Half-year Report

RNS Number : 8231W

JPMorgan US Smaller Co. IT

21 August 2020

 

LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMorgan US Smaller Companies Investment Trust plc

UNAUDITED Half Year RESULTS

for the six months ended 30th June 2020

Legal Entity Identifier :   549300MDD7SOXDMBN667

Information disclosed in accordance with the DTR 4.1.3

The Directors of JPMorgan US Smaller Companies Investment Trust plc announce the Company's results for the six months ended 30th June 2020.

CHAIRMAN'S STATEMENT

Performance

This is my first communication to shareholders since taking over as Chairman, during a time of both volatility and weakness in global stockmarkets. Over the six month period ended 30th June, your Company's total return on net assets was -4.9% (with net dividends re-invested) which outperformed our benchmark the Russell 2000 index which delivered -6.8% (in sterling terms). As a result of the widening of the discount to Net Asset Value the total return to shareholders was -14.3%.

This NAV outperformance relative to the benchmark index is explained in the Investment Managers' Report which provides a detailed commentary on the portfolio positioning and the outlook for investing in US small cap companies.

Discount and Premium

During the six month period to 30th June 2020 the Trust's share price (with dividend re-invested) declined by 14.3% compared to a decline of 4.9% in NAV; this resulted in the discount to NAV at year end moving from a premium of 2.6% to a discount of 7.6%. The relationship between our share price and the NAV is monitored on a daily basis by the Board and our professional advisers, and to help with the management of the discount we have in place the authority to repurchase up to 14.99% of the Company's issued share capital. Although, as has been written in the past, aligning our share price movement with the change in the NAV is always going to be a challenge as it is more art than science, the Board will continue to be proactive on this issue. The authority to repurchase shares has been used during the first six months of 2020 and a total of 243,100 shares have been purchased into Treasury. The Company has purchased an additional 60,000 shares into Treasury since the period end.

Gearing

In April 2019 our revolving credit facility with Scotiabank was renewed at US$25 million with an option to draw a further US$10 million. During November 2019 the Company's revolving line of credit was renewed on the same terms. As at 30th June 2020 US$25 million was drawn and the portfolio was 5.1% geared. This facility matures in November 2020 and the Board will consider renewing the gearing facility at this point.

The investment managers employ the Company's gearing tactically, within a strategic range set by the Board.

Board Succession Planning

Following the retirement of Davina Walter at the Annual General Meeting in May, the Board now consists of five non-executive directors with a range of tenures from 2 to 8 years. We believe the Board has good diversity and the correct balance of skills, and two directors have been appointed in 2019. The Board has set in place a well-structured succession plan.

Audit Tender

Following a recent competitive tender overseen by the Audit Committee, the Board announces its decision to appoint BDO LLP as Auditor for the year ending 31st December 2020. The decision to conduct an audit tender at this time was because the Company is managing Auditor transition and Board succession and is therefore keen to have the new Auditor working on the 2020 audit.

A letter has been sent to shareholders of the Company today pursuant to Section 520(2) of the Companies Act 2006. The letter is for information only and relates to the statutory statement received from Grant Thornton LLP in connection with its ceasing to be the Company's auditor with effect from 18th August 2020

Outlook

The first half of 2020 has been dominated by the COVID-19 pandemic which has had a tragic effect on the lives of many. I'm sure I don't need to remind shareholders of volatility seen in markets since the COVID threat began to be appreciated by investors.

The extent to which markets have recovered since the lows reached in March has surprised many, with the S&P 500 Index down a mere 4% over the six months to 30th June 2020 raising fears that markets may have risen too far too fast. However, the market for smaller US companies as measured by our benchmark has lagged this rise abating some fears of extended valuations. The continued rise in COVID cases in the US combined with the forthcoming election and rising tensions with China means we can expect volatile market conditions to continue.

Regardless of these shorter terms concerns, we continue to find a wide range of innovative, fast growing and resilient companies in which to invest and while we cannot predict short term price movements, we are confident that these offer exciting investment opportunities to those with patience.

David Ross

Chairman         21st August 2020

INVESTMENT MANAGERS' REPORT

Market Review

After a strong close to 2019, a strong US economic backdrop propelled stocks higher in the first several weeks of 2020, despite the onset of the COVID-19 virus in China. As virus infections accelerated outside of China in late February, the Russell 2000 entered its fastest bear market in history by declining 35.9%, in sterling terms, in less than a month. As stay-at-home orders were issued, economic activity ground to a halt, which weighed especially hard on cyclical stocks and companies with high financial leverage.

The Russell 2000 bottomed on March 18th when it became clear a large fiscal stimulus package and significant monetary easing would cushion the blow to the economy. From the market bottom through the end of June, the Russell 2000 rallied 39.1%, leaving the index down 6.8% (in sterling terms) for the first half of 2020. While many economic indicators, for both businesses and consumers, hit multi-decade lows in March and April, most have recovered strongly in the subsequent months. Evidence of a 'V-shaped' recovery, along with optimism around vaccines and treatments for COVID-19, drove the strong stock market recovery.

In terms of style, growth outperformed value, and dramatically so as many growth companies were viewed as more defensive during this period, while many value stocks fall into industries hardest hit by the pandemic. With regard to market capitalisation, large cap stocks outperformed their small cap peers. Small cap stocks disproportionately took the brunt of the decline, as recessionary fears and high unemployment took centre stage.

Performance

The Company's net asset value decreased by 4.9% (in sterling terms) for the first six months of 2020. The trust outperformed the benchmark, the Russell 2000 Index (Net), by 1.9% in sterling terms. The outperformance was driven by stock selection. The portfolio's gearing detracted from the Company's performance during the period.

With regard to relative performance, stock selection in the consumer discretionary and producer durables sectors added the most to relative performance.

Within consumer discretionary, our exposure to wholesale swimming pool supplies distributor, Pool Corp. was the top contributor to performance. The shares outperformed, as the company has a defensive business model where over 60% of revenue is recurring in the form of filters, chemicals, and pumps to keep pools operational. The company also has a strong balance sheet, something that was heavily rewarded during this time. Management also provided a positive business update in May, noting that top-line trends have improved since their 2020 1Q earnings call in late April. Management attributed the improvement to both stay-at-home orders driving increased usage of residential pools as well as recent easing of restrictions enabling contractors to resume work on healthy backlogs for pool construction and renovations.

Also in the consumer discretionary sector, our overweight position in BJ's Wholesale Club was a material performance contributor. The warehouse club has been a prime beneficiary of the COVID-19 pandemic as consumers stock up on food and other household essentials. The company reported very strong earnings in May amid high expectations. Membership was up 40% year over year along with record free cash flow generation. This should continue to drive long term growth and we view the business as more durable and defensive in a recessionary environment or if there is a COVID-19 relapse.

Among individual names, our exposure to CoreLogic within producer durables proved beneficial. CoreLogic provides consumer, financial, and property information and analytics to businesses and governments to assist in decision-making and forecasting. The outperformance was driven both by strong fundamentals given low interest rates and high mortgage refinancing activity, as well as an unsolicited bid to acquire the company by an investor group led by Bill Foley. Given Foley's strong track record of value creation in this space, shares continued to move above the initial bid.

On the other hand, our stock selection in consumer staples and sector allocation to health care weighed on relative performance.

Our overweight position in Performance Food Group within consumer staples was among the top detractors. The foodservice distributor operates in a highly attractive industry that normally produces consistent stable cash flow throughout economic cycles. However, their primary customers include restaurants, theatres, retail, and hospitality, which have all experienced significant declines in their businesses due to the pandemic. The company also has higher leverage due to their recent acquisition of Reinhart. Nonetheless, we still like the company long term as it has a strong competitive position and a veteran CEO that has a proven record from both an operations and capital allocation standpoint. In late June, the company gave an update on sales trends, which have materially improved off of the March bottom.

In health care, our large underweight in the sector, primarily driven by our lack of exposure to biotechnology stocks hurt performance. Contrary to previous market sell offs, the factors that usually work did not work as well or at all in some cases. Lower quality, loss making, and higher beta companies outperformed. These traits are common in the biotechnology sector. These companies also tend to have little to no debt and an emphasis on clean balance sheets was rewarded.

At the security level, our overweight position in Patterson UTI Energy was the largest detractor for the period. With oil prices having collapsed amid short term demand weakness due to COVID-19 and a globally weaker supply-demand balance with the Russia-Saudi Arabia price war, shares were down sharply. Given fundamental weakness, we exited the position.

Portfolio Positioning

With regard to our portfolio positioning, not much has changed as we continue to focus on finding companies with durable franchises, good management teams and stable earnings that trade at a discount to intrinsic value. However, we have been able to capitalise on the market volatility and upgrade the portfolio's quality at more attractive valuations. We added 14 new positions to the portfolio in the first half of 2020, which compares to 13 new positions for the entirety of 2019. Most of these new positions are companies that we have long admired, but had not bought due to elevated valuations and market capitalisation constraints. We have also used short term bounces in the market to trim or exit lower conviction names. We want to position the portfolio for the long term and have exposure to companies that can withstand the duration of this pandemic and emerge stronger once it's over. Similar to the previous year, our main allocations are in the financial services, producer durables and consumer discretionary sectors, which make up close to 60% of the overall portfolio's allocation.

On a relative basis, our largest overweights can be found in the producer durables and consumer discretionary sectors. On the other hand, our largest relative underweight remains in the health care space due to a lack of exposure to biotechnology stocks. We have also eliminated all of our direct energy exposure in the portfolio, causing it to be our second largest underweight, as we feel there are better areas to allocate capital given the many uncertain macro risks affecting the sector. The next largest underweight is in technology as this remains an area where we have had a difficult time finding opportunities that meet our quality and valuation criteria.

Market Outlook

While we believe the economy will eventually recover, we believe a higher-than-average period of uncertainty will persist until there is a viable cure for COVID-19. Through the volatility, we continue to increase our exposure to quality, focus on high conviction stocks, and take advantage of market dislocations for compelling stock selection opportunities.

We continue to focus on the fundamentals of the economy and on company earnings. We estimate negative earnings growth for 2020 before a rebound in 2021, though we have low conviction in the magnitude of a potential rebound. We expect investor sentiment to remain subject to news regarding COVID-19 vaccines as well as the trajectory of key economic indicators, including employment. The upcoming US presidential election has the potential to add another layer of uncertainty.

Don San Jose

Dan Percella

Jon Brachle

Investment Managers     21st August 2020

INTERIM MANAGEMENT REPORT

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

Principal and Emerging Risks and Uncertainties

During 2020, the emergence of the virus COVID-19 (Coronavirus) has created significant uncertainty for markets, and therefore risk to the value of investments and volatility. Other than this, the principal risks and uncertainties faced by the Company fall into the following broad categories: investment and strategy; loss of investment team or investment managers; discount; market; political and economic; accounting, legal and regulatory; corporate governance and shareholder relations; operational; cybercrime; foreign currency; going concern; and financial. Information on each of these areas is given in the Business Review within the Annual Report and Financial Statements for the year ended 31st December 2019.

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, and the actual and potential economic and operational impact of Covid-19, 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 and, more specifically, that there are no material uncertainties pertaining to the Company that would prevent its ability to continue in such operational existence for at least 12 months from the date of the approval of this half yearly financial report. In reaching that view, the Directors have considered the impact of the current Covid-19 pandemic on the Company's financial and operational position. 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 FRS 104 'Interim Financial Reporting' and gives a true and fair view of the state of affairs of the Company, and of the assets, liabilities, financial position and net return of the Company as at 30th June 2020 as required by the UK Listing Authority Disclosure and Transparency Rules 4.2.4R; and

(ii)  the interim management report includes a fair review of the information required by 4.2.7R and 4.2.8R of the UK Listing Authority Disclosure and Transparency Rules.

In order to provide these confirmations, and in preparing these financial statements, the Directors are required to:

• select suitable accounting policies and then apply them consistently;

• make judgements and accounting estimates that are reasonable and prudent;

• state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business;

and the Directors confirm that they have done so.

For and on behalf of the Board

David Ross

Chairman     21st August 2020

STATEMENT OF COMPREHENSIVE INCOME

FOR THE SIX MONTHS ENDED 30TH JUNE 2020

	(Unaudited)			(Unaudited)			(Audited)
	Six months ended			Six months ended			Year ended
	30th June 2020			30th June 2019			31st December 2019
	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	-	(9,624)	(9,624)	-	33,706	33,706	-	40,506	40,506
Net foreign currency
(losses)/gains on cash and
loans	-	(851)	(851)	-	(77)	(77)	-	492	492
Income from investments	1,458	-	1,458	1,451	-	1,451	2,828	-	2,828
Interest receivable	55	-	55	98	-	98	195	-	195
Gross return/(loss)	1,513	(10,475)	(8,962)	1,549	33,629	35,178	3,023	40,998	44,021
Management fee	(160)	(639)	(799)	(190)	(761)	(951)	(356)	(1,425)	(1,781)
Other administrative expenses	(201)	-	(201)	(263)	-	(263)	(521)	-	(521)
Net return/(loss) before
finance costs and taxation	1,152	(11,114)	(9,962)	1,096	32,868	33,964	2,146	39,573	41,719
Finance costs	(37)	(150)	(187)	(52)	(203)	(255)	(100)	(398)	(498)
Net return/(loss) before
taxation	1,115	(11,264)	(10,149)	1,044	32,665	33,709	2,046	39,175	41,221
Taxation	(191)	-	(191)	(222)	-	(222)	(456)	-	(456)
Net return/(loss) after
taxation	924	(11,264)	(10,340)	822	32,665	33,487	1,590	39,175	40,765
Return/(loss) per share (note 3)	1.58p	(19.23)p	(17.65)p	1.42p	56.53p	57.95p	2.76p	67.96p	70.72p

No interim dividend has been declared in respect of the six months ended 30th June 2020 (2019: nil).

All revenue and capital items in the above statement derive from continuing operations.

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 net return on ordinary activities after taxation represents the profit for the period/year and also the total comprehensive income.

STATEMENT OF CHANGES IN EQUITY

FOR THE SIX MONTHS ENDED 30TH JUNE 2020

	Called up		Capital
	share	Share	redemption	Capital	Revenue
	capital	premium	reserve	reserves1	reserve1	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Six months ended 30th June 2020 (Unaudited)
At 31st December 2019	1,445	13,392	1,851	179,718	1,846	198,252
Issues of ordinary shares	24	3,394	-	-	-	3,418
Repurchase of shares into Treasury	-	-	-	(558)	-	(558)
Net (loss)/return	-	-	-	(11,264)	924	(10,340)
Dividends paid in the period (note 4)	-	-	-	-	(1,464)	(1,464)
At 30th June 2020	1,469	16,786	1,851	167,896	1,306	189,308
Six months ended 30th June 2019 (Unaudited)
At 31st December 2018	1,445	13,291	1,851	140,543	1,701	158,831
Repurchase of shares into Treasury	-	-	-	(62)	-	(62)
Net return	-	-	-	32,665	822	33,487
Dividend paid in the period (note 4)	-	-	-	-	(1,445)	(1,445)
At 30th June 2019	1,445	13,291	1,851	173,146	1,078	190,811
Year ended 31st December 2019 (Audited)
At 31st December 2018	1,445	13,291	1,851	140,543	1,701	158,831
Shares reissued from Treasury	-	101	-	1,206	-	1,307
Repurchase of shares into Treasury	-	-	-	(1,206)	-	(1,206)
Net return	-	-	-	39,175	1,590	40,765
Dividends paid in the year (note 4)	-	-	-	-	(1,445)	(1,445)
At 31st December 2019	1,445	13,392	1,851	179,718	1,846	198,252

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

STATEMENT OF FINANCIAL POSITION

AT 30TH JUNE 2020

	(Unaudited)	(Unaudited)	(Audited)
	30th June 2020	30th June 2019	31st December 2019
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	198,950	196,177	208,253
Current assets
Debtors	837	772	655
Cash and cash equivalents	10,500	9,782	4,605
	11,337	10,554	5,260
Current liabilities
Creditors: amounts falling due within one year1	(20,979)	(15,920)	(15,260)
Derivative financial liabilities	-	-	(1)
Net current liabilities	(9,642)	(5,366)	(10,001)
Total assets less current liabilities	189,308	190,811	198,252
Net assets	189,308	190,811	198,252
Capital and reserves
Called up share capital	1,469	1,445	1,445
Share premium	16,786	13,291	13,392
Capital redemption reserve	1,851	1,851	1,851
Capital reserves	167,896	173,146	179,718
Revenue reserve	1,306	1,078	1,846
Total shareholders' funds	189,308	190,811	198,252
Net asset value per share (note 5)	323.6p	330.3p	343.0p

¹  At 30th June 2020, the Company had drawn down US$25.0m (GBP £20.23m equivalent) on its loan facility with Scotiabank.

STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED 30TH JUNE 2020

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th June 2020	30th June 2019	31st December 2019
	£'000	£'000	£'000
Net cash outflow from operations before dividends
and interest (note 6)	(1,027)	(1,231)	(2,297)
Dividends received	1,252	1,252	2,376
Interest received	55	81	195
Overseas tax recovered	40	22	23
Interest paid	(229)	(136)	(425)
Net cash inflow/(outflow) from operating activities	91	(12)	(128)
Purchases of investments	(55,454)	(22,628)	(46,362)
Sales of investments	55,192	28,613	47,557
Settlement of foreign currency contracts	3	4	14
Net cash (outflow)/inflow from investing activities	(259)	5,989	1,209
Dividend paid	(1,464)	(1,445)	(1,445)
Issue of ordinary shares	3,804	-	-
Shares reissued from Treasury	-	-	921
Repurchase of shares into Treasury	(558)	(62)	(1,206)
Draw down of bank loans	3,799	-	-
Net cash inflow/(outflow) from financing activities	5,581	(1,507)	(1,730)
Increase/(decrease) in cash and cash equivalents	5,413	4,470	(649)
Cash and cash equivalents at start of period/year	4,605	5,382	5,382
Exchange movements	482	(70)	(128)
Cash and cash equivalents at end of period/year	10,500	9,782	4,605
Increase/(decrease) in cash and cash equivalents	5,413	4,470	(649)
Cash and cash equivalents consist of:
Cash and short term deposits	4	1	10
Cash held in JPMorgan US Dollar Liquidity Fund	10,496	9,781	4,595
Total	10,500	9,782	4,605

NOTES TO THE FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED 30TH JUNE 2020

1.  Financial statements

The information contained within the financial statements in this half year report has not been audited or reviewed by the Company's auditors.

The figures and financial information for the year ended 31st December 2019 are extracted from the latest published financial statements of the Company and do not constitute statutory accounts for that year. Those financial statements have been delivered to the Registrar of Companies, including the report of the auditors which was unqualified and did not contain a statement under either section 498(2) or 498(3) of the Companies Act 2006.

2.  Accounting policies

The financial statements have been prepared in accordance with the Companies Act 2006, FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' of the United Kingdom Generally Accepted Accounting Practice ('UK GAAP') and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' (the revised 'SORP') issued by the Association of Investment Companies in October 2019.

FRS 104, 'Interim Financial Reporting', issued by the Financial Reporting Council ('FRC') in March 2015 has been applied in preparing this condensed set of financial statements for the six months ended 30th June 2020.

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

The accounting policies applied to this condensed set of financial statements are consistent with those applied in the financial statements for the year ended 31st December 2019.

3.  Return/(loss) per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th June 2020	30th June 2019	31st December 2019
	£'000	£'000	£'000
Return/(loss) per share is based on the following:
Revenue return	924	822	1,590
Capital (loss)/return	(11,264)	32,665	39,175
Total (loss)/return	(10,340)	33,487	40,765
Weighted average number of shares in issue	58,579,874	57,787,453	57,641,214
Revenue return per share	1.58p	1.42p	2.76p
Capital (loss)/return per share	(19.23)p	56.53p	67.96p
Total (loss)/return per share	(17.65)p	57.95p	70.72p

4.  Dividend paid

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th June 2020	30th June 2019	31st December 2019
	£'000	£'000	£'000
Final dividend in respect of the year ended 31st December 2019 of 2.5p
(2018: 2.5p)	1,464	1,445	1,445
Total dividend paid in the period/year	1,464	1,445	1,445

The dividends paid in the period/year have been funded from the revenue reserve.

5.   Net asset value per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th June 2020	30th June 2019	31st December 2019
Net assets (£'000)	189,308	190,811	198,252
Number of shares in issue at period/year end	58,508,828	57,771,928	57,791,928
Net asset value per share	323.6p	330.3p	343.0p

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

21st August 2020

For further information, please contact:

Lucy Dina

For and on behalf of

JPMorgan Funds Limited, Secretary

020 7742 4000

ENDS

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

The Half Year Report will also shortly be available on the Company's website at www.jpmsmallercompanies.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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