Final Results

RNS Number : 0491G

JPMorgan European Smaller Co.

31 May 2013

 

STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN EUROPEAN SMALLER COMPANIES TRUST PLC

ANNOUNCEMENT OF FINAL RESULTS

The Directors of JPMorgan European Smaller Companies Trust plc announce the Company's results for the year ended 31st March 2013.

Chairman's Statement

I am pleased to present the Company's results for the year ended 31st March 2013 in my first statement as Chairman.

Performance

During the year ended 31st March 2013, the Company outperformed its benchmark index. The Company's total return on net assets (i.e. with net dividends reinvested) was +16.7%, which compares with a return of +14.7% on the same basis from the Company's benchmark, the HSBC Smaller European Companies (ex UK) Total Return Index in sterling terms. This continues your Company's long term outperformance of the index with the three, five and ten years also generating a higher return than the index.

Performance attribution analysis shows that the Investment Managers contributed +2.3%. A review of the market and more details on performance are given in the Investment Managers' Report.

The discount of the Company's share price to net asset value decreased over the year from 15.5% to 13.0% at year end, resulting in a total return to shareholders of 20.6%.

Marketing

The regulatory environment for Independent Financial Advisers changed this year following the completion of the Retail Distribution Review ('RDR') and is already offering opportunities to attract new investors into the Company. The Manager has organised a number of specialist roadshows and information material to support the IFAs who are new to the sector. Your Board and Manager have also focused on increasing broader awareness of our Company and have instigated a range of measures to achieve this. New investors to our Company are coming from a variety of different sources: from the established base of stockbrokers and wealth managers we already know, to more IFAs recommending investment trusts for the first time and increasingly investors attracted through electronic media. Our website has been greatly improved and our fund managers regularly provide fund and market updates on it. We intend to increase this focus on spreading awareness of our Company throughout this year.

Revenue and Dividends

Our Company's objective is to provide our shareholders with capital return and this focus means that the level of income received by our Company during a year is quite variable, as our Manager will optimise the growth structure of the portfolio.

Net revenue return for the year amounted to £6.1 million (2012: £7.1 million), thus increasing the positive balance on the Company's Revenue Reserve. The Board's policy is to pay out the vast majority of the revenue available each year. An interim dividend of 6.0 pence per share was paid on 16th January 2013. Subject to shareholder approval at the forthcoming Annual General Meeting, a final dividend of 10.0 pence per share will be paid on 30th August 2013 to shareholders on the register at the close of business on 2nd August 2013 (ex dividend date 31st July 2013).

Gearing

Your Investment Managers actively manage the gearing level of your Company within a framework set by your Board that is currently between 20% net cash and 20% geared. This has been a considerable source of extra value over the years and in the last year contributed 1.2% to relative outperformance of the index.

Share Buybacks

Your Board carefully monitors the level of the discount and seeks to use its ability to buy back shares to minimise short term volatility in the level of the discount. In accordance with this policy your Board repurchased 310,000 shares for cancellation during the year (excluding the shares repurchased as a result of the reverse tender offer).

Tender Offer

The discount has remained higher than the Board had hoped and having considered the position of the Company carefully and after taking independent advice, as announced on 15th May 2013, the Board has decided to implement a limited tender offer for up to 5% of the Company's ordinary share capital at a tender price being the NAV per ordinary share (including the undistributed revenue reserves) less the direct costs and expenses of the tender offer (including stamp duty and portfolio realisation costs) and a further 3% discount.

The tender offer requires approval by Shareholders and a special resolution will therefore be put to Shareholders at a General Meeting to be held immediately after the Company's Annual General Meeting on 16th July 2013. The record date for the tender offer was the close of business on 14th May 2013.

The Board

During the year, Paul Manduca and Michael Wrobel retired from the Board. I would like to record my thanks to Paul and Michael for their considerable contribution to the Company. I assumed the role of Chairman on 1st January 2013, having served as a Director since September 2010. The Board engaged the services of an independent search consultant to recruit a new Director and on 1st January 2013, Ashok Gupta was appointed. Ashok brings considerable experience to the Board. He is Advisor to the Group Chief Executive Officer at Old Mutual Plc, a Member of the FRC Actuarial Council, Chairman of eValueFE (which provides actuarially-based financial planning tools to major banks, insurers and IFAs) and Chairman of Skandia Life UK.

Corporate Governance

The governance of the Company is a key matter for the Board and we review a range of relevant matters at each Board meeting in a planned and structured manner and more details of this can be found in the annual report. We hold an annual strategy review and this year we focused on how we could best take advantage of the new opportunities flowing from RDR, how to develop our electronic offering, the implications of the Alternative Investment Fund Managers Directive, the Company's risk appetite statement, how to maximise the benefits of gearing and how to manage our revenue.

We hold a formal annual Board evaluation and the Nomination and Remuneration Committee evaluated the operations of the Board, individual Directors and the Chairman. We continue to adopt best practices in corporate governance and in accordance with the UK Code of Corporate Governance will present all Directors for annual reappointment and this year an externally facilitated Directors' appraisal will take place.

Manager Evaluation

During the year the Board carried out a formal review of the Manager, JPMorgan Asset Management (UK) Limited ('JPMAM'). This covered the investment management, company secretarial, administrative and marketing services provided to the Company by JPMAM and took into account their investment performance record, management processes, investment style, resources and risk control mechanisms. The Board is satisfied with the performance of the Manager and concluded that its continued appointment on the existing terms is very much in the interests of shareholders as a whole.

Annual General Meeting

The Company's AGM will be held at Holborn Bars, 138 - 142 Holborn, London EC1N 2NQ, on Tuesday, 16th July 2013 at 12.00 noon. The Investment Managers will make a presentation reviewing the past year and commenting on the outlook for the current year. The meeting will be followed by a General Meeting to approve the Tender Offer. Your Board and the Manager invite all shareholders to join them for lunch where there will be opportunities for informal questions.

Outlook

Your Investment Managers are encouraged by the positive feedback from many of the companies they research and see many opportunities to invest in attractive companies at reasonable ratings.

Carolan Dobson

Chairman                                                                                                                     31st May 2013

Investment Managers' Report

Investment Scope and Process

The objective of the Company is to achieve capital growth from a portfolio of quoted smaller companies in Europe, excluding the United Kingdom. The investment universe is defined at the time of purchase by the countries and market capitalisation range of the constituents of the benchmark index, the HSBC Smaller European Companies (ex UK) Index. At the end of March 2013 the index consisted of 1,000 companies with a market value of between £74 million and £2.6 billion across 15 countries. This universe of potential investments is screened using a proprietary multi-factor model, to the results of which we apply fundamental analysis.

The investment process is driven by bottom-up stock selection with a focus on identifying market leading growth companies which offer the potential to outperform over the long term. Position sizing is determined by investment conviction and trading liquidity in a stock. Investments are sold when there is a fundamental negative change in business prospects, long term price momentum has broken down or the market capitalisation has outgrown significantly the benchmark index. The policy is not to hedge the currency exposure of the portfolio's assets. The Board has established a liquidity range of between 20% net cash and 20% geared within which the Managers may operate.

Market Review

The financial year began poorly as confidence generated by the ECB's near €1 trillion liquidity injection into the banking system between December 2011 and February 2012 began to wane and markets focused increasingly on the structural difficulties of the Euro project. With a loss of confidence in the Euro, by June 2012 European equities had sold-off sharply and bond yields in the two largest Eurozone periphery economies, Italy and Spain, had reached what appeared to be unsustainable levels.

The turning point for the better proved to be ECB President Draghi's speech on 26th July 2012 when he asserted that 'Within our mandate, the ECB is ready to do whatever it takes to preserve the Euro. And believe me, it will be enough.' Markets responded positively and pursued an upward trajectory through to the Company's year end, which none of the US fiscal cliff, Cypriot financial bailout or unresolved Italian election was able to derail. This renewed confidence was reflected in bond markets and, by the second quarter of 2013, yields in both Italy and Spain were making three year lows.

Over the 12 months to 31st March 2013 the large company MSCI Europe (ex UK) Index rose by 18.0% in sterling. Smaller companies lagged a little, but still the HSBC Smaller European Companies (ex UK) Index in sterling rose by 14.7%.

Portfolio Performance

The net asset value of the Company rose by 16.7% over the year, outperforming the benchmark HSBC Index by 2.0% thanks to positive stock selection and successful management of the portfolio's gearing. Top stock contributors included French food and pharmaceutical testing provider Eurofins Scientific, whose services were re-rated following the horse meat scandal, German independent mobile telecom service provider Freenet, where the cheap valuation and strong free cash flow generation drove strong performance, Danish hearing aid and headset producer GN Store Nord, which benefitted from ongoing restructuring and German industrial lubricants producer Fuchs Petrolub, which continued to profit from global growth. Stocks which failed to deliver expected returns included Dutch oil service business SBM Offshore, which was hurt by poor contract execution and automotive services business D'ieteren, which suffered from increased competition.

Portfolio liquidity was actively managed over the year, moving from being 7.6% geared at the end of March 2012 to approximately 10% cash in June and this was reinvested as the market recovery gained momentum to end the year with 12.9% gearing.

Portfolio Positioning

With holdings in Dutch business software producer Unit4 and French research and development consultancies Alten and Altran Technologie, software and computer services again represented one of the portfolio's most overweight sectors relative to the benchmark index at the end of March 2013. This was followed by chemicals, with investments in Swiss pigments and additives specialist Clariant and in German industrial lubricants producer Fuchs Petrolub and flavours and fragrances business Symrise. The newly overweight position in auto components comprised such companies as Faurecia and Plastic Omnium in France. Non-life insurance was again one of the most overweight sectors with holdings in Topdanmark in Denmark and Helvetia Holding in Switzerland. Real estate remained one of the portfolio's most underweight sectors relative to the benchmark.

Valuation

In terms of valuation, smaller companies in Europe now trade on a price/book multiple comparable to large companies. As shown below, this is towards the top end of the range in which they have traded over the last twenty years. Nevertheless, as also can be seen below, smaller companies are cheap on an absolute basis, currently being valued towards the bottom end of the historic range of 1.0 - 2.5x book value. Both the portfolio and the benchmark HSBC Index currently have a price/earnings ratio of 12.8x 2013 earnings.

Outlook

For the time being, the worst of the Euro crisis appears to be behind us and the mood in the Eurozone is relatively calm. Indeed, it is impressive to witness the magnitude of progress made in the most troubled periphery countries and Ireland, Spain, Portugal and even Greece are beginning to see light at the end of the tunnel. The extent of change in these countries is analogous to that experienced in Britain in the early 1980s but with a notable difference. Absent the option of currency devaluation, these Eurozone countries have regained their competitiveness by cutting salaries, in some cases by up to 50%. Whilst the social cost has been extremely high, there is mounting anecdotal evidence that the worst is over. In Greece, for example, with many hotel prices down sharply over the last three years, summer holiday bookings for 2013 are up by 20% as the country can once again compete with Turkey. A similar process is underway in Spain and Portugal where car manufacturers are expanding capacity.

More broadly, with lacklustre economic growth across the developed world and markets having rallied a long way from the lows of June 2012, it could be tempting to take some profits. However, with bond yields at historically low levels - compressing risk premiums, with central banks committed to very loose monetary policies, with liquidity rich companies increasingly willing to return cash to shareholders and with absolute valuations near historic lows, we believe that there can be more to go for. We are optimistic that economic growth may have bottomed in the first quarter of this year and should begin to recover as the year unfolds.

Jim Campbell

Francesco Conte

Investment Managers                                                                                                  31st May 2013

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 these risks by diversification of investments through its investment restrictions and guidelines which are monitored and reported on by the Manager. 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 Managers, who attend all Board meetings, and reviews data which show statistical measures of the Company's risk profile. The Investment Managers employ the Company's gearing within a strategic range set by the Board. The Board holds a separate meeting devoted to strategy each year.

• Market: Market risk arises from uncertainty about the future prices of the Company's investments. It represents the potential loss that the Company might suffer through holding investments in the face of negative market movements. The Board considers asset allocation, stock selection and levels of gearing on a regular basis and has set investment restrictions and guidelines, which are monitored and reported on by JPMAM. The Board monitors the implementation and results of the investment process with the Manager.

• Accounting, Legal and Regulatory: In order to qualify as an investment trust, the Company must comply with Section 1158. Details of the Company's approval are given under 'Business of the Company' above. Were the Company to breach Section 1158, it might lose investment trust status and, as a consequence, gains within the Company's portfolio could 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 and, since its shares are listed on the London Stock Exchange, the UKLA Listing Rules and Disclosure and Transparency Rules ('DTRs'). 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 or DTRs 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, the UKLA Listing Rules and DTRs.

• 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 report in the annual report.

• Operational: Loss of key staff by JPMAM, such as the Investment Managers, could affect the performance of the Company. 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 Risk Management and Internal Control section of the Corporate Governance report in the annual report.

• Financial: The financial risks arising from the Company's financial instruments includemarket price risk, interest rate risk, liquidity risk and credit risk. Further details are disclosed in note 21 in 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' Responsibility Statement

Each of the Directors, whose names and functions are listed in the Directors' Report confirms that, to the best of their knowledge:

• the financial statements, which have been 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 return or loss of the Company; and

• the Directors' Report 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 it faces.

For and on behalf of the Board

Carolan Dobson

Chairman

31st May 2013

Income Statement

for the year ended 31st March

		2013			2012
		Revenue	Capital	Total	Revenue	Capital	Total
		£'000	£'000	£'000	£'000	£'000	£'000
Gains/(losses) on investments held at
fair value through profit or loss		-	40, 908	40,908	-	(104,011)	(104,011)
Net foreign currency (losses)/gains		-	(1,276)	(1,276)	-	1,382	1,382
Income from investments		8,240	-	8,240	10,040	-	10,040
Other interest receivable and similar   income		241	-	241	175	-	175
Gross return/(loss)		8,481	39,632	48,113	10,215	(102,629)	(92,414)
Management fee		(1,008)	(2,353)	(3,361)	(1,301)	(3,035)	(4,336)
Other administrative expenses		(570)	-	(570)	(620)	-	(620)
Net return/(loss) on ordinary   activities before finance costs
and taxation		6,903	37,279	44,182	8,294	(105,664)	(97,370)
Finance costs		(197)	(460)	(657)	(360)	(841)	(1,201)
Net return/(loss) on ordinary
activities before taxation		6,706	36,818	43,524	7,934	(106,505)	(98,571)
Taxation		(572)	-	(572)	(879)	-	(879)
Net return/(loss) on ordinary
activities after taxation		6,134	36,818	42,952	7,055	(106,505)	(99,450)
Return/(loss) per share (Note 3)		16.47p	98.88p	115.35p	17.12p	(258.41)p	(241.29)p

Details of the dividend declared are given in note 2.

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

for the year ended 31st March

	Called up		Capital
	share	Share	redemption	Capital	Revenue
	capital	premium	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
At 31st March 2011	10,877	1,312	4,759	457,728	2,752	477,428
Repurchase and cancellation of the
Company's own shares	(856)	-	856	(31,523)	-	(31,523)
Net (loss)/return on ordinary activities	-	-	-	(106,505)	7,055	(99,450)
Dividends appropriated in the year	-	-	-	-	(4,156)	(4,156)
At 31st March 2012	10,021	1,312	5,615	319,700	5,651	342,299
Repurchase and cancellation of the
Company's own shares	(1,075)	-	1,075	(30,042)	-	(30,042)
Net return on ordinary activities	-	-	-	36,818	6,134	42,952
Dividends appropriated in the year	-	-	-	-	(6,102)	(6,102)
At 31st March 2013	8,946	1,312	6,690	326,476	5,683	349,107

Balance Sheet

at 31st March

		2013	2012
		£'000	£'000
Fixed assets
Investments held at fair value through profit or loss		394,223	359,138
Investment in liquidity fund held at fair value through profit or loss		13,911	15,003
Total investments		408,134	374,141
Current assets
Debtors		7,971	15,077
Cash and short term deposits		347	568
		8,318	15,645
Current liabilities
Creditors: amounts falling due within one year		(50,429)	(47,487)
Derivative financial instruments		(3)	-
Net current liabilities		(42,114)	(31,842)
Total assets less current liabilities		366,020	342,299
Creditors: amounts falling due after more than one year		(16,913)	-
Net assets		349,107	342,299
Capital and reserves
Called up share capital		8,946	10,021
Share premium		1,312	1,312
Capital redemption reserve		6,690	5,615
Capital reserves		326,476	319,700
Revenue reserve		5,683	5,651
Total equity shareholders' funds		349,107	342,299
Net asset value per share (Note 4)		975.7p	854.0p

Company registration number: 2431143.

Cash Flow Statement

for the year ended 31st March

		2013	2012
		£'000	£'000
Net cash inflow from operating activities		3,033	3,807
Returns on investments and servicing of finance
Interest paid		(712)	(1,411)
Net cash outflow from returns on investments and servicing of finance		(712)	(1,411)
Taxation
Overseas tax recovered		107	203
Capital expenditure and financial investment
Purchases of investments		(963,290)	(2,001,039)
Sales of investments		981,083	2,062,677
Other capital charges		(186)	(253)
Net cash inflow from capital expenditure and financial investment		17,607	61,385
Dividends paid		(6,102)	(4,156)
Net cash inflow before financing		13,933	59,828
Financing
Net drawdown/(repayment) of loans		17,384	(26,696)
Repurchase and cancellation of the Company's own shares		(30,403)	(31,162)
Net cash outflow from financing		(13,019)	(57,858)
Increase in cash for the year		914	1,970

Notes to the Accounts

for the year ended 31st March 2013

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 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 through profit or loss.

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

2.             Dividends

(a)           Dividends paid and declared

		2013	2012
		£'000	£'000
	Dividends paid
	2012 final dividend of 11.0p (2011: 4.0p) per share	3,952	1,724
	Interim dividend of 6.0p (2012: 6.0p) per share	2,150	2,432
	Total dividends paid in the year	6,102	4,156
	Dividend declared
	Dividend proposed of 10.0p (2012: 11.0p) per share	3,578	4,409

                The dividend declared in respect of the year ended 31st March 2013 is subject to shareholder 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 March 2014.

                The dividend declared in respect of the year ended 31st March 2012 amounted to £4,409,000. However, the amount actually paid was £3,952,000 due to shares repurchased and cancelled after the balance sheet date but prior to the dividend record date.

3.             Return/(loss) per share

                The revenue return per share is based on the revenue attributable to the ordinary shares of £6,134,000 (2012: £7,055,000) and on the weighted average number of shares in issue during the year of 37,234,966 (2012: 41,215,645) excluding shares held in Treasury.

                The capital return per share is based on the capital gain attributable to the ordinary shares of £36,818,000 (2012: £106,505,000 loss) and on the weighted average number of shares in issue during the year of 37,234,966 (2012: 41,215,645) excluding shares held in Treasury.

                The total return per share is based on the earnings attributable to the ordinary shares of £42,952,000 (2012: £99,450,000 loss) and on the weighted average number of shares in issue during the year of 37,234,966 (2012: 41,215,645) excluding shares held in Treasury.

4.             Net asset value per share

                The net asset value per share is based on the net assets attributable to the ordinary shareholders of £349,107,000 (2012: £342,299,000) and on the 35,781,923 (2012: 40,083,803) shares in issue at the year end.

5.             Status of announcement

2012 Financial Information

The figures and financial information for 2012 are extracted from the published Annual Report and Accounts for the year ended 31st March 2012 and do not constitute the statutory accounts for that year.  The Annual Report and Accounts have been delivered to the Registrar of Companies and included the Report of the Independent Auditors which was unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006.

2013 Financial Information

The figures and financial information for 2013 are extracted from the Annual Report and Accounts for the year ended 31st March 2013 and do not constitute the statutory accounts for the year. The Annual Report and Accounts includes the Report of the Independent Auditors which is unqualified and does not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. The Annual Report and Accounts will be delivered to the Registrar of Companies in due course.

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement

JPMORGAN ASSET MANAGEMENT (UK) LIMITED

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

JPMORGAN ASSET MANAGEMENT (UK) LIMITED

 

END

 

 

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