Final Results

RNS Number : 3991H

JPMorgan Japan Smaller Co Tst PLC

19 June 2013

 



LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN JAPAN SMALLER COMPANIES TRUST PLC

FINAL RESULTS FOR THE YEAR ENDED 31ST MARCH 2013

The Directors of JPMorgan Japan Smaller Companies Trust plc announce the Company's results for the year ended 31st March 2013.

Chairman's Statement

Investment Performance

During the year to 31st March 2013, the Company's undiluted total return on net assets (or portfolio return) was 26.4%. This comfortably exceeded the return of the Company's benchmark, the S&P/Citigroup Japan Extended Market Index (Total Return Net), which rose by 17.2%, although it trailed slightly the peer group median, which increased by 28.0%, over the same period. The Company's diluted return on net assets, which assumes that all of the Subscription shares in issue were exercised at the rate of 174 pence per share and that all of the Treasury shares were re-issued in accordance with the Board's policy on the re-issuance of Treasury shares, was 25.2%. Over the same period, the Company's Ordinary share price rose by 24.5%, reflecting a modest widening of the discount to the diluted net asset value per share from 10.4% to 10.9%.

Review of Services Provided by the Manager

Your Board is pleased that the revised portfolio management arrangements put in place in 2012 have worked more effectively over the course of the year under review. The new investment management team, led by Shoichi Mizusawa, has outperformed the benchmark by 9.2% and has achieved this with a sensible, well thought out approach that has focussed on judicious stock picking and the identification of companies with the potential to grow and produce attractive absolute returns.

Your Board has again reviewed the performance of the Manager and has concluded that JPMAM remains the best option for the management of the Company's assets.

Gearing

The Company has a Japanese yen 2.0 billion credit facility with Scotiabank Europe PLC which gives the Investment Managers the ability to gear tactically. The facility is due to expire on 4th October 2013. The Board reviews the level of gearing at each Board meeting and has given the Investment Managers the flexibility to operate within the range of 90% to 125% invested. During the year the Company's gearing level ranged between 2.0% cash and 7.8% geared and at the time of writing was 10% geared.

Subscription Shares

On 5th March 2009 the Company issued 7,798,873 Subscription shares as a bonus issue to Ordinary shareholders on the basis of one Subscription share for every five Ordinary shares held on 3rd March 2009. Each Subscription share confers the right (but not the obligation) to subscribe for one Ordinary share at predetermined prices on any business day during the period from 1st April 2009 until 31st March 2014, after which the rights on the Subscription shares will lapse. From 1st April 2012 to 31st March 2013, 34,737 Subscription shares were exercised into Ordinary shares raising proceeds of £52,000.

Further details on the Subscription shares, including their exercise prices, the apportionments for capital gains tax purposes and how they may be exercised, can be found on the Company's website at www.jpmjapansmallercompanies.co.uk

Share Issues and Repurchases

The Company repurchased 374,500 Ordinary shares into Treasury during the year under review. The Company did not issue any shares from Treasury nor issue any new Ordinary shares during this period, other than Ordinary shares issued as a result of the exercise of Subscription shares.

Your Board believes that the ability to issue new Ordinary shares, repurchase Ordinary and Subscription shares for cancellation and to hold and reissue Ordinary shares from Treasury at a premium, is in the interests of shareholders in assisting the Company in managing any imbalance between the supply and demand for the Company's shares and in reducing the volatility of the discount. Accordingly, the Board will be seeking shareholders' approval to renew these authorities at this year's Annual General Meeting.

Board of Directors

In accordance with the Company's Articles of Association, Alan Clifton and Ben Grigsby, who have both served as Directors for longer than nine years, will retire at the forthcoming Annual General Meeting and seek re-appointment. The Nomination Committee has met to consider the attributes and contributions of each of the Directors and, following this review, recommends their reappointment.

In the course of the Board's year end review of its own performance and composition, John Gibbon made known his intention to stand down as a Director at this year's Annual General Meeting. It is with sadness that the Board bids farewell to John, who has been a Director and Audit Committee Chairman of this Company since 2003. His sound judgement and wise counsel will be greatly missed. Chris Russell will become Audit Committee Chairman on John's retirement and the Board will look to recruit a replacement for John over the coming months.

Annual General Meeting

This year's Annual General Meeting will be held at the Holborn Bars, 138-142 Holborn, London EC1N 2NQ on Tuesday 16th July 2013 at 10.00 a.m.

Outlook

Our Managers believe that the rally in Japanese equities since last year can be sustained. The emergence of strong political leadership, the changes in monetary and fiscal policy and the prospect of real economic reform are encouraging. Foreign and domestic institutions still have relatively low weightings in Japanese equities, while valuations are attractive compared with other equity markets. Furthermore, the general reduction in sell-side and buy-side research commitments to smaller companies in Japan over the last twenty years provides opportunities for our Managers, who have maintained the size and experience of their smaller company team, to exploit. Returns will continue to be volatile but there are good reasons to be optimistic for the year ahead.

Alan Clifton

Chairman                                                                                                                               19th June 2013

Investment Managers' Report

Over the year to 31 March 2013, the Company's net asset value rose by 25.2%, which compares favourably with the return from the benchmark index, the S&P/Citigroup Japan Extended Market Index which rose by 17.2%. This was the first year that your new management team has been responsible for the portfolio and we are pleased with the improvement in performance.

Market review

The main event, which caused the Japanese stock market to rally substantially, was the landslide victory for the Liberal Democratic Party (LDP) in the December election and the expectations arising from its manifesto promises.

The first half of the fiscal year saw mixed global economic data, further problems in the Eurozone, a continuation of yen strength and increased tensions between Japan and China. The December election substantially changed the outlook for Japan. The LDP, under the leadership of Shinzo Abe, won a decisive victory, with a pledge to introduce much more aggressive policies to revive the economy, including both fiscal and monetary measures. These are now dubbed 'Abenomics' and we outline his policies in greater detail below. One consequence of these changes has been a rapid weakening of the yen. From the beginning of October to the end of March, the yen depreciated from 78 to 94 against the US dollar.

Abenomics

There are three pillars to the Prime Minister Abe's policy initiatives.

1.  Structural reform: Abe aims to bring the economy to a sound, sustainable growth path through structural reforms. He has established an 'Industrial Competitiveness Council' whose task is to provide the prime minister with growth strategies. He has also committed to engage in TPP (Trans Pacific Partnership) trade negotiations. Most politicians have avoided the issue in the past and, as such, this is another piece of evidence that the Prime Minister is committed to painful reforms.

2.  Monetary policy: At the 3-4 April policy meeting, the Bank of Japan (BoJ) fired a 'bazooka', by adopting 'quantitative and qualitative monetary easing' that the Governor, Haruhiko Kuroda described as a 'new dimension in monetary easing'. This was the first policy meeting under the leadership of the new Governor and he surprised the market very positively with measures that comfortably exceeded the most bullish expectations. The key announcements from the BoJ have been:

     New monetary base target - the BoJ changed its operational target to the monetary base from the overnight call rate, such that the monetary base is projected to increase at an annual pace of JPY60-70 trillion. That compares to a 13.4 trillion increase in 2012 and 15.6 trillion in 2011. This is a major historical change in BoJ policy.

     Two year timeframe to hit inflation goal - the BoJ indicated that the 2% inflation target should be achieved in around 2 years; this is aggressive since Japan has not had headline inflation of 2% in over 20 years.

     More quantitative easing - the BoJ will increase JGB purchases to JPY50 trillion a year from the current JPY20 trillion a year.

     Purchases of Exchange Traded Funds (ETFs) and Real Estate Investment Trusts (REITs) - The BoJ will increase its annual purchases of ETFs and J-REITs.

3.  Fiscal policy: As structural reform will take time to impact the economy, the Prime Minister also announced a Y10 trillion stimulus package.

Portfolio review, performance and strategy

Throughout the fiscal year, we maintained a bias towards quality companies; namely, those with strong balance sheets, high returns on assets and equity, and sustainable (rather than cyclical) earnings growth. Following the December election, we have made changes to the portfolio. First, we raised the gearing on the Trust. At the same time, we have increased the exposure to economic-sensitive, domestic sectors such as real estate and retail. We also initiated positions in selective export stocks.

We believe that the primary beneficiaries of Abenomics lie in domestic sectors. The improved outlook for export companies thanks to the weaker yen will feed directly through to the domestic economy in the form of higher profits and, in turn, higher wages. Furthermore, the drive for inflation should force companies and individuals out of cash into investments and consumption. Real estate companies will benefit as the improved economic outlook pushes down vacancy rates and drives up rents. Eventually, we expect wages to rise as the economy improves, which should in turn increase demand for discretionary goods. We also have investments in companies that will benefit from the new government's plan to increase public works spending. We think that the changes in Japan are structural and long-term in nature and the Trust is positioned to take advantage of these.

Long-term structural trends are the other core pillar of the holdings. The percentage of exports from Japan to Asia has increased from 25% to 55% over the last 25 years. For example, Japanese car companies have a 95% market share in the nascent Indonesian auto market. Japanese companies are also global leaders in growth areas such as factory automation - as Chinese wages rise we expect factories to increasingly automate. There are long-term trends in the domestic economy as well. For instance, the percentage of shopping done on the internet is still very low by global standards but we see no reason why this low level should persist. The Trust invests in a number of internet stocks.

The attribution data above shows that the portfolio benefited from both good stock and sector selection during the financial year. The best contributions to outperformance came from JIN Company, a fashion wholesaler and retailer and Ship Healthcare Holdings, the medical equipment company. The Company employed gearing during the year and this was a positive contributor.

Outlook

We believe that Japan is on the cusp of meaningful reform and that there are reasons to believe the Japanese stock market rally can be sustained over the medium term for the following reasons:

Strong political leadership: After years of weak leadership, Japan now has a government and a prime minister with a large enough parliamentary mandate to push through substantial reforms. We believe that the prime minister is committed to the introduction of policies designed to help reflate the economy and also to structural reforms.

Changing inflation expectations: The end of deflation is likely to have a material impact on the way companies and households behave. Japan has been suffering from one of the highest real interest rates in the world due to falling prices. As and when real interest rates come down, the attractiveness of cash will decline relative to investments and consumption. Indeed, all we need is a change in inflation expectations. There are tentative signs, such as from department store sales and the number of visitors to apartment showrooms, that this change is already underway. We believe that wage increases are a necessary condition for ending deflation. The Abe government has emphasised the importance of rising nominal wages, and has decided to introduce tax breaks for private sector firms that increase their average nominal wage. In addition, nominal wages in the manufacturing sector have followed corporate profitability. If we are right and earnings improve strongly in the future, nominal wages are likely to follow a similar path.

Strong corporate earnings prospects: At the current exchange rate of around 100 JPY/USD, the outlook for Japanese companies is dramatically different from six months ago. Many Japanese exporters have worked very hard over the past years to maintain their global competitiveness under a continuously appreciating currency. As a result, we believe that there is a considerable likelihood that the market is underestimating the operational gearing of Japanese companies to a weaker yen.

Attractive valuations: Despite the rally since the fourth quarter of last year, Japan continues to offer attractive valuations relative to other markets. The TOPIX is still 40% below its 2007 peak prior to the Lehman crisis. Japan also offers some of the fastest earnings growth opportunities over the 2012-2014 period.

Conclusion

We are encouraged that the Company's performance for the fiscal year has improved from the disappointments of previous years. This has happened following the changes in the portfolio management team as well as the portfolio construction approach that we have implemented upon agreement with the Board. We also recognise that we have much work to do in order to establish the sustained long term performance that shareholders deserve. At JPMorgan we have a strong team based on the ground in Tokyo, conducting many company visits each year - around 2,400 company meetings in the last 12 months - to try to identify significant changes in sectors and companies. We expect this to be a source of continued improvement in future performance.

Shoichi Mizusawa-

Nicholas Weindling

Naohiro Ozawa

Investment Managers                                                                                                                  19th June 2013

Principal Risks

With the assistance of the Manager the Board has drawn up a risk matrix, which identifies the key risks to the Company. These key risks fall broadly under the following categories:

• Investment and Strategy: An inappropriate investment strategy, for example asset allocation or the level of gearing, may lead to underperformance against the Company's benchmark index and peer companies, resulting in the Company's shares trading on a wider discount. The Board manages these risks by an investment process designed to identify stocks with best prospects and by diversification of investments through its investment restrictions and guidelines which are monitored and reported on by the Manager. JPMAM provides the Directors with timely and accurate management information, including performance data and attribution analyses, revenue estimates, liquidity reports and shareholder analyses. The Board monitors the implementation and results of the investment process with the investment managers, who attend all Board meetings, and review data which shows statistical measures of the Company's risk profile. The investment manager employs the Company's gearing within a strategic range set by the Board. The Board holds a separate meeting devoted to strategy each year.

• Market: Market risk arises from uncertainty about the future prices of the Company's investments. It represents the potential loss that the Company might suffer through holding investments in the face of negative market movements. The Board considers asset allocation, stock selection and levels of gearing on a regular basis and has set investment restrictions and guidelines, which are monitored and reported on by JPMAM. The Board monitors the implementation and results of the investment process with the Manager.

• Accounting, Legal and Regulatory: In order to qualify as an investment trust, the Company must comply with Section 1158 of the Corporation Tax Act 2010 ('Section 1158'). Were the Company to breach Section 1158, it might lose investment trust status and, as a consequence, gains within the Company's portfolio would be subject to Capital Gains Tax. The Section 842 qualification criteria are continually monitored by JPMAM and the results reported to the Board each month. The Company must also comply with the provisions of the Companies Act 2006 and, as its shares are listed on the London Stock Exchange, the UKLA Listing Rules and Disclosure & Transparency Rules ('DTRs'). A breach of the Companies Act could result in the Company and/or the Directors being fined or the subject of criminal proceedings. Breach of the UKLA Listing Rules or the DTRs could result in the Company's shares being suspended from listing which in turn would breach Section 1158. The Board relies on the services of its Company Secretary, JPMAM to ensure compliance with the Companies Act and the UKLA Listing Rules and DTRs.

• Corporate Governance and Shareholder Relations: Details of the Company's compliance with Corporate Governance best practice, including information on relations with shareholders, are set out in the Corporate Governance section of the annual report.

• Operational: Disruption to, or failure of, JPMAM's accounting, dealing or payments systems or the custodian's records could prevent accurate reporting and monitoring of the Company's financial position. Details of how the Board monitors the services provided by JPMAM and its associates and the key elements designed to provide effective internal control are included within the Internal Control section of the Corporate Governance report.

• Financial: The financial risks faced by the Company include market risk (which comprises currency risk, interest rate risk and other price risk), liquidity risk and credit risk. Further details are disclosed in note 24 of the Company's Report & Accounts.

Related Parties Transactions

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

Directors' Responsibilities

The Directors each confirm to the best of their knowledge that:

a)         the financial statements have been prepared in accordance with applicable UK accounting standards, and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

b)         the Annual Report, to be published shortly, includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that they face.

For and on behalf of the Board

Alan Clifton

Chairman 19th June 2013

Income Statement

for the year ended 31st March 2013

			2013			2012
		Revenue	Capital	Total	Revenue	Capital	Total
		£'000	£'000	£'000	£'000	£'000	£'000
Gains on investments held at
fair value through profit or loss		-	17,176	17,176	-	936	936
Net foreign currency losses		-	(19)	(19)	-	(411)	(411)
Income from investments		1,261	-	1,261	1,295	-	1,295
Other interest receivable and
similar income		-	-	-	1	-	1
Gross return		1,261	17,157	18,418	1,296	525	1,821
Management fee		(708)	-	(708)	(873)	-	(873)
Other administrative expenses		(357)	-	(357)	(372)	-	(372)
Net return on ordinary activities
before finance costs and taxation		196	17,157	17,353	51	525	576
Finance costs		(93)	-	(93)	(124)	-	(124)
Net return/(loss) on ordinary activities
before taxation		103	17,157	17,260	(73)	525	452
Taxation		(89)	-	(89)	(91)	-	(91)
Net return on/(loss) ordinary activities
after taxation		14	17,157	17,171	(164)	525	361
Return/(loss) per Ordinary
share - undiluted (note 2)		0.04p	43.67p	43.71p	(0.42)p	1.33p	0.91p
Return/(loss) per Ordinary share - diluted (note 2)		0.04p	43.67p	43.71p	(0.42)p	1.34p	0.92p

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

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

for the year ended 31st March 2013

	Called up		Capital
	share	Share	redemption	Other	Capital	Revenue
	capital	premium	reserve	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 31st March 2011	4,058	710	1,794	314,823	(243,728)	(12,099)	65,558
Repurchase of shares into Treasury	-	-	-	(48)	-	-	(48)
Cancellation of shares in Treasury	(42)	-	42	-	-	-	-
Issue of Ordinary shares on exercise of
Subscription shares	1	6	-	-	-	-	7
Net return/(loss) on ordinary activities	-	-	-	-	525	(164)	361
At 31st March 2012	4,017	716	1,836	314,775	(243,203)	(12,263)	65,878
Repurchase of shares into Treasury	-	-	-	-	(565)	-	(565)
Issue of Ordinary shares on exercise of
Subscription shares	4	48	-	-	-	-	52
Net return on ordinary activities	-	-	-	-	17,157	14	17,171
At 31st March 2013	4,021	764	1,836	314,775	(226,611)	(12,249)	82,536

Balance Sheet

at 31st March 2013

		2013	2012
		£'000	£'000
Fixed assets
Investments held at fair value through profit or loss		88,488	69,273
Current assets
Debtors		596	1,490
Cash and short term deposits		1,239	554
		1,835	2,044
Creditors: amounts falling due within one year		(7,787)	(5,439)
Net current liabilities		(5,952)	(3,395)
Total assets less current liabilities		82,536	65,878
Net assets		82,536	65,878
Capital and reserves
Called up share capital		4,021	4,017
Share premium		764	716
Capital redemption reserve		1,836	1,836
Other reserve		314,775	314,775
Capital reserves		(226,611)	(243,203)
Revenue reserve		(12,249)	(12,263)
Total equity shareholders' funds		82,536	65,878
Net asset value per Ordinary share - undiluted (note 3)		211.2p	167.1p
Net asset value per Ordinary share - diluted (note 3)		205.4p	164.0p

The Company's registration number is 3916716

Cash Flow Statement

for the year ended 31st March 2013

		2013	2012
		£'000	£'000
Net cash inflow/(outflow) from operating activities		139	(59)
Returns on investments and servicing of finance
Interest paid		(96)	(125)
Net cash outflow from returns on investments and servicing
of finance		(96)	(125)
Capital expenditure and financial investment
Purchases of investments		(35,747)	(65,321)
Sales of investments		34,839	67,652
Other capital charges		(6)	(6)
Net cash (outflow)/inflow from capital expenditure and
financial investment		(914)	2,325
Net cash (outflow)/inflow before financing		(871)	2,141
Financing
Net drawdown/(repayment) of loans		2,243	(7,887)
Issue of Ordinary shares on exercise of Subscription shares		52	7
Repurchase of shares into Treasury		(358)	(48)
Net cash inflow/(outflow) from financing		1,937	(7,928)
Increase/(decrease) in cash in the year		1,066	(5,787)

Notes to the Accounts

for the year ended 31st March 2013

1.  Accounting policies

(a) Basis of accounting

     The accounts are prepared in accordance with the Companies Act 2006, 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 'SORP') issued by the AIC in January 2009. All of the Company's operations are of a continuing nature.

     The accounts have been prepared on a going concern basis under the historical cost convention, as modified by the revaluation of investments at fair value.

The accounting policies applied in these accounts are consistent with those applied in the accounts in the preceding year.

2. Return/(loss) per Ordinary share

	2013	2012
	£'000	£'000
Return/(loss) per Ordinary share is based on the following:
Revenue return/(loss)	14	(164)
Capital return	17,157	525
Total return	17,171	361
Weighted average number of Ordinary shares in issue during the year used
for the purpose of the undiluted calculation	39,289,157	39,446,389
Weighted average number of Ordinary shares in issue during the year used
for the purpose of the diluted calculation	39,289,157	39,134,213
Undiluted
Revenue return/(loss) per share	0.04p	(0.42)p
Capital return per share	43.67p	1.33p
Total return per share	43.71p	0.91p
Diluted
Revenue return/(loss) per share	0.04p	(0.42)p
Capital return per share	43.67p	1.34p
Total return per share	43.71p	0.92p

     The diluted return/(loss) per Ordinary share represents the return/(loss) on ordinary activities after taxation divided by the weighted average number of Ordinary shares in issue during the year as adjusted in accordance with the requirements of Financial Reporting Standard 22 'Earnings per share'.

3.  Net asset value per Ordinary share

	2013	2012
Undiluted
Ordinary shareholders funds (£'000)	82,536	65,878
Number of Ordinary shares in issue	39,081,638	39,421,401
Net asset value per Ordinary share	211.2p	167.1p
Diluted
Ordinary shareholders funds assuming exercise of dilutive Subscription shares and
reissuance of any dilutive Treasury shares (£'000)	95,060	76,510
Number of potential dilutive Ordinary shares in issue	46,279,296	46,653,796
Net asset value per Ordinary share	205.4p	164.0p

     The diluted net asset value per Ordinary share assumes that all outstanding dilutive Subscription shares were converted into Ordinary shares at the year end and all shares held in Treasury at the year end were reissued, where this has a dilutive effect. The Company policy on the reissuance of Treasury shares, where Treasury shares will only be reissued at a premium to net asset value per share. Hence, the shares held in Treasury at 31st March 2013 have no dilutive effect.

4. Status of Announcement

2012 Financial Information

The figures and financial information for 2012 are extracted from the published Annual Report and Accounts for the year ended 31st March 2012 and do not constitute the statutory accounts for that year. The Annual Report and Accounts has been delivered to the Registrar of Companies and included the Report of the Independent Auditors which was unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006.

2013 Financial Information

The figures and financial information for 2013 are extracted from the Annual Report and Accounts for the year ended 31st March 2013 and do not constitute the statutory accounts for the year. The Annual Report and Accounts includes the Report of the Independent Auditors which is unqualified and does not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. The Annual Report and Accounts will be delivered to the Registrar of Companies in due course. 

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 annual report will shortly be submitted to the National Storage Mechanism and will be available for inspection at www.morningstar.co.uk/uk/NSM

The annual report is also available on the Company's website at www.jpmjapansmallercompanies.co.uk where up to date information on the Company, including daily NAV and share prices, factsheets and portfolio information can also be found.

For further information please contact:

Andrew Norman

For and on behalf of

JPMorgan Asset Management (UK) Limited, Secretary - 020 7742 6000

19th June 2013

JPMORGAN ASSET MANAGEMENT (UK) LIMITED

 

END

 

 

FR UKSAROAANAAR