Half Yearly Report

RNS Number : 8600M

JPMorgan US Smaller Co. IT

23 August 2011

 



LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN US SMALLER COMPANIES INVESTMENT TRUST PLC

UNAUDITED HALF YEAR RESULTS FOR THE SIX MONTHS ENDED

30TH JUNE 2010

Chairman's Statement

Performance

I am pleased to report that the investment manager has performed well despite a jittery stock market and a weaker dollar. In the six months to 30th June 2011 the Company's Net Asset Value (NAV) per share rose by 5.4% which compares with a rise of 3.4% in our benchmark, the Russell 2000 in sterling terms. The share price rose by only 1.9% over the period under review which resulted in the discount to NAV widening.

In US dollar terms the Russell 2000 rose by 6.2% and the S&P500, which represents the broad market in the US, rose by 6.0%. For the same period in 2010 both these indices were down despite the background to both periods being identical as investors worried about the US economy, sovereign debt defaults, uncertainties surrounding Europe and the Euro and the implications of natural disasters. In 2011, however, investors have managed to shrug aside these concerns as corporate profits have underpinned value in the markets.

Share Buybacks

At the AGM held in April 2011 the authority to repurchase up to 14.99% of the Company's issued share capital was renewed. Over the past six months to 30th June 2011 the Company did not repurchase any shares.

Although our discount to NAV drifted outside our long term target reaching 9.8% as at 30th June 2011, for the six months period under review I am pleased to report the average discount to NAV was 7.0%.

Gearing

In April 2011 an agreement was signed with Scotiabank to provide a revolving credit facility of $10 million. As at 30th June 2011 it had all been drawn and the portfolio was 8.1% geared.

Auditor Review

Recently the Board undertook a competitive tender process to review the provision of audit services. Following this process it was agreed that Grant Thornton UK LLP should replace Ernst & Young LLP and this appointment is effective today.

Regulatory Issues

There are a number of regulatory changes on the horizon (AIFM, MiFID, FATCA), as yet we do not yet know what impact any of these will have on the Company but the Board, together with JPMorgan Asset Management, will continue to monitor developments closely.

Outlook

Over the short term the outlook for US smaller companies is likely to be hampered by the fragile economy, the high level of unemployment and a difficult housing market. The recent downgrading by Standard & Poor's of the US Government debt rating combined with continuing debt problems in the weaker European economies raise the risk that the current economic slowdown could persist for some time. However, we consider that our manager's focus on balance sheet strength should provide some protection in this environment. Longer term we believe that Glenn Gawronski and his team, through their disciplined investment process, will be able to exploit opportunities that arise out of these markets.

Davina Walter

Chairman                                                                                            

23rd August 2011

Investment Manager's Report

Market Review

The Russell 2000 Index finished the first half of 2011 up a respectable 3.4% in sterling terms, but it was not a slow and steady path to that end point. As April came to a close, the Russell 2000 Index closed slightly above its pre-financial crisis peak, made in the summer of 2007. Much of the strength early in the year reflected strong economic data points that reinforced confidence that both a US and global recovery was taking place. Some of these gains were tempered by fears that unrest in the Middle East or disruption from the Japanese earthquake would lead to a hiccup in global growth, but the Index rallied 12% from a late January trough to finish the month of April at the year's high.

A slump began with May's arrival and continued through mid-June, as worries over European sovereign debt issues, the end of QE2 (second round of quantitative easing) and weak US economic data led to a 10% drop in the Russell 2000 Index over a six-week period. The 'risk off' trade was confirmed by the yield on the 10-year Treasury note, which swung from 3.3% at the beginning of the month down to 2.9% on 24th June 2011. June did manage to end on a positive note, as investors found themselves 'buying the dip', which drove the Index up 6% in the final two weeks of the first half.

Investment Performance

For the six months ended 30th June 2011, the total return on net assets was 5.4% representing 200 basis points of outperformance relative to our benchmark index, the Russell 2000 Index, which rose 3.4% in sterling terms. The Company's outperformance was primarily due to superior stock selection in the financial services and health care sectors, combined with positive stock selection in most other sectors, the one notable exception being materials and processing.

Portfolio Positioning

Since the start of the year, we have meaningfully increased our exposure to the consumer discretionary sector, resulting in an overweight position relative to our benchmark. We have also increased our exposure to the health care sector, but remain underweight in the sector. Additions to these sectors have been at the expense of all others, especially consumer staples, producer durables and financial services. We continue to be underweight in technology, which in some ways is indicative of our investment process and style. Within technology, we have a difficult time finding companies that possess a sustainable competitive advantage, particularly in light of the rapid change in this sector.

Our sector weights remain a by-product of our bottom-up investment analysis and our disciplined approach to portfolio construction. We adhere to a consistent investment strategy, which focuses on identifying companies that possess a sustainable competitive advantage, have a durable business model and are overseen by a competent management team with a track record of success. Finally, we seek to acquire equity stakes in these businesses when they trade at a discount to what we would deem to be their intrinsic value.

Portfolio Highlights

The significant contributors to performance were HFF and Coventry Healthcare. HFF is a leading provider of capital markets services to the US commercial real estate industry and returned +56% during the period. The company's shares outperformed as better than expected transaction volumes seen at the end of 2010 continued into 2011. Additionally, the company continued to gain market share in a rapidly improving deal volume environment. Coventry Healthcare is a managed health care organisation operating health plans and insurance companies throughout the Midwest, Mid-Atlantic and Southeast United States. Its shares returned +38% during the period. The company's shares outperformed as it delivered solid earnings driven by lower utilisation and selling, general and administrative expense costs when it posted first quarter results in April. The company also raised its full year revenue and earnings guidance for the year.

The significant detractors to performance were Greenhill and KBW. Greenhill, where shares fell 33% during the period, is an independent investment bank that provides financial advice on mergers, acquisitions, and restructurings to corporations, partnerships, and governments around the world. Fourth quarter 2010 results, which were reported in late January, disappointed relative to expectations on meaningfully weaker financial advisor fees and higher than expected compensation accrual. The trend of sluggish fee growth and elevated compensation accrual were also evident in first quarter results, but we remain constructive as their business is inherently lumpy. KBW is a full service investment bank, providing investment banking services, equity and fixed income sales and trading, and equity and fixed income research and its shares fell 33% during the period. Results for the fourth quarter and first quarter, which were both reported in the six month period, were below expectations on lower than expected revenues. Declining equity underwriting and sluggish merger and acquisition activity combined to produce sub-par results.

Market Outlook

Looking forward, we believe market volatility and macro events will be front of mind for many investors. In addition to keeping a watchful eye on the pace of the global economic recovery and the ever-evolving European debt crisis, markets will also be tuned in to developments around US deficit-reduction plans. Governments around the world will have an enormous impact on the future path of their respective economies and will need to balance fiscal prudence and regulatory reform with economic growth and job creation. In this type of environment, we believe investors are more measured in their approach to risk, but are reluctant to walk away from markets entirely in fear of missing the next big run-up. Fundamentals for most companies continue to improve, albeit at a more muted pace, and valuations are neither excessive nor compelling. As such, we suspect stock selection will be more critical and we plan to remain disciplined with regards to our investment strategy.

Glenn Gawronski

Investment Manager                                                                                                   

23rd August 2011

Interim Management Report

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

Principal Risks and Uncertainties

The principal risks and uncertainties faced by the Company fall into broad categories: investment and strategy, market; accounting, legal and regulatory; corporate governance and shareholder relations; operational; foreign currency; and financial. Information on each of these areas is given in the Business Review within the Annual Report and Accounts for the year ended 31st December 2010.

Related Parties Transactions

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

Going Concern

The Directors believe, having considered the Company's investment objectives, risk management policies, capital management policies and procedures, nature of the portfolio and expenditure projections, that the Company has adequate resources, an appropriate financial structure and suitable management arrangements in place to continue in operational existence for the foreseeable future. For these reasons, they consider there is reasonable evidence to continue to adopt the going concern basis in preparing the accounts.

Directors' Responsibilities

The Board of Directors confirms that, to the best of its knowledge:

(i)    the condensed set of financial statements contained within the half yearly 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.

Davina Walter

Chairman

For further information, please contact:

Jonathan Latter

For and on behalf of

JPMorgan Asset Management (UK) Limited, Secretary

020 7742 6000

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 2011

	(Unaudited)				(Unaudited)				(Audited)
	Six months ended				Six months ended				Year ended
	30th June 2011				30th June 2010				31st December 2010
		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		-	3,210	3,210	-	2,432	2,432	-		13,106	13,106
Net foreign currency (losses)/gains		-	(8)	(8)	-	107	107	-		298	298
Income from investments		280	-	280	234	-	234	847		-	847
Other interest receivable and
similar income		-	-	-	-	-	-	6		-	6
Gross return		280	3,202	3,482	234	2,539	2,773	853		13,404	14,257
Management fee		(30)	(266)	(296)	(23)	(206)	(229)	(48)		(429)	(477)
Performance fee (charge)/writeback		-	(39)	(39)	-	104	104	-		(95)	(95)
Other administrative expenses		(166)	-	(166)	(135)	-	(135)	(286)		-	(286)
Net return on ordinary activities
before finance costs and
taxation		84	2,897	2,981	76	2,437	2,513	519		12,880	13,399
Finance costs		(6)	(53)	(59)	(3)	(30)	(33)	(9)		(83)	(92)
Net return on ordinary activities
before taxation		78	2,844	2,922	73	2,407	2,480	510		12,797	13,307
Taxation		(41)	-	(41)	(35)	-	(35)	(127)		-	(127)
Net return on ordinary activities
after taxation		37	2,844	2,881	38	2,407	2,445	383		12,797	13,180
Return per share (note 3)		0.70p	54.02p	54.72p	0.70p	44.13p	44.83p	7.09p		236.89p	243.98p

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 2011	capital	reserve	reserves	reserve	Total
(Unaudited)	£'000	£'000	£'000	£'000	£'000
At 31st December 2010	1,316	1,826	54,155	(4,347)	52,950
Net return on ordinary activities	-	-	2,844	37	2,881
At 30th June 2011	1,316	1,826	56,999	(4,310)	55,831

	Called up	Capital
Six months ended	share	redemption	Capital	Revenue
30th June 2010	capital	reserve	reserves	reserve	Total
(Unaudited)	£'000	£'000	£'000	£'000	£'000
At 31st December 2009	1,371	1,771	42,987	(4,730)	41,399
Repurchase and cancellation of the Company's
own shares	(13)	13	(401)	-	(401)
Net return on ordinary activities	-	-	2,407	38	2,445
At 30th June 2010	1,358	1,784	44,993	(4,692)	43,443
	Called up	Capital
Year ended	share	redemption	Capital	Revenue
31st December 2010	capital	reserve	reserves	reserve	Total
(Audited)	£'000	£'000	£'000	£'000	£'000
At 31st December 2009	1,371	1,771	42,987	(4,730)	41,399
Repurchase and cancellation of the Company's
own shares	(55)	55	(1,629)	-	(1,629)
Net return on ordinary activities	-	-	12,797	383	13,180
At 31st December 2010	1,316	1,826	54,155	(4,347)	52,950

Balance Sheet

at 30th June 2011

	(Unaudited)	(Unaudited)	(Audited)
	30th June 2011	30th June 2010	31st December 2010
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	60,348	45,297	53,444
Investments in liquidity funds held at fair value
through profit or loss	2,120	2,430	2,911
Total investments	62,468	47,727	56,355
Current assets
Debtors	272	146	181
Cash and short term deposits	1	416	1,225
	273	562	1,406
Creditors: amounts falling due within one year1	(6,852)	(4,817)	(4,681)
Net current liabilities	(6,579)	(4,255)	(3,275)
Total assets less current liabilities	55,889	43,472	53,080
Provisions for liabilities and charges	(58)	(29)	(130)
Net assets	55,831	43,443	52,950
Capital and reserves
Called up share capital	1,316	1,358	1,316
Capital redemption reserve	1,826	1,784	1,826
Capital reserves	56,999	44,993	54,155
Revenue reserve	(4,310)	(4,692)	(4,347)
Shareholders' funds	55,831	43,443	52,950
Net asset value per share (note 4)	1,060.5p	800.1p	1,005.8p

¹At 30th June 2011, the Company had drawn down US$10 million on its loan facility with Scotiabank.

The Company's registration number is 552775.

Cash Flow Statement

for the six months ended 30th June 2011

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th June 2011	30th June 2010	31st December 2010
	£'000	£'000	£'000
Net cash outflow from operating
activities (note 5)	(379)	(276)	(117)
Net cash outflow from returns on investments
and servicing of finance	(53)	(22)	(82)
Net cash outflow from capital expenditure
and financial investment	(2,542)	(3,311)	(1,355)
Net cash inflow from financing	1,835	3,977	2,748
(Decrease)/increase in cash for the period	(1,139)	368	1,194
Reconciliation of net cash flow to movement in
net funds/debt
Net cash movement	(1,139)	368	1,194
Loans drawn down in the period	(1,835)	(4,779)	(4,779)
Exchange movements	(8)	105	(296)
Changes in net funds/debt arising from cash flows	(2,982)	(4,306)	(3,289)
Net (debt)/funds at the beginning of the period	(3,246)	43	43
Net debt at the end of the period	(6,228)	(4,263)	(3,246)
Represented by:
Cash and short term deposits	1	416	1,225
Debt falling due within one year	(6,229)	(4,679)	(4,471)
	(6,228)	(4,263)	(3,246)

Notes to the Accounts

for the six months ended 30th June 2011

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 2010 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 2010.

3.             Return per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th June 2011	30th June 2010	31st December 2010
	£'000	£'000	£'000
Return per share is based on the following:
Revenue return	37	38	383
Capital return	2,844	2,407	12,797
Total return	2,881	2,445	13,180
Weighted average number of shares in issue	5,264,610	5,454,495	5,404,148
Revenue return per share	0.70p	0.70p	7.09p
Capital return per share	54.02p	44.13p	236.89p
Total return per share	54.72p	44.83p	243.98p

4.             Net asset value per share

                Net asset value per share is based on the net assets attributable to ordinary shareholders of £55,831,000 (30th June 2010: £43,443,000 and 31st December 2010: £52,950,000) and on the 5,264,610 (30th June 2010: 5,429,610 and 31st December 2010: 5,264,610) shares in issue at the period end.

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

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th June 2011	30th June 2010	31st December 2010
	£'000	£'000	£'000
Total return on ordinary activities before finance
costs and taxation	2,981	2,513	13,399
Add back capital return before finance costs and taxation	(2,897)	(2,437)	(12,880)
Increase in net debtors and accrued income	(58)	(44)	(13)
Management fee charged to capital	(266)	(206)	(429)
Overseas withholding tax	(41)	(35)	(127)
Performance fee paid	(98)	(67)	(67)
Net cash outflow from operating activities	(379)	(276)	(117)

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.

JPMORGAN ASSET MANAGEMENT (UK) LIMITED

ENDS

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

The half year will also shortly be available on the Company's website at www.jpmussmallercompanies.co.uk where up to date information on the Company, including daily NAV and share prices, factsheets and portfolio information can also be found.

 

END

 

 

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