Final Results

RNS Number : 5073T

JPMorgan Emerging Mkts Invest Trust

29 September 2010

 



LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN EMERGING MARKETS INVESTMENT TRUST PLC

ANNOUNCEMENT OF FINAL RESULTS

The Directors of JPMorgan Emerging Markets Investment Trust plc announce the Company's results for the year ended 30th June 2010.

Chairman's Statement

In my first report to you as Chairman, it is a pleasure to report on a year of strong performance in the 12 months to 30th June 2010 after the exceptionally volatile and difficult market conditions of the previous year. Not only was there a strong recovery in the underlying net asset value of the Company but our Manager added considerable value through outperformance against our benchmark index, the MSCI Emerging Markets Free Index. Emerging markets have of course led the way in the overall equity recovery of the last year, leaving developed markets well behind.

Following the successful issue of subscription shares a year ago, we now have to report our net asset value on a diluted basis to reflect the potential dilution to net asset value assuming full conversion of the subscription shares to ordinary shares. Until the expiry period of the subscription shares, this gives a somewhat misleading impression of the Company's underlying portfolio performance as it has a negative effect on the net asset value calculation. I should emphasise that it is not the basis on which we judge the performance of the Manager, which we continue to do on an undiluted basis.

Accordingly, I am happy to report that the portfolio return net of fees and expenses of your Company rose by 41.4% before adjustments, against a rise of 35.6% in the benchmark. Allowing for the dilution effect of those subscription shares that were exercised in the year, this adjusts to a rise in net asset value of 41.1% while the rise on a fully diluted basis was only 35.3%. This outperformance was driven by active stock selection as the Manager details in his report, which has been very much the traditional source of added value in the Manager's performance over many years. This is a welcome return to form after a quiet couple of years and a reminder of the strong long term performance record of the Manager.

It also gives rise to a performance fee payment due to the Manager, the calculation of which is rebased to the year when it was last paid (2006/7) so that the Manager receives a lower fee than would seem merited by last year's performance because of weaker performance in the two preceding years.

As a Board, we are of course concerned just as much with the share price as with the underlying net asset value and that means we pay particular attention to the fluctuations in the discount of our share price to underlying asset value. The share price rose 33.7% through the year, from 374p, close to the lows for the year to exactly 500p at year end. The subscription shares are of course a geared play on the underlying and rose some 93% over the year, from 39.5p to 76.3p.

The discount on the ordinary shares traded as low as 4.3% at one stage and in the opposite direction, apart from one daily blip, widened out to 11% briefly, averaging 7.9% through the year. The Board has a clear policy on discount management, namely to buy shares only if the fully diluted discount touches or exceeds 10% for some time, is out of line with our peer group and market conditions are orderly. We have not felt obliged to intervene to date. We like to think your Company is well regarded in the market place and that helps to keep the discount within acceptable bounds but we are very prepared to act if and when necessary.

Income after expenses rose modestly last year and we are proposing to maintain the dividend to shareholders at 3.2p. As you may recall from previous remarks, our investment policy is aimed at maximising capital growth and does not focus on income as such. Accordingly, dividends may fluctuate from year to year according to our income position.

The Board has always taken seriously its governance obligations and we comply fully with the AIC Code of Corporate Governance and the FRC Combined Code. Following the banking crisis, another raft of recommendation on governance has emerged and your Board will review them with regard to suitability in due course.

We continue to monitor our Manager carefully, believing this is one of the key responsibilities of any investment trust board. We have decided to formalise this monitoring function going forward with the establishment of a Management Engagement Committee to that end. We confirm that we are fully satisfied that the Manager is the right manager for the Company, not only in terms of investment performance but also in terms of risk management, administration, controls, compliance, etc. As an example of our continuing monitoring of operational risk, we reviewed the Company's custody arrangements during the year which we found satisfactory. In these turbulent times, there is some comfort in having such a strongly capitalised and well managed operation as JPMorgan standing behind the Company.

The Board itself has been stable in terms of composition over the year after the planned departures of the previous year. As previously, we carry out a review of the Board and separately the Board reviews my role as Chairman. I am pleased to say no major concerns were raised and I would like to thank my colleagues for their support in my first year as Chairman.

I leave the Manager in his report to comment on the shorter term outlook for emerging markets but as a broad statement of faith, your Board believes that the long term outlook for the countries we invest in remains good and in many ways brighter than the prospects for the developed world. The rapid recovery from the recent global credit crisis seems ample validation for that view. The days of scepticism over emerging markets are long over and emerging markets now have their proper place in both institutional and private portfolios.

Alan Saunders

Chairman        

29th September 2010

Investment Manager's Report

Results

Shareholders should regard this as a good year for the Company from the point of view of investment results. Market conditions were buoyant, as the recovery in asset prices from the collapse of 2008 continued and the returns from the asset class as a whole were more than acceptable, reflected in the 35.6% rise in our benchmark index. The returns from our investment activity are shown in the 41.4% increase in the portfolio return, after fees and expenses are taken into account.

Further details of this performance are shown in the Annual Report, which reveals that we had a good year in terms of stock selection, which generated the entirety of the outperformance. Worthy of note in particular were our selections in the financial sector, which was discussed at some length in last year's commentary and also the overall contribution from Russia, where the Company achieved some notable results.

Was that it?

For most of the last year stock markets were driven by an ongoing if sometimes stuttering recovery from the credit crisis in 2008. Economic growth returned, banking systems did not fail. It is even difficult, now, to remember how much genuine fear there was around a year or two earlier and walking around London in the summer of 2010, you might wonder about the reality of what people now term the "Great Recession"; it all seems to have passed so quickly. But in the developed world the next few years are likely to be challenging; the arithmetic of government finances suggests either a protracted drag on economic growth from fiscal austerity, or the risk of higher inflation as a consequence of high volumes of money creation; or even some combination of the two. None of these courses is going to make people feel better off and a weak and slow recovery is likely to further emphasise the difference between developed and emerging economies. In the latter, economic growth continues and incomes are rising; the Company's portfolio retains, therefore, a pronounced bias towards sectors which are positively affected by domestic demand and consumption, with a focus on well-managed cash-generating businesses with a track record of creating value for shareholders.

Old stocks and new investments

We changed just over a third of the portfolio this year, which is more than usual. A number of new names appeared which may not be familiar to shareholders; some of these are companies we have tracked for a long time, whose valuations came to acceptable levels only during the downturn; quite a lot of activity involved additions to existing positions too, where we tend to have the highest confidence because of greater familiarity.

But there were also many investments which we did not change during the year and I regard these as just as significant as the changes we made. In fact the Company's portfolio contains some investments that have been there for more than a decade. Over the course of my career as an investor, I have always found it surprising that others should be surprised by this; the best investments are those that you never want to sell and we try to capture the long term effects of compounding (which, when successful, dwarf pretty much everything else) by being prepared to own companies for many years.

HDFC, the largest single investment in the portfolio at the end of the financial year, is good example of this approach in practice. I first met this company in 1994 and together with my colleagues, have sustained this relationship over more than fifteen years. Through repeated meetings with the managing director and other senior personnel we have developed and maintained our understanding of this unusual financial institution, which began as the leading mortgage lender in India and has expanded to become a financial conglomerate doing business also in banking, insurance and asset management. Following companies for long periods is necessary, I believe, in order to achieve two things: the first is an understanding of the real drivers of value creation in a business (skill or luck? the industry or the company? productivity or price cycles?); the second is the confidence to act against the market at times when the valuation reflects either complete euphoria or real pessimism. In the case of HDFC, our interactions with the company have brought continued validation of our original investment thesis - that this was a very well run business which has cemented its competitive position through high efficiency and continued increases in productivity, without losing the judgement that any lending organisation needs to navigate credit cycles. We have only once materially reduced our investment in this business since first purchasing its shares in 1998 and that was at the very beginning of 2008, when the Indian stock market as a whole was carried to very high valuations by investor euphoria. We bought back a year later, at roughly half the price, the shares we had sold.

Looking for more stocks like HDFC commands probably more of our time than any other aspect of what we do, because we are looking for those infrequent examples of companies that combine high intrinsic profitability with a very large and long-lasting opportunity to go on investing money in their businesses to generate similar rates of return. And crucially, we do not want this all reflected up front in the share price. Beyond the simple maths of it, though, there are other judgements (less quantifiable, but equally critical) to be made: are our objectives the same as, or compatible with, those of the controlling shareholders? How do the managers think about the risks that they have to confront? Can we reach a view about their judgement, especially where decisions about large capital investments are concerned? Do we want to engage with them as part owners of their business, on behalf of our clients? Investment should be as much about ownership as about transacting, if not more so: we cannot hope to maximise the returns from our most successful investments if we are not prepared to stick with them, so for us the purchase of a new investment should imply a degree of commitment for the future which we will not easily abandon. We spend a lot of time talking to the managers and owners of businesses in order to form these qualitative judgements which are so necessary to complement plain financial analysis.

Looking into the future

On a short term view we are beginning to find stretched valuations in some parts of the emerging world; the scarcity of growth in the developed world has led investors to push up the prices of those companies whose growth seems most assured. The persistence of low interest rates in mature economies is likely to continue this trend and the possibility of an outright bubble, with bad consequences later, cannot be altogether ruled out. At the moment developed world companies often look significantly cheaper than comparable businesses in emerging markets, which is surprising given their deep corporate resources, but this may be explained in part by the fact that only a minority of their activity is exposed to the growth in the emerging world.

However, any significant rise in dollar interest rates (probably resulting from a strong economic recovery in the US) is going to sort the wheat from the chaff in emerging markets. This may not seem like a very likely outcome at the moment, but that is why it preoccupies us, since a very low probability of its occurring is embedded in today's share prices. There are many companies in emerging markets that have only listed in the last few years and which remain untested as far as their ability to thrive though an entire cycle is concerned. We know that some of theses stocks will do really badly if the following wind turns to a headwind, because their share prices do not allow for such an outcome. So it is especially important for us, at this stage in the evolution of the bull market, to be wary of excessive valuations, and also to pay a lot of attention to the strength of corporate balance sheets and the common sense of those making decisions about capital investment. We often try to explore in meetings a company's sense of its own limits, because those that lack this awareness usually over-expand and in consequence run much larger risks than they had anticipated.

On a long term view, by which I mean five years and beyond, the case for investing in the world's emerging economies seems if anything stronger than ever, especially when seen relative to other opportunities. The downturn in the developed world has served to highlight issues of economic sustainability which cannot be quickly resolved by the world's mature economies. The most difficult question to answer now is which companies will benefit the most: multinationals will remain formidable competitors for local firms in many industries and this is why we think it so important to consider not just the profits of our investee companies now, but how sustainable they may be into the future. For those investments that we keep for the longest periods, we are confident that they can go on earning profits and stand comparison with competitors not just now, but for years ahead.

Austin Forey

Investment Manager

29th September 2010

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 Underperformance: An inappropriate investment strategy, for example asset allocation, the level of gearing or the degree of portfolio risk, could 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 and through a set of investment restrictions and guidelines which are monitored and reported on by the Manager. JPMorgan Asset Management (UK) Limited ('JPMAM') 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 all Board meetings, and reviews data which show statistical measures of the Company's risk profile.

•   Political and Economic: Administrative risks, such as the imposition of restrictions on the free movement of capital. These risks are discussed by the Board on a regular basis.

•   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 1158 of the Income and Corporation Taxes Act 2010 ('Section 1158'). 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 JPMAM and the results reported to the Board each month. The Company must also comply with the provisions of the Companies Act 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 1158. The Board relies on the services of its Company Secretary, JPMAM, and its professional advisers to ensure compliance with the Companies Act and the UKLA Listing Rules.

•   Corporate Governance and Shareholder Relations: Details of the Company's compliance with Corporate Governance best practice, including information on relations with shareholders, are set out in the Corporate Governance section of the annual report.

•   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. Details of how the Board monitors the services provided by JPMAM and its associates and the key elements designed to provide effective internal control are included within the Internal Control section of the Corporate Governance report.

•   Financial: The financial risks faced by the Company include market price risk, interest rate risk and credit risk. Further details are disclosed in note 22 of the annual report.

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 year.

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

Alan Saunders

Chairman

29th September 2009

Income Statement

for the year ended 30th June 2010

			2010			2009
		Revenue	Capital	Total	Revenue	Capital	Total
		£'000	£'000	£'000	£'000	£'000	£'000
Gains/(losses) on investments held at fair
value through profit or loss		-	179,076	179,076	-	(73,264)	(73,264)
Net foreign currency gains/(losses)		-	78	78	-	(316)	(316)
Income from investments		12,333	-	12,333	11,033	-	11,033
Other interest receivable and
similar income		2	-	2	311	-	311
Gross return/(loss)		12,335	179,154	191,489	11,344	(73,580)	(62,236)
Management fee		(5,770)	-	(5,770)	(4,106)	-	(4,106)
Performance fee		-	(712)	(712)	-	-	-
VAT recoverable		-	-	-	38	(42)	(4)
Other administrative expenses		(1,038)	-	(1,038)	(962)	-	(962)
Net return/(loss) on ordinary activities
before finance costs and taxation		5,527	178,442	183,969	6,314	(73,622)	(67,308)
Finance costs		(2)	-	(2)	-	-	-
Net return/(loss) on ordinary activities
before taxation		5,525	178,442	183,967	6,314	(73,622)	(67,308)
Taxation		(473)	-	(473)	(1,426)	922	(504)
Net return/(loss) on ordinary activities
after taxation		5,052	178,442	183,494	4,888	(72,700)	(67,812)
Return/(loss) per Ordinary share
- undiluted (note 3)		4.56p	161.21p	165.77p	4.43p	(65.91)p	(61.48)p
Return/(loss) per Ordinary share
- diluted (note 3)		4.47p	157.94p	162.41p	4.43p	(65.91)p	(61.48)p

Dividends proposed in respect of the financial year ended 30th June 2010 total 3.2p (2009: 3.2p) per Ordinary share, costing £3,558,000 (2009: £3,530,000).

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.

Reconciliation of Movements in Shareholders' Funds

	Called up		Capital
	share	Share	redemption	Other	Capital	Revenue
	capital	premium	reserve	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 30th June 2008	27,575	71,052	1,665	69,939	344,862	3,337	518,430
Bonus issue of Subscription shares	221	(221)	-	-	-	-	-
Subscription shares' issue costs	-	(252)	-	-	-	-	(252)
Net (loss)/return on ordinary activities	-	-	-	-	(72,700)	4,888	(67,812)
Dividends appropriated in the year	-	-	-	-	-	(2,206)	(2,206)
At 30th June 2009	27,796	70,579	1,665	69,939	272,162	6,019	448,160
Subscription shares' issue costs
written back	-	5	-	-	-	-	5
Exercise of Subscription shares into
Ordinary shares	(9)	9	-	-	-	-	-
Issue of Ordinary shares on exercise
of Subscription shares	223	3,545	-	-	-	-	3,768
Net return on ordinary activities	-	-	-	-	178,442	5,052	183,494
Dividends appropriated in the year	-	-	-	-	-	(3,532)	(3,532)
At 30th June 2010	28,010	74,138	1,665	69,939	450,604	7,539	631,895

Balance Sheet

At 30th June 2010

		2010	2009
		£'000	£'000
Fixed assets
Investments held at fair value through profit or loss		621,354	444,352
Investment in liquidity fund held at fair value through profit or loss		3,496	496
Total investments		624,850	444,848
Current assets
Debtors		7,515	10,064
Cash and short term deposits		469	364
		7,984	10,428
Creditors: amounts falling due within one year		(939)	(7,116)
Net current assets		7,045	3,312
Total assets less current liabilities		631,895	448,160
Total net assets		631,895	448,160
Capital and reserves
Called up share capital		28,010	27,796
Share premium		74,138	70,579
Capital redemption reserve		1,665	1,665
Other reserve		69,939	69,939
Capital reserves		450,604	272,162
Revenue reserve		7,539	6,019
Shareholders' funds		631,895	448,160
Net asset value per Ordinary share (note 4)
Undiluted		568.3p	406.3p
Diluted		544.9p	406.3p

Cash Flow Statement

for the year ended 30th June 2010

		2010	2009
		£'000	£'000
Net cash inflow from operating activities		5,286	6,017
Returns on investments and servicing of finance
Interest paid		(2)	-
Net cash outflow from returns on investments and servicing
of finance		(2)	-
Taxation
Taxation recovered		8	6
Capital expenditure and financial investment
Purchases of investments		(202,308)	(96,628)
Sales of investments		197,248	93,582
Other capital charges		(235)	(65)
Net cash outflow from capital expenditure and financial
investment		(5,295)	(3,111)
Dividends paid		(3,532)	(2,206)
Net cash (outflow)/inflow before financing		(3,535)	706
Financing
Issue of Ordinary shares on exercise of Subscription shares		3,768	-
Subscription shares' issue costs		(198)	(42)
Net cash inflow/(outflow) from financing		3,570	(42)
Increase in cash in the year		35	664

Notes to the Accounts

for the year ended 30th June 2010

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 AIC in January 2009.

            All of the Company's operations are of a continuing nature.

            The accounts have been prepared on a going concern basis under the historical cost convention, as modified by the revaluation of investments and derivative financial instruments at fair value.

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

2.         Dividends

	2010	2009
	£'000	£'000
Dividends paid and proposed
Dividends paid
2009 Final dividend of 3.2p (2008: 2.0p)1	3,532	2,206
Total dividends paid in the year	3,532	2,206
Dividends proposed
Final dividend proposed of 3.2p (2009: 3.2p)	3,558	3,530
Total dividends proposed	3,558	3,530

¹ The final dividend proposed in respect of the year end 30th June 2009 amounted to £3,530,000. However the actual payment amounted to £3,532,000 due to shares issued after the balance sheet date but prior to the record date.

The final dividend proposed in respect of the year ended 30th June 2010 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 30th June 2011.

	2010	2009
	£'000	£'000
3. Return/(loss) per Ordinary share
Return/(loss) per Ordinary share is based on the following:
Revenue return	5,052	4,888
Capital return/(loss)	178,442	(72,700)
Total return/(loss)	183,494	(67,812)
Weighted average number of Ordinary shares in issue during
the year used for the purpose of the undiluted calculation	110,690,361	110,303,742
Weighted average number of Ordinary shares in issue during
the year used for the purpose of the diluted calculation	112,979,623	110,303,742
Undiluted
Revenue return per share	4.56p	4.43p
Capital return/(loss) per share	161.21p	(65.91)p
Total return/(loss) per share	165.77p	(61.48)p
Diluted
Revenue return per share	4.47p	4.43p
Capital return/(loss) per share	157.94p	(65.91)p
Total return/(loss) per share	162.41p	(61.48)p

The diluted return/(loss) per Ordinary share represents the return/(loss) on ordinary activities after taxation divided by the weighted average number of Ordinary shares in issue during the year as adjusted in accordance with the requirements of Financial Reporting Standard 22 'Earnings per share'.

There was no dilution to the returns for the year ended 30th June 2009 as there were no dilutive potential Ordinary shares in issue at the year end.

	2010	2009
4. Net asset value per Ordinary share
Undiluted
Ordinary shareholders funds (£'000)	631,895	448,160
Number of Ordinary shares in issue	111,196,525	110,303,742
Net asset value per Ordinary share (pence)	568.3	406.3
Diluted
Ordinary shareholders funds assuming exercise of Subscription shares (£'000)	721,220	448,160
Number of potential Ordinary shares in issue	132,363,525	110,303,742
Net asset value per Ordinary share (pence)	544.9	406.3

The diluted net asset value per Ordinary share assumes that all outstanding Subscription shares were converted into Ordinary shares at the prevailing price of 422p at the year end. There were no dilutive potential Ordinary shares in issue at 30th June 2009.

5. Status of results announcement

2009 Financial Information

The figures and financial information for 2009 are extracted from the published Annual Report and Accounts for the year ended 30th June 2009 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.

2010 Financial Information

The figures and financial information for 2010 are extracted from the Annual Report and Accounts for the year ended 30th June 2010 and do not constitute the statutory accounts for the year.  The Annual Report and Financial Statements include 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 Register of Companies in due course.

JPMORGAN ASSET MANAGEMENT (UK) LIMITED

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

For further information please contact:

Jonathan Latter

For and on behalf of

JPMorgan Asset Management (UK) Limited, Secretary                         020 7742 6000

29th September 2010

 

END

 

 

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