Annual Financial Report

RNS Number : 2847D

JPMorgan American IT PLC

26 March 2014

 



LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN AMERICAN INVESTMENT TRUST PLC

FINAL RESULTS FOR THE YEAR ENDED 31ST DECEMBER 2013

Chairman's Statement

This time last year, I wrote that the US equity market looked like a reasonable place to be, although it would have been unwise to assume that market turmoil had disappeared. I also commented on how far the market (as measured by the S&P 500 Index) had risen since the dark days of 2008 and early 2009. In the event, the US equity market, measured in sterling, provided a very strong return, of 29.5% (including income) in the 12 months to 31st December 2013. The confluence of this rise in the US market, good stock-picking both within the large and small cap portfolios, gearing and the hedging of the Company's sterling debenture debt has produced particularly strong returns for shareholders. We do not necessarily expect this happy combination to be repeated every year. The return to shareholders was 33.0% and the return on net assets (with debt at par value) was 30.9%, representing an outperformance of the Company's benchmark.

By far the largest contributor to the above returns was the US stock market itself, which surged ahead last year. However, it also was pleasing that both the large and small capitalisation portfolios contributed on top of the market rise, adding approximately 2.1% and 0.8% respectively to returns. The returns were further assisted by gearing, particularly in the latter half of the year. Sterling strengthened slightly over the year as a whole (despite some rather volatile moments), so for sterling investors, the rise in the US stock market was slightly dampened by the fall in dollar values when translated back into the pound. The share price return was also assisted by a small increase in the premium on which the shares trade relative to net asset value.

So this has been a good year for investors in the US, and in other developed markets. Global emerging markets, however, fell by 4.4% in 2013. This pattern is not perhaps what had been predicted by many commentators two or three years ago. The impact of possible and actual 'tapering' - the reduction in levels of quantitative easing - has been felt much more severely in smaller, emerging markets, than it has in the US itself. Investors in the US also managed not to be thrown off course by the political rows over debt ceilings.

Our manager comments in more detail on the US market, and it is perhaps interesting to note the confidence in innovation shown by investors in the US, as Apple and Google have become the two largest stocks in the US market (at the time of writing), surpassing Exxon. (Facebook is around 20th). There has been considerable exuberance in the Biotech sector as well. The US economy has recovered to its pre-2008 levels, and its stock market has reached an all-time high. It is sometimes difficult to think back to the dark days of 2008, and the depths of the financial crisis, when market participants appear confident. However, it is important to remember that the quantitative easing programme has helped owners of financial assets, such as the Company, and not perhaps so much those without, and that the damage caused by the financial crises has not been totally erased for many.

Performance of the Company

The Company has performed well in both absolute and relative terms in the last year. As I said above, the most significant factor was the very strong rise in the S&P 500, and the Company managed to perform a little better than that. This is a good performance also in comparison with its peers (of whom perhaps there are not many in the investment trust universe) and it is now top over one and three years.

What matters is the long term, where over the last 10 years, for all of which Garrett Fish has been investment manager, the Company has outperformed the S&P500 quite significantly. This is reflected in its second percentile positioning over 10 years in the Morningstar competitive universe of European-domiciled US large cap strategies. We are particularly pleased that the Company has shown relative resilience in falling markets. Last year's performance was recognised by Investment Week, which awarded the Company its Single Country Award at its Investment Company of the Year Awards for 2013.

Gearing

Last year, I recorded that we had identified that the tactical use of gearing had not added value in recent years, and given the extent of the quantitative easing programme in place, we felt that the measures we had used previously to assess the appropriate level of gearing for the fund, might not work well in the current environment. We therefore decided that the Company's normal level of gearing would be 10%, but permitted the investment manager to vary this level by plus or minus 2% if it was felt prudent to do so. The investment manager is permitted, if he feels that there is a real risk of loss of capital, to hold cash up to 5% of net assets. All of this remains within our stated gearing policy. We asked the investment manager to implement this policy in stages during the year. In order to meet this requirement, we also negotiated a new shorter term debt facility of £30 million (to be borrowed in US Dollars) with ING to provide additional gearing in excess of the £50 million debenture already in place. This has allowed the fund manager to implement this policy on a larger asset base.

Dividend

The Company paid an interim dividend in respect of the 2013 financial year of 5.0p on 9th October 2013. Subject to shareholder approval at the AGM, a final dividend of 8.5p will be paid on 9th May 2014 to shareholders on the register on 11th April 2014. This year's payment does not necessitate drawing on the Company's reserves, and represents an increase of 8% on last year's 12.5p distribution.

Shareholders should note that both the level of dividends the Company receives from its investee companies and the translation of those dividends into sterling could vary significantly from year to year. However, after the payment of the proposed final dividend, we will have a balance in the revenue reserves of £10.6 million (equivalent to 19.8p per share or 1.47 times the current dividend). These significant income reserves can be used to support dividend payments when corporate payouts are less healthy, as the Company has done in the past.

Share Price and premium/discount

Our share price rose during 2013 from 906p to 1,191p. Compared to net asset value taking debt at fair value, the shares have traded at a premium for most of the year.

The Company again issued stock over the year: a total of 3,402,190 shares, or 6.8% of the issued share capital at the beginning of the year raising £37.9 million. We have always issued shares at a premium to estimated cum income with debt at fair net asset value, and have added 1.24p to the net asset value calculated on that basis during the year. Since the year end the Company has issued a further 1,370,000 shares, or another 2.7% of the issues share capital at the beginning of the year, taking the Company close to its 10% authority. The Board does believe that expanding the trust has benefits to its existing shareholders in terms of increased liquidity and lower costs per share, although we do not intend aggressively to pursue growth for its own sake. We are therefore asking for shareholder permission to continue to issue shares on the same basis, where Directors are confident of sustainable market demand. We are putting the relevant resolutions to shareholders at the forthcoming Annual General Meeting in May, where the Board is seeking permission to issue up to 15% of its issued share capital. This is greater than the normal level which is 10%. To facilitate this, the Company will also be shortly publishing a Prospectus of which further details are set out below. The Company has demonstrated its willingness to buy shares back when the shares stand at anything more than a small discount. Between 2003 and 2007 approximately 30% of the outstanding share capital was repurchased. Having issued shares, the Board is aware of its responsibility not to let the discount widen significantly and therefore the Company will be again be asking shareholders to approve the relevant share buyback resolutions at the Annual General Meeting.

Prospectus

The Company will shortly be publishing a prospectus which will set out proposals to put a share issuance programme in place to enable the Company to continue to issue further shares at a premium to net asset value. The publication of a prospectus removes the usual constraint of a 10% limit on the number of shares that can be issued in any 12 month period. This will be combined with a proposal to be put to shareholders at the Annual General Meeting to permit the Company to issue up to 15% of the issued share capital to investors without first having to offer them pro-rata to existing shareholders.

The Annual Report also contains details of a proposed five for one sub-division of the Company's share capital. The average mid-market price of an existing ordinary share over the year under review was 1,098.8p per share. The Board believes that sub-dividing the shares will reduce the Company's share price to a level where dealing in the shares will be more efficient, hence increasing the attractiveness of the shares to new investors and increasing the liquidity of the market for the Company's shares. Investors should note that the share split will not affect the overall value of their holdings in the Company as the reduction in the price per share will be offset by a commensurate increase in the number of shares they hold in the Company. Using last year's average price per share of 1,098.8p and following a sub-division, each holder of one ordinary share would receive five new shares which would trade at 219.76p. Shareholders will have an opportunity to vote on this proposal at the Annual General Meeting.

Investment Manager

The Company's objective is to achieve capital growth from North American investments by out-performance of the Company's benchmark, which is the S&P 500 Index (with both net asset value and benchmark measured in sterling total return terms).

The Board has once again reviewed carefully the capabilities of the investment manager in order to assess whether J.P. Morgan Asset Management ('JPMAM') should remain the Manager of the Company's assets. Directors meet with the investment managers of both the large and small capitalisation portfolio and the investment company team in London, and have conversations over the teleconference system and visit the investment management offices in New York. The Board also analyses the performance of the sections of the portfolio.

The Board does look at comparisons with appropriate peer groups both in the UK and the US (with regard to performance, fee rates and costs of management). The Manager has this year earned a performance fee of £1.56 million, which when added to the negative balance brought forward from prior years gives a positive balance of £426,000 to be paid in equal amounts over a period of three years.

The Board also spent time reviewing the investment management operation whilst in New York for a Board Meeting in 2013. Time was spent with sector analysts, the behavioural finance asset management team, the dealing team and senior management. In addition to investment management, the Manager provides other services to the Company, including marketing, accounting and company secretarial services. We have concluded that the ongoing appointment of JPMAM is in the continuing interests of shareholders.

Alternative Investment Fund Managers Directive

The AIFMD is a European Union Directive which creates a European wide framework for the regulation of managers of all 'alternative investment funds', including investment trusts. This Directive, whose declared aim is to provide additional protection for investors, came into force in the UK on 22nd July 2013, albeit with a one year transitional period. For investment trusts, who were perhaps included by accident, the Directive would appear unlikely to introduce much increased protection for shareholders and will have some cost, but we have to comply with it by 22nd July 2014.

Compliance with the AIFMD will have an impact on some of the Company's operations, as well as the contractual arrangements between the Company and its Manager. We have considered options and we expect that the Company will be entering into arrangements with an affiliate of JPMAM to act as its 'Alternative Investment Fund Manager', replacing the current arrangement, at no additional cost to the Company and with little other impact. The Directive also requires the appointment of a depository, which will result in extra administration fees for the Company, which are expected to be in the order of £120,000, or 0.017% of the Company's gross assets, per annum.

Costs

Given the increased costs of the AIFMD, and the need to make sure that we continue to offer attractive value for shareholders and potential shareholders, we continue to focus on costs. To that end, and despite the greater amount of time required to develop the Company and regulatory burden continuing to rise, we are holding directors' fees at current levels for 2014; a level that they have been set at since 2011.

In reviewing the cost base of the Company, the Board has developed the table below which it also intends to include in future Report and Accounts. This aims to shows the returns generated on the Company's investments, the extent to which the capital base of the Company has grown or shrunk through share issuance and buy-backs, and the full costs of the Company's operations. It does so without the distortions that may come from the variations in the accounting treatment of certain items of income or expenditure which may obscure the full extent of certain categories of return or expense.

	2013		2012
		Percentage		Percentage
		of opening		of opening
	£'000s	net assets	£'000s	net assets
Net assets at start of year	464,734	100.00	400,379	100.00
Increase/(decrease) in net assets during the year from investing	141,096	30.36	32,529	8.12
Brokerage fees/commissions and other dealing charges	(305)	(0.07)	(143)	(0.04)
Net investment performance	605,525	130.29	432,765	108.09
Income received from investing - net of withholding tax	9,636	2.07	8,416	2.10
Dividends paid to shareholders1	(6,381)	(1.37)	(7,639)	(1.91)
Interest paid on borrowings	(3,518)	(0.76)	(3,468)	(0.87)
Gains/(losses) on currency hedging	3,346	0.72	1,025	0.26
Management fees	(3,483)	(0.75)	(2,465)	(0.62)
Directors' fees	(151)	(0.03)	(159)	(0.04)
Other costs of the Company	(407)	(0.09)	(418)	(0.10)
Issue of new shares	38,001	8.17	37,020	9.26
Cost of issue of new shares	(355)	(0.08)	(343)	(0.09)
Net assets at end of year	642,213	138.19	464,734	116.07

1        Dividends paid in 2012 include a final full year's dividend for 2011 and interim dividend for 2012.

The Board believes this table demonstrates the relatively modest expenses of operating the Company in the context of the returns generated by the portfolio and the capital growth arising on the issuance of new shares. In 2013 the net total of all the costs of the Company were £4,618,000 (including interest) (2012: £5,628,000) against a return to shareholders of £150,732,000 (2012: £43,945,000). However, the continued reduction in the costs of investing in competing investment products with a similar mandate means there is no room for complacency.

The Board

The Board has put in place procedures to ensure that the Company complies fully with the AIC Code on Corporate Governance.

In accordance with corporate governance best practice, all continuing Directors will seek reappointment at the Annual General Meeting. Accordingly, I, along with Kate Bolsover, Simon Bragg, Sir Alan Collins and James Williams all being eligible, offer ourselves for reappointment at this year's Annual General Meeting.

The Board continues to manage succession so that it has an appropriate balance of skills and diverse approaches to its tasks. Having served as a Director since 2003, James Williams will be retiring from the Board in November of this year. James has contributed significantly to the success of the Company and added value for shareholders over the last 11 years and we wish him well for the future. The Board is currently in the process of recruiting a new non-executive Director, and it is hoped that he or she will be appointed following the Company's forthcoming Annual General Meeting. After a handover period, James Williams will retire and the Board will again comprise five Directors.

The Nomination and Remuneration Committee will continue to manage the process of Board succession and refreshment over the next year, to make sure the Board has the skills and experience to add value to shareholders. It has also reviewed the fees paid to Directors and recommended that as noted above, no increase should be made this year. Details of the fee levels can be found in the Directors' Remuneration Report within the Annual Report to be published shortly.

New Reporting Requirements

There have been a number of revisions to reporting requirements for companies with accounting periods beginning on or after 1st October 2012. Accordingly shareholders will note a few amendments to the format of the Company's Annual Report and Accounts from prior years. These include the addition of a new Strategic Report which is intended to replace the Business Review section of the Directors' Report, providing insight into the Company's objectives, strategy and principal risks, and enabling shareholders to assess how effective Directors have been in promoting the success of the Company during the course of the year under review. Other changes comprise additional Audit reporting requirements on the accounts and on the external audit process, and changes to the structure and voting requirements in respect of the Directors' Remuneration Report.

Under the new reporting regime, the Board must ensure that the Annual Report and Accounts, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's performance, business model and strategy, and how this has been achieved. The Board has added more information to help in this regard, in particular the table under costs. Directors believe that the information throughout the Annual Report and Accounts allows the Board to state that it has achieved this requirement. However, as this is the Company's first year reporting under the new regime, I would be happy to hear from shareholders if they feel that there is any information they would like to see or any other changes they would like the Board to make to the content of the Annual Report.

Annual General Meeting

This year's Annual General Meeting will be held on Wednesday, 7th May 2014 at 2.30 p.m. at Holborn Bars, 138-142 Holborn, London EC1N 2NQ. As in previous years, in addition to the formal part of the meeting, there will be a presentation from our investment manager, who will answer questions on the portfolio and performance. There will also be an opportunity to meet the Board, Garrett Fish and representatives of JPMAM after the meeting. I look forward to welcoming as many shareholders as possible to this meeting.

Outlook

The US economy and equity market has continued to recover from the financial crisis and both have now surpassed their pre-crisis levels. The relative robustness of the US economy has perhaps been surprising although the strength of the corporate sector has been evident for a while. The combination of the two (and the massive quantative easing programme, of course) has led to considerable stock market strength and rise in valuation measures beyond increases in earnings. It is interesting that the US equity market still seems to be unpopular with many UK investors although it offers such a range of investment opportunity. Whether or not it will outperform other markets over the next year is difficult to tell, but the US corporate sector is in very good health and the dynamism of many of its companies is hard to match.

Sarah Bates

Chairman

26th March 2014

Investment Manager's Report

Market Review

The S&P 500 Index ended 2013 having risen just under 30% in sterling terms and posted its best performance since 1997 as investors appeared finally to have seen past the dark days of the 2008 financial crisis. Indeed the five year annualised return of 15% represents the best period for equity investors since the glory days of the late '90s bull market.

However it was not all smooth sailing as investors faced a number of potential crises during the period including uncertainty over the economic impact of the US Fiscal Cliff, Federal Reserve tapering and a 16-day US government shutdown. These and other potential headwinds were favourably resolved and the consequent market rally was remarkable in its steadiness.

With profit growth subdued, the big driver of gains in stock prices was a rise in valuations, with investor confidence growing and stocks still looking very reasonably priced in comparison to bonds. A wide range of stocks found favour in 2013, with smaller capitalisation stocks handily outpacing the largest companies that dominate the S&P 500, the Company's benchmark. Within the S&P 500, consumer discretionary was the best performing sector for the year, closely followed by health care. Utilities, telecoms and consumer staples names were significant laggards as the broader market moved higher. One group of companies was however very much out of favour - the defensive stocks with big dividend yields that had proved so popular in the uncertain times following the credit crisis underperformed the market by some margin.

Performance, Asset Allocation and Earnings

The Company produced a total return on net assets of 30.9% over the financial year. This compares to the Company's benchmark, the S&P 500 Index (expressed in sterling terms) which returned 29.5%. The Company's discount to its net asset value narrowed, resulting in a very strong return to shareholders of 33.0%.

The Company's (net cash)/gearing ranged between (3.9)% and 9.1% of shareholders' funds during 2013, ending the year at 9.1%. This marks a significant divergence from 2012, when the Company was not geared. We increased gearing throughout the year in an effort to ensure compliance with the Board's new gearing guidelines and, as one would expect in a rising equity market, the decision to be geared was the correct one, adding to relative performance once the gearing was in place. In hindsight however, there is little doubt that gearing should have been increased sooner in the year.

Turnover within the equity portfolio was 55% for the year. A turnover of 50% means that our average holding period for a security is two years. As part of our investment process we try continually to look out over the next 12-18 month period to ascertain current mispricings in the marketplace. Turnover for the portfolio has generally ranged between 40-60% on an annual basis and is a residual of the level of opportunities present in the marketplace. Turnover in 2013 was higher than in 2012 and reflects an increase in opportunities for 2013.

The weighting in the small cap portfolio ranged between 3.3% and 6.3% of the Company's total assets less current liabilities and ended the year at 2.9%. The reduction in our small cap allocation was based on valuation concerns, as our allocation model indicated smaller companies looked less attractive relative to larger capitalisation names. We will continue to monitor our allocation and will add or trim as necessary. Over the long term our small cap allocation has helped the Company's performance and the allocation did add value in 2013 as small caps were more favoured by the market than larger sized companies.

The vast majority of the Company's assets remain in the larger companies portfolio. After a poor start to the year, when the highest valuation stocks did very well, we stuck to our investment process and this helped performance in the latter half of the year. For the whole year the performance of the large cap segment was modestly behind that of the benchmark.

Overall, the portfolio remains positioned for modest economic growth as secular growth drivers remain in place along with the added potential of a cyclical recovery. In terms of our sector positioning, our largest allocation remains in technology where we continue to find a number of high conviction names with great growth opportunities. We also have significant exposure to the financials sector and added selectively to the sector early in the year at an attractive entry point. As both loan and securities yields increase in a more normal environment there should be a dramatic improvement in the profits of most banks, insurers and asset management companies.

The portfolio has less exposure to the materials, utilities and telecoms names where we are finding fewer attractive investment ideas. In fact, during the year we decreased our holdings in the higher yielding sectors such as telecom, utilities and consumer staples. As we mentioned previously, with bond yields near all time lows investors have sought out income alternatives and this has pushed the valuations of these sectors to very high levels.

The Company's earnings per share for the year to 31st December 2013 were 15.02 pence per share, a healthy increase on the 13.80 pence earned in 2012. This is an encouraging improvement in net revenue from last year, which has been as a result of an improvement in the growth of dividends paid by the underlying companies in the portfolio and the receipt of some special dividends. Initial indications suggest that earnings for 2014 will again exceed that generated in the prior year. My remit as investment manager is to deliver capital growth for shareholders, but it is pleasing that the portfolio is generating healthy income. The outlook for dividend growth is strong as corporations have continued to increase their profitability and with healthy cash balances they remain committed to increasing distributions to shareholders through share repurchases and dividends.

Large Companies Portfolio

When constructing our portfolio, we use the core tenets of behavioural finance to narrow our investment universe. Behavioural finance theory indicates that on average, high quality, fast growing, cheap stocks with good news-flow outperform lower quality, slow growing, and expensive stocks with bad news-flow. Taking this approach, we rank the stocks in our universe to uncover those companies that are high quality, attractively valued and are also exhibiting improving sentiment (momentum). We then undertake fundamental research to validate the rankings. This leads us to invest in quality companies that exhibit good growth characteristics with growing earnings, strong cash flows and reasonable valuations.

Within our large cap portfolio the primary driver of performance was good stock selection across a broad range of sectors. In particular, our stock picking in the consumer staples and financial sectors proved beneficial and were the biggest contributor to performance. Within consumer staples, our allocation to the beverage names such as Constellation Brands, a wine and spirits concern, helped performance as investors rewarded the company for its strong volume growth. Additionally, selling the holding in Procter & Gamble during the period also assisted performance. The stock declined in our rankings prompting us to review this holding, which resulted in its ultimate exit from the portfolio. Whilst this consumer products company ended the year with a positive return, it lagged its benchmark peer group as well as the market overall. Within financials, a few names added value including our exposure to Berkshire Hathaway, for some of the period under review, as well as our holdings in Key Corp, State Street and Prudential Financial, all of which proved beneficial.

On an individual stock basis, the best performing position in the portfolio was Best Buy. The electronics retailer has struggled over the last few years as online competition has intensified. However, the company was rewarded by investors after reporting strong sales trends during the year. We have maintained our exposure to Best Buy as it continues to rank strongly. The company's main priority in 2014 is to cut costs and to grow its online sales at an accelerated pace. The company is also working on personalised marketing messages in an effort to compete with the likes of Amazon. It has outfitted its big box stores with the ability to fulfill and ship online orders, which should result in a big competitive advantage.

In contrast, a few sectors and companies disappointed over the period. In particular, our stock selection in the technology sector was lackluster and detracted the most from relative performance. Inflicting the greatest damage was our lack of exposure to Google, which rallied strongly over the period. While we understand fully the market's excitement with Google, the company ranks poorly in our model, and as a result we do not own it. Also hurting our performance in the sector was our exposure to IBM and Apple. IBM's share price declined marginally for the year as the technology behemoth disappointed investors as its earnings fell short of Wall Street's expectations. We like IBM due to its high exposure to recurring sales, cost cutting levers, solid balance sheet, potential share gains, and relatively stable margins. Longer term, we view IBM as a share winner in the information technology spending market and it continues to rank favourably in our model. Apple's shares lagged the market over the period as investors queried the company's ability to dominate the smart phone market while driving innovation for the next retail product. While we understand investor concerns, Apple is an attractively ranked name in our model and ended the year as our largest holding in the portfolio.

Sector Weightings of the Large Cap Portfolio versus S&P 500 as at 31st December 2013

	Large
	Company		Overweight/
	Portfolio	S&P 500	(Underweight)
Sector	%*	%	%
Technology	20.4	16.0	4.4
Financial Services	18.3	17.7	0.6
Consumer Discretionary	15.5	14.4	1.1
Health Care	12.6	12.8	(0.2)
Energy	11.9	10.3	1.6
Producer Durables	10.0	11.3	(1.3)
Consumer Staples	5.8	8.5	(2.7)
Utilities	3.7	5.1	(1.4)
Materials & Processing	1.8	3.9	(2.1)

*Does not include small cap stocks and net current assets.

Source: Wilshire. Based on the Russell Global Sector Classification.

The table below shows the largest positive and negative stock contributors to the Company's portfolio performance in 2013:

	Relative	Stock Return
	Weighting at	in 2013	Contribution
Stock	year end	%	%
Positive Contributors
Best Buy	Overweight	237.8	0.6
Mylan Laboratories	Overweight	55.2	0.3
Constellation Brands	Overweight	95.2	0.3
Parker-Hannifin	Overweight	51.1	0.2
Sandisk	Overweight	60.3	0.2
Negative Contributors
Centurylink	Overweight	(14.8)	(0.4)
Google1	Underweight	55.1	(0.3)
International Business Machines1	Overweight	(2.0)	(0.2)
Broadcom	Overweight	(11.1)	(0.2)
EMC	Overweight	(1.6)	(0.2)

1        Not held in the portfolio at year end.

Source: Wilshire. Contribution figures are based on stock selection relative to the total contribution return, in US$.

Smaller Companies Portfolio

US smaller companies outperformed their large cap brethren in 2013 and contributed to the Company's overall performance. Higher growth stocks within the small cap growth universe generally outperformed, which served as a tailwind for our approach in addition to stock selection.

Stock selection drove returns and the biggest contribution came from our health care sector allocation, where our biotechnology holdings added the most value. Another sector adding value was consumer discretionary, where our positioning in consumer companies that sold higher discretion, higher ticket items, aided performance. In terms of individual stocks, amongst the top contributors was Puma Biotechology, a developmental-stage biotechnology company focused on cancer research. The company reported new, positive clinical trial data for their lead drug, Neratinib. A further noteworthy performer was Fluidigm, a biotech tools company, which reported accelerating revenue growth and increased full year guidance, largely due to the success of its recently launched system for analysing single cells.

Detracting from performance was stock selection in technology and utilities. Model N, a revenue management software company, was the top detractor in the technology sector. The company released disappointing sales and profit guidance in September, causing many initial investors to sell out of this name which had come to market through an IPO in 2013. Within utilities, our holding of Boingo Wireless hindered performance. The operator of Wi-Fi hotspots reported results that were slightly under Wall Street's targets.

Our base case remains that companies continue to look fundamentally attractive underpinned by strong earnings and balance sheets within the small cap space. That said, we are watchful of price multiples which have expanded throughout the year.

Market Outlook

While we do not expect equity markets to repeat the impressive returns that were generated in 2013, we remain positive on US equities for 2014.

Starting with profits, our research suggests that profit growth will be largely in line with the long term average. Net margins for the S&P500 companies continue to hover around 9%, well above historical average. But we think many of the drivers of these high margins, in particular the benefits to multinational US corporations from globalisation and technological change, are longer lasting and will persist over the next few years. Lower interest rates and lower taxes have also helped boost profitability. Meanwhile we would also expect some help for revenues from acceleration in the pace of economic recovery in the US this year, which appears to be playing out at the moment. Earnings growth of around 8% is our best guess for 2014, helped by continued buybacks of equity at a rapid pace, and probably again sweetened with faster growth in dividends as cash flows remain strong.

Rationally we should expect much less of a rise in price/earnings this year, with a starting multiple on our estimates of over 16x compared to 13x a year ago and 9x at the depths of despair in early 2009. Stocks do still look very inexpensive in comparison to bonds but we see little reason to doubt the consensus view that bond yields will be rising again in 2014, gradually making this comparison less attractive. It also seems sensible to prepare for higher volatility in stock prices, after a remarkably calm experience in 2013 was not at all typical of the longer term history of equity investing. Expectations are higher now, and the transition away from the most accommodative monetary policy ever seen probably carries some risks as well.

Garrett Fish

Investment Manager

26th March 2014

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 this risk by insisting on diversification of investments through its investment restrictions and guidelines which are monitored and reported on regularly by the Managers. J.P. Morgan Asset Management ('JPMAM') provides the Directors with timely and accurate management information, including performance data and attribution analyses, revenue estimates, liquidityreports and shareholder analyses.    The Board monitorsthe implementation and results of  the investment process with the investment manager, who attends the majority of Board meetings, and reviews 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.

·     Market: Marketrisk arises from uncertaintyabout the future prices of the Company's investments. This market risk comprises three elements - currency risk, interest rate risk and other price risk. 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. However, the fortunesof the portfolio are significantly determined by market movementsin US equities, the rate of exchange between US dollars and sterling and interest ratechanges.

·     Loss of Investment Team or Investment Manager: The sudden departure of the investment manager or several members of the wider investment management team could result in a short term deterioration in investment performance. The Manager takes steps to reduce the likelihood of such an event by ensuring appropriate succession planning and the adoptionof a team based approach, as well as special efforts to retain key personnel.

·     Change of Corporate Control of the Manager: The Board holds regular meetings with senior representatives of JPMAM in order to obtain assurance that the Manager continues to demonstrate a high degree of commitment toits investment trusts business through the provision of significant resources.

·     Share Price Relative to Net Asset Value ('NAV') per Share:  Ifthe share price of an investment trust is lower than the NAV per share, the shares are said to be trading at a discount. Throughout the majorityof 2013, the Company's shares traded at a premium. However, the Board monitors the Company's premium/discount level and will seek, where deemedprudent, to address imbalances in the supply and demandof the Company's shares through a programme of share buybacks.

·     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'). Details of the Company's approval are given under 'Business of the Company' above. Were the Company tobreach 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 1158 qualification criteria are continuallymonitored by JPMAM and the results reported to the Board each month. The Company must also comply with the provisions ofthe Companies Act 2006 and, as its shares are listed on the LondonStock Exchange, the UKLA Listing Rules and Disclosure & Transparency Rules ('DTRs'). A breach of the Companies Act 2006 could result in the Company and/or theDirectors beingfined or the subject of criminal proceedings. Breach of the UKLA Listing Rules or DTRs could result in the Company's shares being suspended from listing, which in turn would breach Section 1158. The Directors seek to comply with all relevant regulation and legislation in the UK, Europe and the US and rely on the services of its Company Secretary, JPMAM, and its professional advisers to monitorcompliance with all relevant requirements.

·     Operational: Disruptionto, or failure of, JPMAM's accounting, dealing or payments systems could prevent accurate reporting and monitoring of the Company's financial position.The insolvency, negligence, poor administration or fraud at the Company's custodian could result in the Company's securities being lost or that access to them is compromised. Details of how the Board monitors theservices provided by JPMAM and its associates and the key elements designed to provide effective internal control are included within the Risk Management and Internal Control section of the Corporate Governance report within the Annual Report.

•        Financial: The financial risks faced by the Company include market price risk, interest rate risk, foreign currency risk, liquidity risk, credit risk, counterparty risk and fraud. Further details are disclosed in note 22 to the accounts in the annual report.

•        Going concern: Pursuant to the SharmanReport, Boards are now advised to considergoing concern as a potential risk, whether or not there is an apparent issue arisingin relation thereto. Going concern is considered rigorously on an ongoing basis and the Board's statement on going concern is set out in the Directors' Report within the Annual Report.

•        Political and Economic: Changes in financial or tax legislation, including in the US and the European Union, may adversely effect the Company; current examples are the AIFM Directive and FATCA. The Manager makes recommendations to the Board on accounting, dividend and tax policies and the Board seeks externaladvice where appropriate. In addition, the Company is subject to political risks, such as the imposition of restrictions on the freemovement of capital.

•        Corporate Activity: There is always a risk when companies undertake inappropriate corporate initiatives, such as takeovers and mergers.To protect against thisthe Board has no ambition to undertake such an initiative. Given how mindful of how such initiatives can destroy valueto shareholders, the Board wouldonly do so if it was crystal clear that it would increase valueand returns to shareholderswithout changing theprofile or riskof the Company. This would require extensive due diligence, advice and discussion.

Directors' Responsibilities

Related Parties Transactions

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

Directors' Responsibilities

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

(a) the financial statements, prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and Applicable Law), give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

(b) the annual report and accounts taken as a whole are fair, balanced and understandable and provide the information necessary for shareholders to assess the strategy and business model of the Company.

Financial Statements

Income Statement

for the year ended 31st December 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	-	140,791	140,791	-	32,386	32,386
Net foreign currency gains*	-	3,346	3,346	-	1,025	1,025
Income from investments	11,241	-	11,241	9,821	-	9,821
Other interest receivable and similar income	27	-	27	18	-	18
Gross return	11,268	144,137	155,405	9,839	33,411	43,250
Management fee	(611)	(2,446)	(3,057)	(493)	(1,972)	(2,465)
Performance fee	-	(426)	(426)	-	-	-
Other administrative expenses	(558)	-	(558)	(577)	-	(577)
Net return on ordinary activities before finance costs and taxation	10,099	141,265	151,364	8,769	31,439	40,208
Finance costs	(704)	(2,814)	(3,518)	(693)	(2,775)	(3,468)
Net return on ordinary activities before taxation	9,395	138,451	147,846	8,076	28,664	36,740
Taxation	(1,632)	-	(1,632)	(1,423)	-	(1,423)
Net return on ordinary activities after taxation	7,763	138,451	146,214	6,653	28,664	35,317
Return per share (note 3)	15.02p	267.89p	282.91p	13.80p	59.46p	73.26p

*Includes gains and losses on forward foreign currency contracts which are used to hedge the currency risk in respect of the geared portion of the portfolio.

The dividends proposed in respect of the year ended 31st December 2013 amount to 13.5p (2012: 12.5p) per share, costing £7,157,000 (2012: £6,191,000). Details of dividends paid and proposed are given in the annual report and accounts..

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

	Called up		Capital
	share	Share	redemption	Capital	Revenue
	capital	premium	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
At 31st December 2011	11,551	47,328	8,151	318,561	14,788	400,379
Issue of ordinary shares net of costs to the market	1,009	35,668	-	-	-	36,677
Net return on ordinary activities	-	-	-	28,664	6,653	35,317
Dividends appropriated in the year	-	-	-	-	(7,639)	(7,639)
At 31st December 2012	12,560	82,996	8,151	347,225	13,802	464,734
Issue of ordinary shares net of costs to the market	851	36,795	-	-	-	37,646
Net return on ordinary activities	-	-	-	138,451	7,763	146,214
Dividends appropriated in the year	-	-	-	-	(6,381)	(6,381)
At 31st December 2013	13,411	119,791	8,151	485,676	15,184	642,213

Balance Sheet

at 31st December 2013

	2013	2012
	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	702,067	461,036
Investment in liquidity fund held at fair value through profit or loss	8,494	40,174
	710,561	501,210
Current assets
Derivative financial instruments	1,920	794
Debtors	782	568
Cash and short term deposits	10	12,339
	2,712	13,701
Current liabilities
Creditors: amounts falling due within one year	(20,907)	(337)
Net current (liabilities)/assets	(18,195)	13,364
Total assets less current liabilities	692,366	514,574
Creditors: amounts falling due after more than one year	(49,869)	(49,840)
Performance fees	(284)	-
Net assets	642,213	464,734
Capital and reserves
Called up share capital	13,411	12,560
Share premium	119,791	82,996
Capital redemption reserve	8,151	8,151
Capital reserves	485,676	347,225
Revenue reserve	15,184	13,802
Total equity shareholders' funds	642,213	464,734
Net asset value per share (note 4)	1,197.2p	925.0p

The Company's registration number is 15543.

Cash Flow Statement

for the year ended 31st December 2013

	2013	2012
	£'000	£'000
Net cash inflow from operating activities	5,794	5,302
Returns on investments and servicing of finance
Interest	(3,440)	(3,440)
Taxation
Overseas tax recovered	2	17
Capital expenditure and financial investment
Purchases of equity investments	(365,193)	(124,935)
Purchases of liquidity fund	(216,686)	(75,470)
Sales of equity investments	268,522	86,985
Sales of liquidity fund	248,273	69,862
Other capital charges	(10)	(8)
Net cash outflow from capital expenditure and financial investment	(65,094)	(43,566)
Net cash outflow before management of liquid resources and financing	(62,738)	(41,687)
Management of liquid resources
Net sales of Time Deposits	2,085	-
Net cash inflow from management of liquid resources	2,085	-
Dividends paid	(6,381)	(7,639)
Net cash outflow before financing	(67,034)	(49,326)
Financing
Increase in short term loans	17,045	-
Issue of ordinary shares to the market	37,664	36,678
Net cash inflow from financing	54,709	36,678
Decrease in cash in the year	(12,325)	(12,648)

Notes to the Accounts

for the year ended 31st December 2013

1.  Accounting policies

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 Association of Investment Companies in January 2009. All of the Company's operations are of a continuing nature.

The disclosures on going concern on page 31 of the Directors' Report form part of these accounts.

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

2.  Dividends

     Dividends paid and proposed

		2013	2012
		£'000	£'000
	Dividends paid
	Unclaimed dividends refunded to the Company1	(3)	(4)
	2012 Final dividend paid of 7.5p (2011: 11.0p)	3,787	5,220
	2013 Interim dividend of 5.0p (2012: 5.0p)	2,597	2,423
	Total dividends paid in the year	6,381	7,639

     ¹    Represents dividends which remain unclaimed after a period of 12 years and thereby become the property of the Company.

The final dividend proposed in respect of the year ended 31st December 2012, amounted to £3,768,000. However, the actual payment amounted to £3,787,000 due to shares issued after the balance sheet date but prior to the final dividend record date.

		2013	2012
		£'000	£'000
	Dividends proposed
	2013 Final dividend proposed of 8.5p (2012: 7.5p)	4,560	3,768

     The final dividend has been proposed in respect of the year ended 31st December 2013 and is subject to approval at the forthcoming Annual General Meeting. In accordance with the accounting policy of the Company, this dividend will be reflected in the accounts for the year ending 31st December 2014.

3.  Return/(loss) per share

     The revenue return per ordinary share of 15.02p (2012: 13.80p) is based on the revenue earnings attributable to the ordinary shares of £7,763,000 (2012: £6,653,000) and on the weighted average number of shares in issue during the year of 51,682,267 (2012: 48,208,366).

     The capital return per ordinary share of 267.89p (2012: 59.46p) is based on the capital return attributable to the ordinary shares of £138,451,000 (2012: £28,664,000) and on the weighted average number of shares in issue during the year of 51,682,267 (2012: 48,208,366).

     The total return per ordinary share of 282.91p (2012: 73.26p) is based on the total return attributable to the ordinary shares of £146,214,000 (2012: £35,317,000) and on the weighted average number of shares in issue during the year of 51,682,267 (2012: 48,208,366).

4.  Net asset value per share

     The net asset value per share of 1,197.2p (2012: 925.0p) is based on the net assets attributable to the ordinary shareholders of £642,213,000 (2012: £464,734,000) and on the 53,643,782 (2012: 50,241,592) shares in issue at the year end.

5. 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 December 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 December 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

JPMORGAN ASSET MANAGEMENT (UK) LIMITED

26th March 2014

For further information:

Jonathan Latter,

JPMorgan Asset Management (UK) Limited                                 020 7742 4000

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

JPMORGAN ASSET MANAGEMENT (UK) LIMITED

 

END

 

 

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