Final Results

RNS Number : 6587E

JPMorgan Emerging Mkts Invest Trust

30 September 2008

 



LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN EMERGING MARKETS INVESTMENT TRUST PLC

RESULTS FOR THE YEAR ENDED 30TH JUNE 2008

    Chairman's Statement

It is pleasing to report a positive return over the year as against a fall in most of the main financial markets. However, for the first time in five years we have underperformed our benchmark index. The net asset value ('NAV') total return for the year to 30th June was +2.5% as against a total return of +5.5% for our benchmark index, the MSCI Emerging Markets Free Index (in sterling terms). The share price increased over the year from 416.5p to 433.5p, producing a total return to shareholders of +4.7%.

Our performance over the year was clearly affected by the high volatility and uncertainty in markets generally. The Manager's approach, with the support of the Board, has been to take a long term view and at the same time try to take advantage of any short term weakness to adjust the portfolio. Our medium and long term performance remains excellent, and over a five year period the NAV total return has been +273% as against our benchmark of +205%. Moreover, the Company is also the best performer over this period within a peer group of ten open and closed end funds that the Board monitors for performance comparison.

As a Board we continue to monitor carefully the discount of our share price to NAV and it is pleasing to report that it narrowed from 9.6% to 7.8% over the reporting period. The discount remained in line with our peers and at no time did the Board feel it was necessary to buy back shares. Our discount policy remains as stated last year, that in a stable market and with the Company performing well against its benchmark, we would buy back shares if the discount is materially out of line with our peers and over 10%. The Board regularly reviews this policy. As last year we will be putting forward resolutions at the AGM to buy back shares for cancellation or to put into Treasury for reissue only at a premium to the then NAV.

In 2007 the European Court of Justice ruled that VAT should not be levied on the management and performance fees of investment trust companies. Consequently, with effect from 1st October 2007, VAT is no longer payable on these fees. The Company also has the right to reclaim VAT it has paid on these fees in most years since its launch in 1991. Following discussions with JPMorgan Asset Management, the Board has concluded that the recovery of £1.1m of this VAT is sufficiently certain that it can be recognised in the Company's accounts for the year to 30th June 2008. However, the timing of its receipt remains uncertain. 

The Company's policy continues to be to maximise capital growth. Nevertheless, we are proposing to maintain the level of the final dividend at 2.00p per share (2007: 2.00p). Subject to shareholders' approval at the AGM, this will be paid on 13th November 2008 to shareholders on the register at the close of business on 24th October 2008.

The Board fully complies with the Financial Reporting Council Combined Code and the AIC Code of Corporate Governance. We pay particular attention to monitoring the performance of the Manager and ensuring that we have the strategies in place to see that the Manager continues to deliver out-performance in the medium and long term. At the end of the year we carried out a formal review of the Manager, the Board as a whole and, separately the Board evaluated my role as Chairman. I am pleased to report that no concerns were raised in these appraisals and the Board believes the Manager is continuing to do an excellent job and that their reappointment is in the best interests of shareholders as a whole.

As I mentioned in last year's statement Val Powell and I will be retiring from the Board during 2009 and I will be giving up my Chairman's role at the AGM in 2009. The Nomination Committee, with the help of external advisors, has therefore been searching for two new Directors to join the Board and we have been fortunate in securing the services of Nigel Kenny and Percy Mistry. Nigel joined us on 1st September 2008 and Percy will join the Board on 1st January 2009. Both bring with them enormous knowledge of developing economies. Nigel Kenny is a founding partner of Sabre Capital, an emerging markets private equity company. He has considerable experience in emerging markets having held a number of senior positions in Standard Chartered Bank including Group Head of Strategy, Operations and Group Finance Director. Prior to that he spent a number of years with Chase Manhattan Bank. He is a Chartered Accountant and has a PhD in theoretical physics. Percy Mistry, an Indian national living in the UK, has broad emerging markets experience having worked in senior positions with The World Bank and having been Chief Executive of businesses in India and Hong Kong. He is Chairman and founder of Oxford International Group, which provides advice to governments and international companies and institutions operating in developing countries, and is particularly active in India.

To attract and retain Directors of the calibre required it is important that the fees paid are appropriate. Fees were last reviewed in July 2006 and, after taking advice, the Remuneration Committee decided that it was necessary to raise the Directors' fees to £20,000 per annum and those of the Chairman of the Audit Committee and Chairman of the Company to £25,000 and £30,000 respectively as from July 2008.

Last year I wrote about a market correction taking place and increasing levels of uncertainty. Whilst this certainly has proved accurate, by comparison with today's situation last year seems like calm waters. At the time of writing this year's report we are witnessing on almost a daily basis the failure of financial companies that are at the very heart of the world market economy. The changes now happening are of seismic proportions and it is likely that it will take years for us to fully understand the impact of what is now taking place.

There are clearly big implications for the Company. However, emerging markets in general are better run and better capitalised than they were 5-10 years ago and I believe will prove more robust in handling this crisis. Moreover, whilst in no way are global markets decoupled, many of the fundamentals for continued growth in emerging economies remain in place.

That said, it will not be an easy ride and, more than ever, there will be clear winners and losers. As a company we have a number of strengths. As an investment trust we can, and do, take the long-term view and are not forced sellers in market conditions such as these. We have a global emerging markets mandate and have the flexibility to switch the focus of our investments and better manage risk. In JPMorgan we have a manager with a strong base that is not threatened by the current turmoil. Finally, the team managing the Company has shown itself to be one of the best in the business. The years ahead, and particularly this year, will not be easy but the Board remains confident that the Company will deliver long term capital growth for its shareholders and we have no hesitation in recommending its continuation for a further three years.

    Roy Reynolds

    Chairman  

    29th September 2008

Investment Manager's Report

What has happened?

Two simple facts should inform our discussion of this last year. The first fact is that returns from emerging market equities have been notably lower than during the preceding four years; in the year to 30th June 2008, the benchmark index against which we measure ourselves appreciated by 5.5% in sterling terms, though this unremarkable headline number tells far too ordinary a story for the year that passed. The second fact is that, for the first time since 2003, we failed to exceed the index return with the Company's portfolio; net asset value per share rose by only 2.5%.

We concluded last year's report with the expectation of less spectacular returns from emerging markets this time and so it turned out. But we did not anticipate how eventful a period we would see. Such busy conditions are hard to summarise. This was a year of extremes in market behaviour; volatility rose sharply, markets reached frothy, even bubble-like excesses and in some places plumbed real depths as well; some stocks doubled in a few months; others lost two thirds of their value just as quickly; some even managed both in the course of twelve months.

It began in the USA in the summer of 2007 with what became known as the credit crunch; but this label, which neatly pins responsibility on the financial sector, obscures the fact that this is a cycle, just like any other. The initial reaction of the US Federal Reserve was to try to stimulate the economy by cutting interest rates, allowing the dollar to depreciate and thus exporting the problem. For governments who thought that US monetary policy was an adequate framework for managing a developing economy, this presented an immediate challenge: either change your methods or accept that you are in fact not managing anything much. The more the US tried to stimulate its economy, the more risks of overheating arose in emerging economies. This was most visible in inflation, which rose more or less everywhere, but reached notable levels in China, India and in particular Russia and those parts of the Middle East which operate a currency peg to the US dollar. The other consequence was a stockmarket boom, especially in China and later India, which carried valuations to irrational levels. It gathered speed when the Federal Reserve embarked on an easing strategy in August 2007 and lasted until the end of November before collapsing. Chinese domestic shares rose 50% between June and September 2007, but then fell 50% in the next nine months. The rise and fall of the Indian market was almost as marked. Parallel to this, and related to it, was a bull market in commodities of all kinds, most visibly oil, which of course exacerbated the inflationary difficulties for governments and their citizens. In countries which are major producers, like Russia and the Gulf states, a windfall of spectacular proportions arrived, further fuelling inflation. In others where governments subsidise prices, public sector finances became strained. The world seemed full of imbalances.

What did we do?

This was not an easy year; we made some poor decisions. We made others which looked wrong but turned out well later and we spent a lot of time working on areas which have not yet come to fruition, but where we think big opportunities may arise. We changed almost a third of the portfolio, somewhat more than in the preceding year and roughly twice the level we were running at three years ago. Shareholders should not expect our rate of turnover to be constant, because opportunities do not arrive on a regular schedule; you can wait for a while without seeing one, only to find that, like the mythical London bus, several turn up at the same time. It seems probable, as we write, that this current year will see turnover continue at higher levels than in some recent years.

The most significant changes to the portfolio were a reduction in investments in Brazil and Korea and an increase in China (including Hong Kong), India and the United Arab Emirates; this geographic summary should not obscure the fact that, as always, our decisions were driven first and foremost by views about individual stocks. Our thinking was based on the belief that above average growth would become an especially important factor in future returns. The strong results from emerging markets since 2002 have seen valuations rise, many currencies strengthen and profits rise at an above trend rate, helped by various cyclical influences, especially rising prices (commodities) and rising utilisation (operating leverage).We cannot expect valuations or currencies to rise forever any more than we can expect cyclical factors to become permanent. And so we looked for companies where we thought good profit growth could still be expected. Two particular conditions would be required: robust economic growth, giving a high base growth rate for companies, and competitive advantage, implying that significant market share gains could be achieved by individual companies. China and India were top of our list as places to look, though valuations were a deterrent for long periods.

Performance attribution data shows that we did well by being in the right countries, adding +4.3% through asset allocation effects. We had relatively little exposure to Taiwan and Korea and benefited particularly from the degree of investment in Brazil and Egypt. But we more than cancelled this out with poor stock selection; overall, the stocks held in the portfolio performed worse than their respective market indices. More than half of this underperformance came in Asia, especially in China and Hong Kong. Brazil, Korea and South Africa were rare bright spots, but scant consolation. What did we get wrong? To some extent the failures of this year were the successes of the previous one. With such a dramatic reversal in markets towards the end of 2007, many of the solid, unexciting businesses whose share prices had lagged badly during the upswing began to outperform strongly as markets fell. But the reverse was also true; those creatures of the bull market that relied on external funding to grow rapidly were left badly exposed and their share prices performed very poorly. Virtually all of the mistakes we made during the last year can be viewed in this context and come down to being swayed to some extent by market cycles. We simply did not sell enough when stocks had performed very well and we were premature in increasing our exposure to markets like China; an error that is explained in part, though in no way excused, by the fact that we had been looking in this direction for a long time. We should have been more patient.

What happens next?

Sometimes reports seem to go out-of date before they have finished being written; this one may suffer that fate. Since the end of June, commodity prices have reversed sharply and the dollar has been rising. At the same time, a number of emerging countries are struggling to contain inflation. This is not a promising combination of circumstances for equities in emerging markets; share prices have been falling. Those global imbalances are being painfully worked out, despite the efforts of many central banks to resist. The immediate outlook is for more of the same. But we try to look further ahead and therefore hope and expect that significant opportunities to make money will arise. We should still be able to find themes and trends that we can believe with conviction, irrespective of current conditions: private sector operators will take share from government-owned companies with inferior productivity; retail industries will continue to consolidate; financial services will in the long term outgrow GDP; electricity use will not. Cycles cannot become trends; excess profitability will be arbitraged away by inflation and competition; productivity and efficiency will be rewarded. We meet hundreds of companies every year because the most enduring advantage, and that which takes longest to revert to the mean, is human skill; in our meetings we are seeking to understand the nature and economic characteristics of businesses and the ability and ambitions of those who run and own them, so that we can form a view about their value. As markets decline, they offer us the chance to buy businesses we like at prices that we like.

So the current gloom in markets should not obscure the longer term trends in developing economies, any more than this most dismal of English summers should cancel hopes of future sunshine. As emerging economies develop further, their capital markets will expand and attractive investments will be found. The approach we use has not changed and in fact the overall shape of our thinking about the future is very similar to that which we laid out a year ago. China and India, still growing and still offering great scope for productivity gains and industrial consolidation, are likely to continue to be important investment destinations for us in the years ahead, irrespective of this year's fluctuations. Nor do we intend to change our investment approach.

On that subject, I would like to conclude with an observation not about the Company's investments, but about the Company as a vehicle for investing in emerging markets. We have always sought to take a long term approach as investors, for two very simple reasons. First, it reduces the running costs of the portfolio; since all transactions incur costs, fewer transactions mean less cost. Second, we believe that the greatest inefficiencies in markets can be found by those prepared to exploit them over longer periods of time; in particular, the effect of compounding profit growth at above average rates becomes more and more powerful the longer it continues. We hope that the results achieved over the last five and ten years by the Company provide some vindication of this approach, but one should not underestimate the extent to which it is facilitated by the Company's structure as a closed-end investment trust. We have long argued that the ability to exchange the need of immediate short-term liquidity for higher eventual returns (very much in our interests as investors and therefore also in the interests of shareholders) is something that we should exploit. We have sought to do this.

  As we look forward into next year and beyond, we still see great long-term opportunity in emerging markets; we hope that shareholders will want us to continue to invest their money there in the same way, concentrating on that longer term. It is therefore our hope that shareholders will again approve the continuation of the Company in its current form, which has proved well-suited to investing in the developing world.

    Austin Forey 

    Investment Manager

    29th September 2008

    Principal Risks and Uncertainties

 The principal risks and uncertainties faced by the Company fall into the following broad categories:

Investment Underperformance: 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 these risks by diversification of investments through its investment restrictions and guidelines which are monitored and reported by the Manager.

Political and Economic: Administrative risks, such as the imposition of restrictions on the free movement of capital. 

Loss of Investment Team or Investment Manager:  A sudden departure of the investment manager or several members of the 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, as well as special efforts to retain key personnel.

Discount: A disproportionate widening of the discount, relative to the Company's peers could result in loss of value for shareholders. The Board regularly discusses discount policy and has set parameters for the Manager and the Company's broker to follow. 

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 to its investment trusts business through the provision of significant resources.

Accounting, Legal and Regulatory: In order to qualify as an investment trust, the Company must comply with

Section 842 of the Income and Corporation Taxes Act 1988 ('Section 842').Were the Company to breach Section 842, 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 842 qualification criteria are continually monitored by JPMAM and the results reported to the Board each month. The Company must also comply with the provisions of The Companies Acts 1985 and 2006 and, since its shares are listed on the London Stock Exchange, the UKLA Listing Rules. A breach of the Companies Act could result in the Company and/or the Directors being fined or the subject of criminal proceedings. Breach of the UKLA Listing Rules could result in the Company's shares being suspended from listing which in turn would breach Section 842. The Board relies on the services of its Company Secretary, JPMAM, and its professional advisers to ensure compliance with the Companies Acts 1985 and 2006 and the UKLA Listing Rules.

Corporate Governance and Shareholder Relations: The Company is committed to high standards of corporate governance. The shareholder profile for the Company is regularly monitored. The Board aims to provide shareholders with a full understanding of the Company's activities and performance and reports formally to shareholders four times a year.

Operational: Disruption to, or failure of, JPMAM's accounting, dealing or payments systems or the custodian's records could prevent accurate reporting and monitoring of the Company's financial position. A system of internal control is in place which is designed to safeguard the Company's assets, maintain proper accounting records and ensure that financial information used within the business, or published, is reliable. The Board keeps under review the effectiveness of the effectiveness of this system.

Financial: The financial risks faced by the Company include market price risk, interest rate risk, liquidity risk and credit risk. The Board meets regularly to consider these risks and manage them as appropriate.

A detailed explanation of principal risks and uncertainties can be found in the Annual Report and Accounts for the year ended 30th June 2008, which will be available on the Company's website shortly.

Related Parties Transactions

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

Directors' Responsibilities

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

a) the financial statements have been prepared in accordance with applicable UK accounting standards, and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

b) the Annual Report, to be published shortly, includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that they face.

For and on behalf of the Board

Roy Reynolds

Chairman

29th September 2008

For further information please contact:

Jonathan Latter, JPMorgan Asset Management (UK) Limited…………..020 7742 6000

Please note that up to date information on the Company, including daily NAV and share prices, factsheets and portfolio information can be found at www.jpmemergingmarkets.co.uk  

JPMorgan Emerging Markets Investment Trust plc

Audited figures for the year ended 30th June 2008

Income Statement  

	(Audited) Year ended 30th June 2008			(Audited) Year ended 30th June 2007
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Gains from investments held at fair value through profit or loss	-	8,491	8,491	-	151,401	151,401
Net foreign currency losses	-	(516)	(516)	-	(650)	(650)
Income from investments	9,356	-	9,356	8,010	-	8,010
Other interest receivable and similar income	100	-	100	45	-	45
Gross return	9,456	7,975	17,431	8,055	150,751	158,806
Management fee	(5,394)	-	(5,394)	(4,500)	-	(4,500)
Performance fee writeback/(charge)	-	1,020	1,020	-	(4,176)	(4,176)
Other administrative expenses	(1,016)	-	(1,016)	(885)	-	(885)
VAT recoverable	811	292	1,103	-	-	-
Net return on ordinary activities before finance costs and taxation	3,857	9,287	13,144	2,670	146,575	149,245
Finance costs	(129)	-	(129)	(55)	-	(55)
Net return on ordinary activities before taxation	3,728	9,287	13,015	2,615	146,575	149,190
Taxation	(870)	533	(337)	(458)	-	(458)
Net return on ordinary activities after taxation	2,858	9,820	12,678	2,157	146,575	148,732
Return per share (note 2)	2.59p	8.90p	11.49p	1.96p	132.88p	134.84p

  Dividends proposed in respect of the financial year ended 30th June 2008 total 2.0p per share (2007: 2.0p per share) 

  costing £2,206,000 (2007: £2,206,000). 

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.  

JPMorgan Emerging Markets Investment Trust plc

Audited figures for the year ended 30th June 2008

Reconciliation of Movements in Shareholders' Funds (Audited)

	Called up Share capital £'000	Share premium  £'000	Capital redemption reserve £'000	Other reserve  £'000	Capital reserves    £'000	Revenue reserve  £'000	Total £'000
At 30th June 2006	27,575	71,052	1,665	69,939	188,467	2,183	360,881
Net return from ordinary activities	-	-	-	-	146,575	2,157	148,732
Dividends appropriated in the year	-	-	-	-	-	(1,655)	(1,655)
At 30th June 2007	27,575	71,052	1,665	69,939	335,042	2,685	507,958
Net return from ordinary activities	-	-	-	-	9,820	2,858	12,678
Dividends appropriated in the year	-	-	-	-	-	(2,206)	(2,206)
At 30th June 2008	27,575	71,052	1,665	69,939	344,862	3,337	518,430

JPMorgan Emerging Markets Investment Trust plc

Audited figures for the year ended 30th June 2008

Balance Sheet	(Audited) 30th June 2008	(Audited) 30th June 2007
	£'000	£'000
Fixed assets
Investments at fair value through profit or loss	494,109	511,914
Investments in liquidity funds at fair value through profit or loss	23,793	-
	_______	_______
Total investments	517,902	511,914
Current assets
Debtors	2,392	808
Cash and short term deposits	7	925
Derivative financial instrument : forward currency contract at fair value through profit or loss	2	-
	_______	_______
	2,401	1,733
Creditors : amounts falling due within one year	(1,873)	(4,889)
	_______	_______
Net current assets/(liabilities)	528	(3,156)
	_______	_______
Total assets less current liabilities	518,430	508,758
Creditors : amounts falling due after more than one year
Provisions for liabilities and charges	-	(800)
	_______	_______
Total net assets	518,430	507,958
	=====	=====
Capital and reserves
Called up share capital	27,575	27,575
Share premium	71,052	71,052
Capital redemption reserve	1,665	1,665
Other reserve	69,939	69,939
Capital reserves	344,862	335,042
Revenue reserve	3,337	2,685
	_______	_______
Shareholders' funds	518,430	507,958
	=====	=====
Net asset value per share (note 3)	470.0p	460.5p

JPMorgan Emerging Markets Investment Trust plc

Audited figures for the year ended 30th June 2008

CASH FLOW STATEMENT
	30th June 2008	30th June 2007
	£'000	£'000
Net cash (outflow)/inflow from operating activities	(1,351)	206
Returns on investments and servicing of finance
Interest paid	(129)	(55)
	_______	______
Net cash outflow from returns on investments and servicing of finance	(129)	(55)
Taxation
Taxation recovered	3	-
Capital expenditure and financial investment
Purchases of investments	(189,032)	(93,139)
Sales of investments	192,335	93,683
Other capital charges	(20)	(18)
	_______	______
Net cash inflow from capital expenditure and financial investment	3,283	526
	_______	______
Dividends paid	(2,206)	(1,655)
	_______	______
Net cash outflow before financing	(400)	(978)
	_______	______
Decrease in cash in the year	(400)	(978)
	=====	====

Notes to the Accounts

1. Accounting policies 

The accounts are prepared in accordance with the Companies Act 1985, United Kingdom Generally Accepted Accounting Practice ('UK GAAP') and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies' issued by the AIC in December 2005. All of the Company's operations are of a continuing nature.

2. Return per share

	(Audited) 30th June 2008	(Audited) 30th June 2007
	£'000	£'000
Return per share is based on the following:
Revenue return	2,858	2,157
Capital return	9,820	146,575
Total return	12,678	148,732
Weighted average number of shares in issue	110,303,742	110,303,742
Revenue return per share	2.59p	1.96p
Capital return per share	8.90p	132.88p
Total return per ordinary share	11.49p	134.84p

3. Net asset value per share

The net asset value per share is based on funds attributable to shareholders of £518,430,000 (2007: £507,958,000) and on 110,303,742 (2007: 110,303,742) shares in issue at the year end.

4. Status of announcement

The financial information set out in this announcement does not constitute the Company's statutory accounts for the years ended 30th June 2008 or 2007. The statutory accounts for the year ended 30th June 2008 have not been delivered to the Registrar of Companies, nor have the auditors yet reported on them. The statutory accounts for the year ended 30th June 2008 will be finalised on the basis of the information presented by the directors in this announcement and will be delivered to the Registrar of Companies following the approval of the accounts by the Board of Directors. 

JPMORGAN ASSET MANAGEMENT (UK) LIMITED

 

END

 

 

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