Final Results

RNS Number : 0717J

JPMorgan American IT PLC

31 March 2015

 



LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN AMERICAN INVESTMENT TRUST PLC

FINAL RESULTS FOR THE YEAR ENDED 31ST DECEMBER 2014

Chairman's Statement

I am pleased to report on another strong year for shareholders of JPMorgan American Investment Trust.

I would like to remind shareholders of the stock split which we put in place at the Annual General Meeting in 2014, which means that for every one share you held on 7th May 2014, you now hold five. This has, we think, increased liquidity and therefore been a benefit, but it does make comparatives a little difficult.

Last year, the US market, as measured by the S&P 500 total return Index in sterling terms, provided a return of 20.4%. Shareholders in JPMorgan American benefited in 2014 from the strength of the US dollar against sterling, as the S&P's dollar return was 13.7%. This return was also by some way the strongest for sterling investors among major developed equity markets (as well as compared with those from emerging markets). Sterling investors in the equity markets of the UK, Europe, Japan and emerging markets, as measured by the leading market indices in each case, received a total return of 1.0%, -2.1%, 1.7% and 4.3% respectively. Of course, most of us were surprised by bond market returns, with the longer end of the UK bond market providing a return of over 25% and holders of 30 year US Treasuries at the start of the year earning a total dollar return for 2014 in excess of 29%. By the end of 2014 and despite the ending of quantitative easing in October, the US 10 year bond yielded approximately 2.2%, taking the yield back to levels last seen in mid 2013 when the US recovery was far less secure and the effects of monetary policy provided far greater support for the bond market.

Our investment manager, Garrett Fish, reports in more detail on developments in the US corporate sector and in equity markets in his report. I would just like to note Apple's fourth quarter profit of US$18 billion, apparently the largest quarterly profit ever made by a private sector company. Apple is the Company's largest holding at 5.7% of total assets less current liabilities. The strength and dynamism of the US corporate sector, on which we commented last year, has some extraordinary effects. Dividend growth has been strong in 2014 and buy backs have also returned cash to shareholders. The US has also seen a persistent pattern of innovation and commercial development in sectors such as technology and bio technology which have led to very rapid corporate growth for some companies. Whilst they are somewhat backward looking measures, it is interesting to note the sector allocations of the S&P 500, compared with the FTSE All-Share at the year end. In the Company's 2014 Annual Report we have included a chart which highlights that the S&P 500 Index has larger allocations than its UK counterpart to sectors with a record of strong growth and innovation such as Information Technology, Health Care, Consumer Discretionary and Industrials whereas the UK Index has higher exposures to Financials, Consumer Staples, Energy, Telecoms and Utilities where growth prospects perhaps appear more muted. It is worth noting in passing that some of the share and corporate governance structures in the US are different from those we see in the UK and to UK investors may appear on occasion surprising. Perhaps the apparent abundance of available capital in the US for technology and other innovative companies is both a source of corporate success and a reason for a different approach to shareholder rights. Activism is a significant feature of US corporate life and within your Company's portfolio. US investors appear however, less averse to dual voting structures, for example.

Relative Performance of the Company

Your Company's NAV (taking income into account and valuing our debt at its redemption price rather than at market value) provided a return just slightly ahead of our benchmark. This was no mean feat in 2014 when most US equity fund managers underperformed. Apple itself contributed to outperformance as 5.7% of the portfolio was held in Apple shares compared to a benchmark weighting of approximately 4.4%. The large capitalisation portfolio as a whole outperformed and although the small capitalisation portfolio underperformed your investment manager reduced the overall exposure to small companies to 3% at the beginning of the year. The further reasons for outperformance are detailed in the investment manager's report.

Over the longer term, the investment manager has a very strong record: since 1st January 2003 when Garrett Fish took over full responsibility for the management of the Company, the NAV (on a capital return basis) has risen by 229.9%, compared with the relevant benchmark which returned 195.9%; the benchmark representing a market which is regarded as perhaps the most difficult to outperform. The three and five year figures cover the most dramatic rise in the market, and now leave out the difficulties of 2008, when Garrett Fish outperformed significantly in the market crash. The NAV underperformed slightly in the four years following that but has outperformed in 2013 and 2014 (we put in place our current gearing approach in 2012). Performance before 2008 was also good, and looking at peers it is worth noting that the performance of the NAV of the trust, over the 10 years to 31st December 2014, is in the top 4% of the 256 US large capitalisation 'blend' funds in the relevant Morningstar universe.

Your Company's share price return is also ahead of the benchmarket index, over the last one, three, five and 10 years. The Company's shares traded at a significant discount in the past, and the Board showed its commitment to shareholder value by buying back over 30% of the outstanding equity between January 2002 and December 2007. As we have said before, having issued new shares at a small premium in recent years, we are aware of our responsibilities not to let the discount widen significantly.

Gearing

Shareholders may remember that we identified in 2012 that the variation of gearing on a tactical basis by the investment manager was not really adding any value. As a consequence, we established a normal level of gearing of around 10%, with the investment manager authorised to vary this level by plus or minus 2%. The investment manager is further permitted, if he feels that there is a real risk of loss of capital, to hold cash up to 5% of net assets although of course, predicting such events is not straightforward and may even be impossible. This year, we spent some time considering our liability structure given these guidelines. We have an existing 6.875% sterling debenture, which redeems in 2018. This does provide certainty of funding, but is otherwise inflexible, expensive, and requires the hedging of the equivalent amount of assets to avoid a currency mismatch. Over the last two years, we have borrowed additional sums on short term revolving credit facilities which have allowed greater flexibility of drawdown, in both amounts and currency (and at relatively low total costs). In extremis, the undrawn amounts of these facilities could be withdrawn. Our criteria for the liability structure have included transparency, cost, flexibility and diversification of funding source. We have therefore now established a £35 million two year credit facility with ING Bank, which can be drawn down in dollars. This means that we have debt repayment points of December 2016 and June 2018 and a mix of fixed and floating interest payments. We continue to review our arrangements in this area. For full details of the terms of these facilities please refer to the Company's 2014 Annual Report.

Dividend

Overall income from the portfolio increased by some 42.5% in dollar terms over the period. However, these dividends are translated at the time of receipt, and for much of the year sterling was relatively strong, the sterling increase is lower at 35.5%. You may have noticed that sterling was weaker at the end of the year than at the beginning, but there was quite a long period of strength during the year. Several structural factors contributed to this growth in income. These included the greater use of gearing in the year and the income earned on the proceeds of shares issued in the year which your investment manager estimates added approximately 7% and 5% respectively to the income earned in the year. Income was also enhanced by investing a larger proportion of the Company's assets in the relatively higher yielding large-cap element of the portfolio at the expense of the lower yielding smaller companies portfolio. However, the most significant contributor to the revenue received in the year was a significant increase in the dividends paid by the companies in which we are invested. Notable dividend increases among our larger positions came from Microsoft, ExxonMobil, Wells Fargo and Northrup Grumann, all of which produced dividend increases in excess of 10%. We also saw several dividend rises in excess of 50% from a number of smaller holdings in the portfolio such as Suntrust, Morgan Stanley and Hartford Financial.

The Company paid an interim dividend in respect of the 2014 financial year of 1.0 pence per share on 8th October 2014. Subject to shareholder approval at the Annual General Meeting, a final dividend of 2.25 pence per share will be paid on 15th May 2015 to shareholders on the register on 17th April 2015, making a total of 3.25 pence per share. Given the sub-division of shares mentioned below, this represents an increase of 20.4% on last year's distribution of 2.7 pence per share adjusting for the stock split.

After the payment of the proposed final dividend, we will have a balance in the revenue reserves of £11.8 million (equivalent to 4.2 pence per share or 1.3 times the current dividend). It is the intention that such reserves be used to support dividend payments when corporate payouts are less healthy, or if there are other fluctuations in the revenue account which we assess to be temporary.

Share Price and premium/discount

Your Company's share price return was 22.6% for the year. 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 12,815,000 shares (adjusted for the stock split), or 4.8% of the issued share capital at the beginning of the year raising £31.2 million. We continue to issue shares at a premium to estimated cum income with debt at fair net asset value, which has added approximately 0.6 pence to the net asset value calculated on that basis during the year and has not affected NAV measured with debt taken at par. Since the year end the Company has issued a further 600,000 shares, or another 0.21% of the issued share capital in January 2015.

The Board continues to 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 again 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 10% of its issued share capital at prices in excess of the estimated NAV including income with the value of our debt deducted at market prices.

As I indicated above, and as we have stated in previous years, the Company has demonstrated its willingness to buy shares back when the shares stand at anything more than a small discount. Between 2002 and 2007 over 30% of the outstanding share capital was repurchased. The Board remains aware of its responsibility not to let the discount widen significantly and therefore the Company will again be asking shareholders to approve the relevant share buyback resolutions at the Annual General Meeting. I have confirmed this information in my last two statements, but its importance means it is worth reiterating again. You will have also seen us put this into action in March 2015 when the Company started to trade on a discount and we have now bought back 871,032 shares, which are held in Treasury.

Five for One Sub-division of the Company's Share Capital

Following approval at the Company's Annual General Meeting held in May 2014, the Company's shares were sub-divided into five ordinary shares for every one share held. That means for every one share you held previously, you now hold five. This sub-division took effect on 8th May 2014. The share split did not affect the overall value of your holding in the Company as the reduction in the price per share was offset by a commensurate increase in the number of shares you hold in the Company.

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 and robustly the capabilities of the investment manager in order to assess whether JPMorgan Funds Limited ('JPMF') 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. In 2014, the Board visited the Manager's offices in New York where we held a board meeting. We also determined that we wanted to discuss a number of aspects with the team in New York. This included meetings with the corporate engagement team, the dealing team, senior management and the behavioural finance team, of which Garrett Fish is a member. In addition to investment management, the Manager provides other services to the Company, including marketing, accounting and company secretarial services. We have had a number of discussions with the marketing team, to develop appropriate Key Performance Indicators and are generally pleased with the development of their digital marketing approach and have discussed potential improvements to the website with them. We were pleased with the approach taken by the Managers to the demands of new regulation through the AIFM process. We have concluded that the ongoing appointment of the Manager is in the continuing interests of shareholders.

The Manager has this year earned a performance fee of £359,000, which will be paid in three equal amounts over the next three years (the total paid in any one year is capped). When added to the as yet unpaid element of the performance fee brought forward from prior years, this gives a balance of £643,000 to be paid in future years. Full detail of the calculation of the performance fee is detailed in the Company's 2014 Annual Report. This performance fee balance will be subject to claw-back in the event of future underperformance relative to the benchmark up to the point at which it is paid. We have discussed whether the performance fee makes sense, particularly in the context of the post Retail Distribution Review ('RDR') world, where there is increasing competition from open-ended funds that charge a single management fee. We have currently a reasonably low management fee by industry standards, and we have felt that on balance, the performance fee works fairly. However, we do keep it under review, as we do the standard fee, as the size of your Company increases and as we see developments in the investing world.

Alternative Investment Fund Managers Directive ('AIFMD') and New Contractual Relationships

I indicated previously that in order to comply with the AIFMD, the Company would be appointing a different JPMorgan entity as its Manager and Company Secretary and was further required to appoint a depositary in addition to its existing custodian.

Further to legal advice received by the Company from Dickson Minto WS, JPMorgan Funds Limited, which has been approved by the Financial Conduct Authority as an Alternative Investment Fund Manager, was appointed as Manager and Company Secretary to the Company with effect from 1st July 2014. This change of entity does not affect the actual management of the portfolio which will continue to be managed from the US by Garrett Fish and his support team. The Company Secretarial and administration support will also continue to be conducted by the same individuals from the Company's registered office in London. No extra fees are being charged by any JPMorgan entity as a result of the Company's AIFMD obligations.

The Company has also appointed Bank of New York Mellon ('BNYM') as Depositary. This appointment, which is a requirement under the AIFMD, brings with it additional safeguards over the investments of the Company and third party oversight of many of the accounting aspects of the Company's operations. Following the appointment of the Depositary the custodian, JPMorgan Chase Bank NA, which is responsible for safeguarding the Company's assets and processing the purchase and sale of investments and collecting income arising from the portfolio, is now appointed directly by the Depositary, rather than being a direct appointee of the Company, which was previously the case. BNYM are paid a fee of 0.017% per annum of the Company's monthly gross assets per annum (currently around £170,000).

Costs and Directors' Fees

We have kept our focus on costs through the year, 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 said last year that we would address the level of Directors' fees given the greater amounts of time required over recent years and the rising regulatory responsibilities. The last increase in Directors' fees was implemented four years ago, at the beginning of 2011. The Board has examined the time and the effort required to be an effective Director of this particular trust and reviewed the fees paid to the directors of other investment trusts and other trading companies.

The Board has resolved that the base Director's fee will be increased by £3,500 per annum to £28,500. In line with those increases, the Chairman of the Audit Committee's fee will rise by £4,500 to £34,500 and the Chairman's fee will increase by £5,500 to £43,000. We have also established a Risk Committee, the fee for the chairing of which has been set at £2,000, and appointed a Senior Independent Director, the fee for which role has also been set at £2,000. All fee increases to take effect from 1st January 2015.

The table set out below is in the same format as we used last year. It aims to show 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. Management fees generally vary with the size of the Company and therefore rose. There was an increase in the "other costs" which was primarily due to the AIFMD.  There was a loss on our currency hedges shown in this part of the table which was balanced by an increase in the underlying assets due to the strength of the dollar and which is included in the net investment performance figure. However, it is pleasing to note that despite these increases on the prior year costs, the Company's Ongoing Charges remain low at 0.64%, a reduction from the 2013 level of 0.66%. 

	2014		2013
		Percentage		Percentage
		of opening		of opening
	£'000s	net assets	£'000s	net assets
Net assets at start of year	642,213	100.00	464,734	100.00
Increase/(decrease) in net assets during the year from investing	139,421	21.71	141,096	30.36
Brokerage fees/commissions and other dealing charges	(173)	(0.03)	(305)	(0.07)
Net investment performance	781,461	121.68	605,525	130.29
Income received from investing - net of withholding tax	12,567	1.96	9,636	2.07
Dividends paid to shareholders1	(7,467)	(1.16)	(6,381)	(1.37)
Interest paid on borrowings	(3,826)	(0.60)	(3,518)	(0.76)
Gains/(losses) on currency hedging	(4,884)	(0.76)	3,346	0.72
Management and performance fees	(4,076)	(0.63)	(3,483)	(0.75)
Directors' fees	(152)	(0.02)	(151)	(0.03)
Other costs of the Company	(495)	(0.08)	(407)	(0.09)
Issue of new shares	31,273	4.87	38,001	8.17
Cost of issue of new shares	(251)	(0.04)	(355)	(0.08)
Net assets at end of year	804,150	125.22	642,213	138.19

¹Dividends paid in 2013 include a final full year's dividend for 2012 and interim dividend for 2013.

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 the UK Corporate Governance Code, all continuing Directors will seek reappointment at the Annual General Meeting. Accordingly, I, along with Kate Bolsover, Simon Bragg (Chairman of the Audit Committee) and Sir Alan Collins (Senior Independent Director and Chairman of the Risk Committee) 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 retired from the Board in November 2014. During his tenure James contributed significantly to the success of the Company and we wish him well for the future. Dr Kevin Carter was appointed to the Board as an independent non-executive director from 1st July 2014. We identified a clear set of requirements for this role, including an understanding of US fund management, an understanding of quantitative fund management approaches as well as fundamental approaches, and an understanding of the investment company sector. Dr Carter is a CFA charterholder and has a PhD in mathematical statistics and has been involved in the fund management world for very many years in a wide range of capacities. He has wide experience and technical understanding of both fund management and the management of fund managers. He currently sits on two other investment trust boards. Dr Carter will stand for appointment by shareholders at this year's Annual General Meeting.

The Nomination and Remuneration Committee will continue to manage the process of Board succession and refreshment, to make sure the Board has the skills and experience to add value to shareholders. We would note that we have a Board which is diversified by gender and also by background and experience.

Annual General Meeting

This year's Annual General Meeting will be held on Wednesday, 13th May 2015 at 2.30 p.m. at 60 Victoria Embankment, London EC4Y 0JP. 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 JPMF after the meeting. I look forward to welcoming as many shareholders as possible to this meeting.

Outlook

The US equity market continues to provide a range of opportunities not readily available elsewhere and UK investors have tended to underestimate the strength of the US corporate sector. Valuations are clearly not cheap and the impact of the ending of quantitative easing and the possible increase in interest rates is very difficult to assess. Our Manager tends not to make major macro-economic calls, but focuses on picking companies which appear to offer both reasonable quality and reasonable value. The portfolio is broadly spread and carefully put together so that, compared with the US market as a whole, there are no extreme positions. If markets were to fall, the assets of your Company would undoubtedly fall as well. On the other hand, in a very uncertain world, there are considerable attractions in the US corporate sector and our Manager has demonstrated some ability to steer a sensible course through both exuberant and difficult market conditions.

Sarah Bates

Chairman                                                                                                                                                                                                  31st March 2015

Investment Manager's Report

Market Review

While many correctly anticipated a positive 2014 for the US stock market, few could have predicted the way in which it was achieved. Large cap stocks outperformed small caps and defensive sectors outperformed cyclical ones. All was not smooth sailing as the US equity market experienced three pullbacks in 2014. However, the market rebounded strongly each time on the strength of economic and market fundamentals.

In the end, the S&P 500 Index (S&P 500) made 56 new highs in 2014 and finished close to its record high (2090.57) set just before the year end on 29th December 2014. Large cap stocks, as represented by the S&P 500 returned 20.4% in sterling terms significantly outpacing small cap stocks, measured by the Russell 2000 Index which rose 11% in sterling terms.

Part of the returns from the market were driven by an increased focus by corporate activists pressuring underperforming management teams to restructure their businesses and in many cases to increase capital distributions back to shareholders through share repurchases or dividends. We are generally fans of corporations buying back their shares if the shares are at a reasonable valuation and their capital levels are robust. We are also in favour of increasing dividend payments with the excess cash that the corporations generate through the year. At this point in time there are many US corporations that are generating healthy cash flows, which coupled with robust balance sheets should allow for increased capital returns in the years ahead.

Investors were quite perplexed when after an April Employment Report that significantly exceeded expectations, bond yields continued to fall. Geopolitical tensions in the Ukraine, unrest in Iraq, and concerns over US growth were cited, particularly after the poor showing of US GDP in the first quarter of the year, which experienced a -2.9% contraction. Clearly, the low yield environment is not a reflection of poor growth prospects for the US, but a function of supply and demand. Given the low yields in developed countries such as Japan, Germany and France, yields in the US look far more attractive. An improving US fiscal deficit has led to lower levels of Treasury issuance, decreasing the supply.

The year's deepest sell off began in mid September as the possibility of another recession in Europe rose to the forefront as weakness began to spread to Germany. As expected in October, the Fed ended its quantitative easing programme.

The final bout with volatility came in early December amidst concerns over the fierce decline in crude oil prices, the collapse of Russian equity markets and its currency, and increasing political uncertainty in and over Greece. Thankfully, markets rebounded from the sell-off on the strength of US economic data. The current resilience of the US economy was also confirmed as the final estimate of US GDP for the third quarter came in at an annualised rate of 5.0%, higher than the second estimate of 3.9%.

The top performing sector within the S&P 500 over the year was the utilities sector, which was clearly helped by the fall in bond yields and investors' quest for income. The worst performing sector was the energy sector which fell dramatically from late summer, as crude oil prices began to fall. WTI futures, the US benchmark for crude oil pricing, reached a high of US$107.26 per barrel on 20th June and then fell for the rest of year finishing 2014 at the low of US$53.27 per barrel, a -50.3% decline.

The Company's net asset value total return (in sterling terms) rose by 20.8%, which was slightly ahead of the benchmark, the S&P 500 Index.

Overall Asset Allocation and Performance

I am responsible for managing the allocation between the large and the small cap portfolios, and for implementing the levels of cash and gearing within the gearing guidelines laid down by the Board. The Company ended the year 8.7% geared, having remained around this level all year. Our gearing was a positive factor as one would expect in a rising equity market and added approximately a net 0.5% to relative performance.

The weighting in the small cap portfolio was increased from 2.9% to 3.5% of the Company's total assets less current liabilities over the year. We had reduced our small cap allocation in 2013 based on our valuation tool. This action proved beneficial in 2014 due to the strong underperformance of small caps versus large caps. We believe that our ability to move between the two segments enhances returns to shareholders over the long term and also helps to balance our overall risk.

Attribution data for 2014 shows that our large cap portfolio was a contributor for the period and our smaller companies portfolio detracted.

Large Companies Portfolio

Our investment methodology continues to focus on investing in high quality, reasonably valued companies. This style leads us to invest in companies that exhibit good growth characteristics with growing earnings, strong cash flows and reasonable valuations. 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.

The large companies portfolio marginally contributed to performance for the period under review. In terms of sectors where we added value, in a reversal from last year, our positioning in the information technology sector proved very beneficial. We have added to our technology exposure during the year, as we continue to find a number of stocks in the space that meet our investment criteria. Within the sector, our exposure to a handful of names such as Apple, Yahoo, Hewlett Packard and SanDisk helped performance. With regards to Apple, the stock's momentum continues following the company's latest iPhone, iPad and iMac launch and better than expected quarterly results. We think revenue and earnings numbers still have upside as we consider potential unit growth from market share gains and higher average selling prices from the iPhone 6 and iPhone 6 Plus. From our perspective, Apple remains attractively valued, has a cash rich balance sheet, and the company continues to launch new products and services such as the Apple Watch and Apple Pay. We had added to our position earlier this year and the name remains our top holding.

Our positioning in the consumer staples and industrials also added value, although to a lesser extent. Within consumer staples, overweight positions in pharmacy chains Walgreen Boots Alliance and CVS Health helped performance. Walgreen posted strong sales over most of the period, but more importantly completed its acquisition of European pharmacy concern Alliance Boots which gives it a vast drug distribution empire across 11 countries. During the year, CVS Health hit the headlines as the company decided to remove tobacco products from sale in its stores. It is unclear whether the move has yielded any financial benefit to the pharmacy chain. However, at this time none of the other national pharmacy chains have followed CVS to drop cigarettes.

In contrast our stock selection in the consumer discretionary and financial services sectors detracted slightly. Within consumer discretionary our exposure to General Motors and Staples for some of the period under review disappointed us as both stocks sold off on stock specific issues. General Motors suffered from negative investor sentiment over numerous recall-related issues. While General Motors' valuation remains attractive, we have concerns how long the recalls will act as an overhang as litigation remains pending. Staples' earnings came under pressure as the struggling office-supplies retailer was faced with weaker than expected sales due to a reduction in traffic falls in the face of stronger online competition and weaker demand for traditional office supplies. While the company is closing underperforming stores and trying to increase its online growth, we have fundamental concerns on how quickly the company can reignite sales growth. As a result we exited our position.

In the financials sector, a lack of exposure to Berkshire Hathaway hurt us, as the name rallied strongly. Whilst we do admire Warren Buffet's proficiency as an investor, we would prefer to own the name when it was not trading at such an extended valuation.

Sector Weightings of the Large Cap Portfolio versus S&P 500 as at 31st December 2014

	Large company		Overweight/
	portfolio	S&P 500	(underweight)
Sector	%*	%	%
Information Technology	23.1	19.7	3.2
Financials	16.5	16.7	(0.2)
Health Care	14.9	14.2	0.7
Consumer Discretionary	11.8	12.1	(0.3)
Consumer Staples	10.6	9.8	0.8
Industrials	9.9	10.4	(0.5)
Energy	8.8	8.4	0.4
Telecom Services	2.5	2.3	0.2
Utilities	1.2	3.2	(2.0)
Materials	0.8	3.2	(2.4)

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

Source: Wilshire. Based on the MSCI Global Industry Classification Standards.

The table below shows the largest positive and negative stock contributors to the Company's portfolio performance in 2014:

	Average position relative to benchmark over year	Stock return (based on average weight over the year)	Contribution
Stock	%	%	%
Positive Contributors
Apple	1.8	49.4	0.9
Southwest Airlines	0.5	140.4	0.4
Amazon1	-0.7	n/a	0.3
Yahoo	0.4	55.7	0.3
Hewlett Packard	0.2	55.1	0.3
Negative Contributors
Peabody Energy2	0.3	-51.5	-0.4
General Motors2	0.5	-14.7	-0.3
Terex2	0.6	-21.4	-0.3
Devon Energy	0.9	6.6	-0.3
Intel1	-0.9	n/a	-0.2

¹Not held in the portfolio during the year.

²Not held in the portfolio at year end.

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

Smaller Companies Portfolio

US small caps, which performed well in 2013, came under pressure in 2014 and ended the period lagging their large cap peers. The year presented a challenging environment for the investment style of the JPMorgan US small cap growth portfolio, which unfortunately detracted from overall performance against our benchmark. Starting in the middle of March, we witnessed fairly extreme market trends, where the higher growth segments, for large and small caps alike, sold off dramatically, as investors were concerned with potentially frothy valuations. Given our approach which leads us to have a consistent high growth bias, we experienced headwinds to our investment style as valuations in the growth pockets compressed significantly. Stocks such as Gigamon and Financial Engines were the biggest detractors from performance.

On the positive side, stock selection was strong in the industrials space with Old Dominion Freight Line and Spirit Airlines delivering strong earnings and revenue growth. Both companies are supported by disciplined management teams and have favourable industry backdrops. Other top performers include positions in two biotechnology names, Receptos and Puma Biotechnology.

With regards to positioning, the small cap portfolio continues to have significant exposure to healthcare and technology names which represent nearly half the allocation. The portfolio has less exposure to the energy, consumer staples and utilities sectors as we are finding less attractive investment ideas in these areas.

Outlook

We believe that US equity markets can continue to march higher from here despite that fact that they have had a very strong rally over the last several years. While earnings growth in 2015 will most likely be lower than the prior years due to weaker global economic growth, with significantly lower oil prices and a strong US dollar the equity market still has some positives. Record high margins continue to increase due to lower interest costs and muted wages costs and the US economy continues to maintain its low growth trajectory. US companies continue to have healthy balance sheets with ample cash reserves which should continue to support dividend increases and share buybacks. We may also see an increase in mergers and acquisitions activity as management teams continue to look at the best ways to grow their businesses.

From a US economic standpoint the slow and steady pace continues to persist while the global emerging markets are decelerating and the other developed markets are struggling to expand. The US employment picture continues to improve as hiring trends continue to drift higher and consumer confidence levels are at the highest levels since the financial crisis ended.

The Fed will no doubt play a part in this year's financial markets. Current expectations are for the Fed funds rate to be increased from the very low levels at which they stand now. If this does turn out to be true, history says that the market volatility will increase as market participants will worry that the current economic cycle has peaked and the higher interest rates will restrict the economy from growing further. This is the inherent tension between the level of short term interest rates and the level of economic growth.

There are many interesting developments in the world right now. Our outlook remains positive on the US equity market partly because of recent economic trends in the US and, whilst the US is not immune to the global economy, we continue to scour the market for highly attractive securities that are priced at reasonable valuations.

Garrett Fish

Investment Manager                                                                                                                                                                                 31st March 2015

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. JPMorgan Funds Limited ('JPMF') provides the Directors with timely and accurate management information, including performance data and attribution analyses, revenue estimates, liquidity reports and shareholder analyses.    The Board monitors the implementation and results of the investment process with the investment 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: Market risk arises from uncertainty about the future prices of the Company's investments. This market risk comprises three elements - equity market risk, currency risk and interest rate 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 JPMF. The Board monitors the implementation and results of the investment process with the Manager. However, the fortunes of the portfolio are significantly determined by market movements in US equities, the rate of exchange between US dollars and sterling and interest rate changes.

·        Operational and Cybercrime: Disruption to, or failure of, the Manager's accounting, dealing or payments systems or the custodian's or depositary's records could prevent accurate reporting and monitoring of the Company's financial position. On 1st July 2014, the Company appointed BNY Mellon Trust & Depositary (UK) Limited to act as its depositary, responsible for overseeing the operations of the custodian, JPMorgan Chase Bank, N.A., and the Company's cash flows. Details of how the Board monitors the services provided by the Manager and its associates and the key elements designed to provide effective internal control are included in the Internal Control section of the Corporate Governance report within the Company's 2014 Annual Report. The threat of cyber attack, in all its guises, is regarded as at least as important as more traditional physical threats to business continuity and security. The Company benefits directly or indirectly from all elements of JPMorgan's Cyber Security programme. The information technology controls around the physical security of JPMorgan's data centres, security of its networks and security of its trading applications are tested by Deloitte and reported every six months against the AAF Standard.

·        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 adoption of a team based approach. The Board has stressed to JMPF the importance of retaining the current investment manager.

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

·        Share Price Relative to Net Asset Value ('NAV') per Share:  If the 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 majority of 2014, the Company's shares traded at a premium. However, the Board monitors the Company's premium/discount level and will seek, where deemed prudent, to address imbalances in the supply and demand of the Company's shares through a programme of share issuance and 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' within the Company's 2014 Annual Report. Were the Company to breach Section 1158, it might lose investment trust status and, as a consequence, gains within the Company's portfolio would be subject to Capital Gains Tax. The Section 1158 qualification criteria are continually monitored by JPMF and the results reported to the Board each month. The Company must also comply with the provisions of the Companies Act 2006 and, as its shares are listed on the London Stock Exchange, the UKLA Listing Rules and Disclosure & Transparency Rules ('DTRs'). A breach of the Companies Act 2006 could result in the Company and/or the Directors being fined 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, JPMF, and its professional advisers to monitor compliance with all relevant requirements.

·        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 Company's 2014 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, FATCA and MIFID II. JPMF makes recommendations to the Board on accounting, dividend and tax policies and the Board seeks external advice where appropriate. In addition, the Company is subject to political risks, such as the imposition of restrictions on the free movement of capital.

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.

Income Statement

for the year ended 31st December 2014

		2014			2013
		Revenue	Capital	Total	Revenue	Capital	Total
		£'000	£'000	£'000	£'000	£'000	£'000
Gains on investments held at fair value
through profit or loss		-	139,248	139,248	-	140,791	140,791
Net foreign currency (losses)/gains1		-	(4,884)	(4,884)	-	3,346	3,346
Income from investments		15,228	-	15,228	11,241	-	11,241
Interest receivable and similar income		-	-	-	27	-	27
Gross return		15,228	134,364	149,592	11,268	144,137	155,405
Management fee		(743)	(2,974)	(3,717)	(611)	(2,446)	(3,057)
Performance fee		-	(359)	(359)	-	(426)	(426)
Other administrative expenses		(647)	-	(647)	(558)	-	(558)
Net return on ordinary activities before
finance costs and taxation		13,838	131,031	144,869	10,099	141,265	151,364
Finance costs		(765)	(3,061)	(3,826)	(704)	(2,814)	(3,518)
Net return on ordinary activities before
taxation		13,073	127,970	141,043	9,395	138,451	147,846
Taxation		(2,661)	-	(2,661)	(1,632)	-	(1,632)
Net return on ordinary activities after
taxation		10,412	127,970	138,382	7,763	138,451	146,214
Return per share2 (note 3)		3.76p	46.24p	50.00p	3.00p	53.58p	56.58p

¹Includes 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. Details of the Company's hedging strategy are given in note 23(a)(i) in the Company's 2014 Annual Report.

²Comparative figures for the year ended 31st December 2013 have been restated due to the sub-division of each existing Ordinary share of 25p into five Ordinary shares of 5p each on 8th May 2014.

The dividends payable in respect of the year ended 31st December 2014 amount to 3.25p (2013: 2.70p) per share, costing £9,114,000 (2013: £7,157,000). Details of dividends paid and proposed are given in note 8 in the Company's 2014 Annual Report.

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 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
Issue of ordinary shares net of costs to the market	641	30,381	-	-	-	31,022
Net return on ordinary activities	-	-	-	127,970	10,412	138,382
Dividends appropriated in the year	-	-	-	-	(7,467)	(7,467)
At 31st December 2014	14,052	150,172	8,151	613,646	18,129	804,150

Balance Sheet

at 31st December 2014

		2014	2013
		£'000	£'000
Fixed assets
Investments held at fair value through profit or loss		875,701	702,067
Investment in liquidity fund held at fair value through profit or loss		11,234	8,494
		886,935	710,561
Current assets
Derivative financial assets		-	1,920
Debtors		776	782
Cash and short term deposits		3	10
		779	2,712
Current liabilities
Creditors: amounts falling due within one year		(1,808)	(20,907)
Derivative financial liabilities		(1,529)	-
Net current liabilities		(2,558)	(18,195)
Total assets less current liabilities		884,377	692,366
Creditors: amounts falling due after more than one year		(79,720)	(49,869)
Performance fees		(507)	(284)
Net assets		804,150	642,213
Capital and reserves
Called up share capital		14,052	13,411
Share premium		150,172	119,791
Capital redemption reserve		8,151	8,151
Capital reserves		613,646	485,676
Revenue reserve		18,129	15,184
Total equity shareholders' funds		804,150	642,213
Net asset value per share1   (note 4)		286.1p	239.4p

¹Comparative figures for the year ended 31st December 2013 have been restated due to the sub-division of each existing Ordinary share of 25p into five Ordinary shares of 5p each on 8th May 2014.

The Company's registration number is 15543.

Cash Flow Statement

for the year ended 31st December 2014

		2014	2013
		£'000	£'000
Net cash inflow from operating activities		8,085	5,794
Returns on investments and servicing of finance
Interest		(3,709)	(3,440)
Taxation
Overseas tax recovered		11	2
Capital expenditure and financial investment
Purchases of equity investments		(252,234)	(365,193)
Purchases of liquidity fund		(91,333)	(216,686)
Sales of equity investments		213,841	268,522
Sales of liquidity fund		89,420	248,273
Other capital charges		(8)	(10)
Net cash outflow from capital expenditure and financial investment		(40,314)	(65,094)
Net cash outflow before management of liquid resources and financing		(35,927)	(62,738)
Management of liquid resources
Net (purchases)/sales of Time Deposits		(5)	2,085
Net cash (outflow)/inflow from management of liquid resources		(5)	2,085
Dividends paid		(7,467)	(6,381)
Net cash outflow before financing		(43,399)	(67,034)
Financing
Increase in bank loans		11,173	17,045
Issue of ordinary shares to the market		30,998	37,664
Net cash inflow from financing		42,171	54,709
Decrease in cash in the year		(1,228)	(12,325)

Notes to the Accounts

for the year ended 31st December 2014

1.    Accounting policies

(a)  Basis of accounting

The accounts are prepared in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice ('UK GAAP') and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' (the 'SORP') issued by the Association of Investment Companies in January 2009. All of the Company's operations are of a continuing nature.

The disclosures on going concern, contained within the Directors' Report in the Company's 2014 Annual Report, form part of these accounts.

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

2.   Dividends

(a)  Dividends paid and proposed

	2014	2013
	£'000	£'000
Dividends paid
Unclaimed dividends refunded to the Company1	-	(3)
2013 Final dividend paid of 1.7p (2012: 1.5p)2	4,676	3,787
2014 Interim dividend of 1.0p (2013: 1.0p)2	2,791	2,597
Total dividends paid in the year	7,467	6,381

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

²Dividend rates have been restated due to the sub-division of each existing ordinary share of 25p into 5p each on 8th May 2014.

The final dividend proposed in respect of the year ended 31st December 2013, amounted to £4,560,000. However, the actual payment amounted to £4,676,000 due to shares issued after the balance sheet date but prior to the final dividend record date.

	2014	2013
	£'000	£'000
Dividends proposed
2014 Final dividend proposed of 2.25p (2013: 1.7p)1	6,323	4,560

¹Dividend rates have been restated due to the sub-division of each existing ordinary share of 25p into 5p each on 8th May 2014.

The final dividend has been proposed in respect of the year ended 31st December 2014 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 2015.

(b) Dividends for the purposes of Section 1158 of the Corporation Tax Act 2010 ('Section 1158')

      The requirements of Section 1158 are considered on the basis of dividends proposed in respect of the financial year, as follows:

	2014	2013
	£'000	£'000
Interim dividend of 1.0p (2013: 1.0p)1	2,791	2,597
2014 Final dividend proposed of 2.25p (2013: 1.7p)1	6,323	4,560
Total	9,114	7,157

¹Dividend rates have been restated due to the sub-division of each existing ordinary share of 25p into 5p each on 8th May 2014.

The revenue available for distribution by way of dividend for the year is £10,412,000 (2013: £7,763,000).

3.   Return per share

The revenue return per ordinary share of 3.76p (2013: 3.00p) is based on the revenue earnings attributable to the ordinary shares of £10,412,000 (2013: £7,763,000) and on the weighted average number of shares in issue during the year of 276,739,581 (2013: 258,411,335).

The capital return per ordinary share of 46.24p (2013: 53.58p) is based on the capital return attributable to the ordinary shares of £127,970,000 (2013: £138,451,000) and on the weighted average number of shares in issue during the year of 276,739,581 (2013: 258,411,335).

The total return per ordinary share of 50.00p (2013: 56.58p) is based on the total return attributable to the ordinary shares of £138,382,000 (2013: £146,214,000) and on the weighted average number of shares in issue during the year of 276,739,581 (2013: 258,411,335).

Comparative figures for the year ended 31st December 2013 have been restated due to the sub-division of each existing ordinary share of 25p into five ordinary shares of 5p each as 8th May 2014.

4.   Net asset value per share

The net asset value per share of 286.1p (2013: 239.4p) is based on the net assets attributable to the ordinary shareholders of £804,150,000 (2013: £642,213,000) and on the 281,033,910 (2013: 268,218,910) shares in issue at the year end.

5.   Status of announcement

2013 Financial Information

The figures and financial information for 2013 are extracted from the published Annual Report and Accounts for the year ended 31st December 2013 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.

2014 Financial Information

The figures and financial information for 2014 are extracted from the Annual Report and Accounts for the year ended 31st December 2014 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

31st March 2015

For further information:

Alison Vincent,

JPMorgan Funds 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 FUNDS LIMITED

 

END

 

 

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