	£'000
Return/(loss) per share is based on the following:
Revenue return	327	168	526
Capital (loss)/return	(509)	14,647	22,444
Total (loss)/return	(182)	14,815	22,970
Weighted average number of shares in issue1	56,358,013	51,636,230	52,385,920
Revenue return per share	0.58p	0.32p	1.00p
Capital (loss)/return per share	(0.90)p	28.37p	42.85p
Total (loss)/return per share	(0.32)p	28.69p	43.85p

      ¹Comparative figures for the six months ended 30th June 2013 and the year ended 31st December 2013 have been restated following the sub-division of each existing ordinary share of 25p into ten ordinary shares of 2.5p each on 6th March 2014.

5.   Net asset value per share

      Net asset value per share is based on the net assets attributable to ordinary shareholders of £89,208,000 (30th June 2013: £73,559,000 and 31st December 2013: £86,339,000) and on the 56,970,928 (30th June 2013: 51,636,230 and 31st December 2013: 54,657,800) shares in issue at the period end. Comparative figures for the six months ended 30th June 2013 and the year ended 31st December 2013 have been restated following the sub-division of each existing ordinary share of 25p into ten ordinary shares of 2.5p each on 6th March 2014.

6.   Reconciliation of total (loss)/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 2014	30th June 2013	31st December 2013
	£'000	£'000	£'000
Net (loss)/return on ordinary activities before finance costs   and taxation	(50)	14,931	23,224
Less capital loss/(return) on ordinary activities before   finance costs and taxation	480	(14,683)	(22,516)
Decrease/(increase) in net debtors and accrued income	99	(64)	(176)
Decrease in accrued expenses	(34)	(31)	(5)
Management fee charged to capital	(505)	(407)	(866)
Overseas withholding tax	(112)	(81)	(192)
Performance fee paid	-	(229)	(229)
Net cash outflow from operating activities	(122)	(564)	(760)

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 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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