Half-year Report

RNS Number : 6530Y

Jupiter US Smaller Companies PLC

06 March 2017

 

Jupiter US Smaller Companies PLC

Half Yearly Financial Report for the six months to 31 December 2016

Financial Highlights

Performance

	31.12.16	30.06.16	% Change
Net Assets (£'000)	199,055	174,163	14.3

Ordinary Share Performance

			31.12.16		30.06.16	% Change
Net Asset Value (pence)			961.85		787.33	22.2
Mid-market price (pence)			907.75		698.00	30.1
Russell 2000 Index (Sterling adjusted)			1,098.31		861.70	27.5
Discount to Net Asset Value (%)			(5.6)		(11.3)

Chairman's Statement

Performance

I am pleased to report that the NAV per share of your Company increased by 22.2% in the six month period to 31 December 2016. This compared to a rise of 27.5% for the Company's benchmark the sterling-adjusted Russell 2000 Index.

Although the comparison with the benchmark appears disappointing, two factors made it difficult for the Company's portfolio to keep up with the Index in the six month period. Not only was there very strong performance by the technology sector, meaning that the Company's conservatively run portfolio lagged but also in the aftermath of the Presidential Election there was a huge surge of US retail investment in small stocks via passively managed exchange traded funds. These latter simply replicate the entire index. The effect of this surge was to boost the smallest and least liquid stocks in the Russell 2000, which is the part of the market that portfolio managers find it most difficult in which to invest because of the lack of liquidity.

Market review

Equities rallied strongly in the period led by small companies: the Russell 2000 Index added 17.8% compared to a rise of only 6.7% for the S&P 500 Index, both figures expressed in dollar terms. The dollar's rise of 8.2% against sterling meant that shareholders gained from the exchange rate movement because the Company's assets are valued in sterling.

Small companies rose from the beginning of the period as the stock market recovered quickly from the shock of the Brexit result. The rally continued until October, notwithstanding the gradually rising oil prices, but then suffered a bout of weakness in the run up to the Election as the prospect loomed of four more years of rising regulation under another Democratic President. The surprise victory for Mr Trump was greeted with enthusiasm by equity investors who were encouraged by the potential for improved corporate profits from his domestic agenda of lower corporate taxes, reduced regulation and higher infrastructure spending. The bond market fell in response to the Election result, because of the risk of higher inflation and Treasury yields rose sharply breaking a long downward trend. The much delayed increase in the Federal Funds Rate occurred in December but did not trouble equities.

Meanwhile in the real economy, the manufacturing sector began to pick up strength: it had been very sluggish since early 2015 following the setback in the energy industry. The rise in the US dollar may limit export growth but a recovering oil price will be a positive for energy which has become one of the key swing sectors of the economy.

All market sectors rose in the six months (although the gain was marginal for utilities). The best performers were energy, technology and financial services while the laggards were utilities, consumer staples and health care.

Portfolio Review

There was good performance in particular from Tivity Health (previously called Healthways, a company that provides health fitness programs to health plans), Addus Homecare (a provider of day care service to so-called dual-eligibles, individuals who fall under both Medicare and Medicaid schemes) and Big 5 Sporting Goods (a West Coast local neighbourhood retailer that sells branded sports goods at value prices). Whereas the first two saw a doubling of their stock prices as the efforts of new management to turnaround the companies began to bear fruit, Big 5 saw a recovery in sales growth as competitors went bankrupt. As ever there were stocks that performed poorly and the worst contributors in the period were The Rubicon Project (a technology company that operates auctions for online advertising), Amplify Snack Brands (a branded snack food company focusing on "better for you" products) and Kindred Healthcare (a leading operator of hospitals, nursing homes and home care in large cities). The first was hit when it was slow to launch its new on-line advertising product; Amplify Snack Brands' management appeared to be distracted by an acquisition and reported disappointing growth in Q3; and a confusing change in Kindred's strategy and poor results hurt the stock: it was sold on a bounce.

The main focus of buying in the period was in consumer discretionary stocks with resilient growth that had lagged the market. An example was Murphy USA (which operates a chain of gas stations and convenience stores - a sector that is enjoying secular growth and undergoing consolidation). An old favourite, the waste to energy operator Covanta Holding was bought back after a period of under-performance. Sales on the other hand reflected profit-taking in banks that performed well after the Election in anticipation of higher interest rates. An example was Towne Bank (received when it was acquired for the Company's holding in Monarch Financial). After a strong recovery, the retailer Big 5 Sporting Goods was sold. Another area of profit-taking was in health care stocks that performed well, e.g. Tivity Health and HMS Holdings.

There was only one takeover of a portfolio holding in the period: Cardinal Financial received an agreed bid from United Bancshares (headquartered in West Virginia). It is sad to see Cardinal go: it had been held for many years because of its exceptionally high credit quality (non-performing loans barely rose in the financial crisis) and exposure to the perennially strong Washington DC economy.

Share price and discount

The price of the shares gained 30.1% to 907.8p over the period. The discount to NAV was 5.6% at the end of the period, which compared to a discount of 11.3% at 30 June 2016. As at 27 February 2017, the discount was 9.0%.

The Company bought back 1,425,870 shares for cancellation in the period at an average discount of 12.3%. The Board will continue to apply its long standing policy of buying back shares at appropriate times with a view to limiting any discount in the longer term to around 10%.

Outlook

The outlook for corporate profits growth appears to have improved markedly, assuming the new President can get his proposed measures through Congress.

The economy is now almost eight years into a recovery and prospective fiscal stimulus is likely to cause overheating especially as US average hourly earnings are already rising at around 3% p.a. A politically astute Federal Reserve (Fed) may well allow the economy to "run hot" for a while rather than seek to cut off growth too soon. The strength of the US dollar in general will act to restrain economic growth somewhat and may provide the Fed with a suitable excuse for tightening more slowly than it might otherwise.

The market has run strongly since November without a significant correction, which is unusual. Longer term the arrival of the new President may herald a reversal of some of the trends we have experienced for the last thirty years or so but for now the bull market probably continues.

The US smaller company sector is still an attractive and interesting one for long term investors. It is generally under-researched and offers areas of undiscovered value.

Gordon Grender

Chairman

6 March 2017

Twenty largest equity holdings as at 31 December 2016

		Stock	% of total	Value
	Company Description	Exchange	investments	£'000s
1	Alleghany
	Specialist insurance underwriter.	NYSE	2.7	5,160
2	Genesee & Wyoming "A"
	Operator of short line railroads.	NYSE	2.5	4,869
3	ATN International
	Holding company for telecommunications businesses.	NASDAQ	2.5	4,835
4	America's Car-Mart
	Sells and finances used cars.	NASDAQ	2.3	4,553
5	Franklin Financial Network
	Bank holding company owning and controlling one or more banks.	NYSE	2.3	4,544
6	American Vanguard
	Producer of specialised agrichemicals.	NYSE	2.3	4,400
7	Almost Family
	Provider of home healthcare services.	NASDAQ	2.2	4,233
8	Allegiant Travel
	Leisure travel company.	NASDAQ	2.2	4,207
9	Civitas Solutions
	Provider of care in the community to intellectually disabled adults.	NYSE	2.2	4,183
10	The Andersons
	A diversified agri-business.	NASDAQ	2.1	4,166
11	FMC Technologies
	Designs, manufactures, and services systems and products used in offshore.	NYSE	2.1	4,158
12	Old Dominion Freight Line
	An inter-regional and multi-regional motor carrier.	NASDAQ	2.1	4,140
13	Tejon Ranch
	Owner and developer of land north of Los Angeles.	NYSE	2.1	4,044
14	The Chefs' Warehouse
	Distributor of gourmet foods.	NASDAQ	2.1	4,012
15	LKQ
	Distributor of alternative car parts.	NASDAQ	2.1	4,002
16	Ollie's Bargain Outlet Holdings
	Operates a chain of retail stores that offers brand name products at discounted and closeout prices.	NASDAQ	2.1	4,002
17	CatchMark Timber Trust "A"
	Timberland REIT.	NYSE	2.0	3,930
18	CoreLogic
	Provider of residential property information and analytics.	NYSE	2.0	3,890
19	State Bank Financial
	Regional bank operating in and around Atlanta.	NASDAQ	2.0	3,857
20	Acxiom
	Provider of database marketing services.	NASDAQ	2.0	3,798

The value of the twenty largest holdings represents 43.9% (30 June 2016: 49.5%) of the Company's total investments.

Cross Holdings in other Investment Companies

As at 30 June 2016 and 31 December 2016, none of the Company's assets were invested in the securities of other listed closed-ended investment companies.

Directors' Statement of Principal Risks and Uncertainties

Related Party 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 performance of the Company. Details of related party transactions are contained in the Annual Report and Accounts for the year to 30 June 2016.

The principal risks and uncertainties associated with the Company's business are set out on page 14 of the 2016 Annual Report & Accounts.

In the view of the Board these principal risks and uncertainties are as applicable to the remaining six months of the financial year as they were to the six months under review.

Going Concern

The Half Yearly Financial Report has been prepared on a going concern basis. The Directors consider that this is the appropriate basis as they have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. In considering this, the Directors took into account the Company's investment objective, risk management policies and capital management policies, the diversified portfolio of readily realisable securities which can be used to meet short-term funding commitments and the ability of the Company to meet all of its liabilities and ongoing expenses. Thus the Directors continue to adopt the going concern basis of accounting in preparing the financial statements.

Directors' Statement of Responsibilities in Respect of the Financial Statements

Directors' Responsibility Statement

The Directors of Jupiter US Smaller Companies PLC, confirm to the best of their knowledge that:

(a)   the condensed set of financial statements 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 assets, liabilities, financial position and loss of the Company for the period ended 31 December 2016;

(b)   the Chairman's Statement and the Interim Management Report include a fair review of the information required by Disclosure and Transparency Rule 4.2.7R; and

(c) the Interim Management Report includes a fair review of the information required by Disclosure and Transparency Rule 4.2.8R on related party transactions.

The Half Yearly Financial Report has not been audited or reviewed by the Company's auditors.

By Order of the Board

Gordon Grender

Chairman

6 March 2017

Income Statement

For the six months to 31 December 2016 (unaudited)
	Six months to 31.12.16			Six months to 31.12.15
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Gains/(Losses) from investments held at fair value through profit or loss	-	35,423	35,423	-	(8,185)	(8,185)
Net foreign currency gain	-	377	377	-	283	283
Income	903	-	903	802	-	802
Gross return/(loss)	903	35,800	36,703	802	(7,902)	(7,100)
Investment management fee	(756)	-	(756)	(647)	-	(647)
Other expenses	(209)	(1)	(210)	(158)	(1)	(159)
Net (loss)/return on ordinary activities
before finance costs and taxation	(62)	35,799	35,737	(3)	(7,903)	(7,906)
Tax on ordinary activities	(126)	-	(126)	(67)	-	(67)
Net (loss)/return on ordinary
activities after taxation	(188)	35,799	35,611	(70)	(7,903)	(7,973)
Net (loss)/return per Ordinary share	(0.89)p	168.68p	167.79p	(0.29)p	(32.88)p	(33.17)p

The total column of this statement is the profit and loss account of the Company prepared in accordance with UK Generally Accepted Accounting Practice ('UK GAAP').

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

No operations were acquired or discontinued in the period.

The financial information does not constitute 'accounts' as defined in section 434 of the Companies Act 2006.

Statement of Financial Position As at 31 December 2016	31.12.16	30.06.16
	(unaudited)	(audited)
	£'000	£'000
Fixed asset investments
Investments at fair value through profit or loss	194,299	169,432
Current assets
Debtors	377	117
Cash and cash equivalents	4,887	5,821
	5,264	5,938
Creditors: amounts falling due within one year	(508)	(1,207)
Net current assets	4,756	4,731
Net assets	199,055	174,163
Capital and reserves
Called up share capital	5,174	5,530
Share premium	19,550	19,550
Non-distributable reserve	841	841
Capital redemption reserve	9,009	8,653
Retained earnings+	164,481	139,589
Total shareholders' funds	199,055	174,163
Net Asset Value per Ordinary share	961.85p	787.33p

+ Under the Company's Articles of Association any dividends are distributed only from the revenue element of retained earnings.

Statement of Changes in Equity

For the six months to 31 December 2016 (unaudited)
	Called up		Non-	Capital
	share	Share	distributable	Redemption	Retained
	Capital	Premium	Reserve	Reserve	Earnings	Total
For the six months to 31 December 2016	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 1 July 2016	5,530	19,550	841	8,653	139,589	174,163
Shares bought back and cancelled	(356)	-	-	356	(10,719)	(10,719)
Net return from ordinary activities	-	-	-	-	35,611	35,611
Balance at 31 December 2016	5,174	19,550	841	9,009	164,481	199,055
	Called up		Non-	Capital
	share	Share	distributable	Redemption	Retained
	Capital	Premium	Reserve	Reserve	Earnings	Total
For the six months to 31 December 2015 (unaudited)	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 1 July 2015	6,008	19,550	841	8,175	139,459	174,033
Shares bought back and cancelled	(18)	-	-	18	(422)	(422)
Net return from ordinary activities	-	-	-	-	(7,973)	(7,973)
Balance at 31 December 2015	5,990	19,550	841	8,193	131,064	165,638

	Called up		Non-	Capital
	share	Share	distributable	Redemption	Retained
	Capital	Premium	Reserve	Reserve	Earnings	Total
For the year ended to 30 June 2016 (audited)	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 1 July 2015	6,008	19,550	841	8,175	139,459	174,033
Shares bought back and cancelled	(478)	-	-	478	(12,282)	(12,282)
Net return from ordinary activities	-	-	-	-	12,412	12,412
Balance at 30 June 2016	5,530	19,550	841	8,653	139,589	174,163

Notes

1    Accounting policies

The significant accounting policies have not been changed and have been applied consistently during the period ended 31 December 2016 (except to align with changes to the AIC SORP and FRS 102).

FRS 104, 'Interim Financial Reporting', issued by the FRC in March 2015 has been applied in preparing the financial statements included in this half yearly report.

2    Gains/(losses) on investments held at fair value through profit or loss

	Six months to 31.12.16	Six months to 31.12.15
	£'000	£'000
Net gains realised on sale of investments	14,706	7,847
Movement in investment holdings losses/(gains)	20,717	(16,032)
Gains/(losses) on investments held at fair value through profit or loss	35,423	(8,185)

3    Return per share

	Six months to 31.12.16	Six months to 31.12.15
	£'000	£'000
Net revenue loss	(188)	(70)
Net capital return/(loss)	35,799	(7,903)
Net total return/(loss)	35,611	(7,973)
Weighted average number of Ordinary shares in
issue during the period	21,223,298	24,033,427
Net revenue/(loss) per Ordinary share	(0.89)p	(0.29)p
Net capital return/(loss) per Ordinary share	168.68p	(32.88)p
Net return/(loss) per Ordinary share	167.79p	(33.17)p

4    Net Asset Value per Ordinary share

The Net Asset Value per Ordinary Income share as at 31 December 2016, calculated in accordance with the Articles of Association, was as follows:

		31.12.16		30.06.16
	Net		Net
	Asset Value		Asset Value
	per share	Net assets	per share	Net assets
	attributable	attributable	attributable	attributable
	(p)	£'000	(p)	£'000
Ordinary shares	961.85	199,055	787.33	174,163

Net Asset Value per Ordinary share on the balance sheet is based on net assets of £199,055,000 (30 June 2016: £174,163,000) and on 20,694,942 (30 June 2016: 22,120,812) Ordinary shares, being the number of Ordinary shares in issue at the end of the period.

5    Related Parties

Transactions with the Investment Adviser and related parties

There are no transactions with the Board other than remuneration paid to the Directors as disclosed in the Directors' Remuneration Report on page 27 of the 2016 Annual Report & Accounts and as set out in note 5 to the accounts therein and the beneficial interests of the Directors in the Ordinary shares of the Company as disclosed on page 28 thereof.

Jupiter Unit Trust Managers Limited ('JUTM') is contracted to provide investment management services to the Company (subject to termination by not less than one year's notice by either party) for a quarterly fee of 0.20% of the net assets of the Company, excluding the value of any Jupiter managed investments.

The management fee payable to JUTM for the period 1 July 2016 to 31 December 2016 was £756,000 with £398,000 outstanding as at 31 December 2016.

JUTM is also eligible for a performance related management fee, charged through the capital account, of 5% of any annual out-performance by the net asset value ("NAV") per share of "target performance", defined as a margin of 2% over the Russell 2000 Index (in both cases converted to sterling). If the NAV per Ordinary share performance (adjusted to exclude the relevant performance-related fee) exceeds the target, the performance-related fee is payable on the excess. If the NAV per Ordinary share underperforms the Russell 2000 Index by 2% or more, the under-performance will be carried forward and no further performance-related fee will be payable until the NAV per ordinary share has both recovered the accumulated under-performance and exceeded the target performance for the year. The maximum performance-related fee which may be payable in respect of any year is 0.7% of gross assets.

At 31 December 2016, no performance fee has been accrued (30 June 2016: £nil).

6    Report and accounts

A copy of the Half Yearly Financial Report will shortly be available for download from the Company's website www.jupiteram.com/JUS.

By order of the Board

Jupiter Asset Management Limited, Secretary

The Zig Zag Building

70 Victoria Street

London SW1E 6SQ

6 March 2017

 

END

 

 

IR BUGDXXDGBGRL