Interim Results

RNS Number : 6965U

JPMorgan Japanese Inv. Trust PLC

16 May 2008

 



LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN JAPANESE INVESTMENT TRUST PLC

UNAUDITED HALF YEAR RESULTS FOR THE PERIOD ENDED 31ST MARCH 2008

Chairman's Statement

Performance

The six months to 31st March 2008 have continued to be difficult for investors in Japan. Over the period, in sterling terms, the Tokyo Stock Exchange First Section (TOPIX) Index fell by 10.3% and the Company suffered a decline in net assets of 14.8%, an underperformance of 4.5%. Eliminating the effect of the strength of the yen, Japanese equities fell by 24.9%, which demonstrates the challenging conditions facing investors in Japan. Whilst this is a further disappointing result for both shareholders and the Board, there are early signs of a stabilisation in portfolio performance relative to other Managers, although JPMorgan Asset Management (UK) Limited remains under no illusion as to the necessity to achieve rapid material gains in relative performance.

Management Arrangements

As I outlined in my year end report and following a detailed review of the Manager's investment process, the day-to-day management of the Company's assets was relocated from London to Tokyo with effect from 1st December 2007. In addition, JPMorgan Asset Management (UK) Limited agreed to a reduction in the notice period provisions in the management agreement from one year to six months. Responsibility for the portfolio was assumed by James Elliot, Head of the equity investment team in Tokyo. 

Revenue and Dividends

The improvement in the Company's revenue position in recent years enabled the payment of a 2.8p per share final dividend in December 2007. As I stated in my year end report, dividend streams from Japan remain unpredictable and estimates provided to the Board indicate a modest reduction in revenue for the year to September 2008. At this stage, and in the absence of unforeseen circumstances, it appears likely that the Company will be in a position to pay a final dividend slightly in excess of 2.0p per share in respect of the current financial year.

Gearing

Following the relocation of the management of the portfolio, a decision was taken to reduce the Company's level of gearing. For most of the period under review therefore, the portfolio remained ungeared, a decision that aided performance.

Outlook

The Managers continue to express short term concerns as to the prospects for an imminent upturn in Japanese economic fortunes and this fact, combined with the risk aversion being demonstrated by investors worldwide, suggests a period of further uncertainty for the Japanese market. However, company valuations in Japan, historically much higher than elsewhere in Asia, have converged with many of those markets and the growth in pan Asian trade should lead to increased opportunities for many Japanese companies in the coming months.

Jeremy Paulson-Ellis

Chairman 16th May 2008

  Interim Management Report 

The Company is now required to make the following disclosures in its half year report.

Principal Risks and Uncertainites

The principal risks and uncertainties faced by the Company fall into five broad categories: investment and strategy; accounting, legal and regulatory; corporate governance and shareholder relations; operational and financial. Information on each of these areas is given in the Business Review within the Annual Report and Accounts for the year ended 30th September 2007.

Related Parties Transactions

During the first six months of the current 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 Board of Directors confirms that, to the best of its knowledge:

(i) the condensed set of financial statements contained within the half-yearly financial report has been prepared in accordance with the Accounting Standards Board's Statement 'Half-Yearly Financial Reports'; and

(ii) the interim management report includes a fair review of the information required by 4.2.7R and 4.2.8R of the UK Listing Authority Disclosure and Transparency Rules.

for and on behalf of the Board

Jeremy Paulson-Ellis

Chairman 16th May 2008

Investment Managers' Report

Investment Review

The Japanese stock-market as measured by the TOPIX Index fell by 24.3% in yen terms over the half year. During this period the yen strengthened considerably, reaching levels not seen since 1995 and rose by 17.1% against sterling. This provided some relief for sterling based investors and, when measured in sterling, the TOPIX index fell by 10.3% over the six month period to 31st March 2008. 

The strength of the yen had little to do with a change in Japan's economic outlook and was predominantly a function of the unwinding of risk taking and leverage that has characterised many markets in the last three years. 

It has been a very difficult period for Japanese equities and it is disappointing to note that having been criticised in the foreign press in the early part of 2007 for the over-capitalisation of balance sheets, Japanese companies have been given little credit for that conservatism when credit markets have collapsed. In the absence of any signs of a sustained reflation of the domestic economy, Japan has continued to be seen as a warrant on US economic growth. The over-capitalisation of balance sheets is part of a wider corporate governance concern (and as such a wider concern over the misallocation of capital and persistently low returns on equity), which has become the focus of much of the newsprint dedicated to Japanese equities.

There has also been a lack of clarity in the political agenda, which led to policy errors such as the new building regulations, which knocked as much as 1% off GDP in the period, as well as a political stand-off with the Bank of Japan, which left the central bank without a Governor for three weeks at the height of the global financial crisis. All of these issues have weighed on an already weak domestic economy and undoubtedly contributed to the ongoing de-rating of Japanese equities.

Portfolio and Performance

The NAV of the fund declined 14.8% in sterling terms over the period, underperforming the market by 4.5%. The principal contributors to the underperformance relative to the market were our positions in global cyclical companies and an underweight in Utilities.We continue to look with circumspection on the Utility sector, which has attracted attention as a safe haven, but where valuations are not reflective of likely earnings or cash-flow growth, particularly with cost input pressure rising and heavy capital expenditure commitments likely in the next 18 months.

Those sectors in the market that performed best were predominantly defensive sectors with low yen exposure such as Food Producers, Utilities, Land Transport and Insurance or the beneficiaries of rising commodity prices such as Wholesale Trading. Pharmaceuticals and Tobacco, although traditionally more defensive, suffered along with the rest of the market, on account, we think, of the relatively high exchange rate exposure of these companies' operating profits. The worst performing sectors were predominantly either finance related or cyclical/export related - Machinery, Technology, Autos and Chemicals. 

Many of those domestic companies that held up well in the period were companies with low return operations and very poor growth outlooks and we will continue to avoid these in the absence of a substantial change in business conditions. This explains our continued underweight in the domestic Utilities and Construction sectors - these stocks are in our opinion performing well by default.We have made new purchases in the IT Services and Retail sectors where either business trends or Nicholas Weindling James Elliot restructuring initiatives are generating operating profit growth that justifies the relatively high PE ratios.

A decision was made to reduce the gearing in the trust to zero to coincide with the transfer of the fund's assets and management to Tokyo at the end of November 2007.With markets having fallen considerably since this decision was taken, this has proved beneficial, but we are acutely aware of the value on offer in many parts of the market. We will seek opportunities to increase the level of gearing when the outlook for earnings in both domestic and export sectors becomes a little clearer.

Outlook

With the political situation uncertain and little strong leadership it seems unlikely that the domestic economy will become more dynamic in the short term.With concerns about earnings at globally exposed companies, capital expenditure trends (one of the key drivers of the domestic economy in recent years) could weaken. There seems little prospect of an imminent end to the problem of rising prices of consumer staples (food and petrol in particular) on the one hand, and stagnant wages on the other. Corporate governance concerns remain. Our own view is that Japanese corporates should stop buying back shares and start raising pay-out ratios from around 25% to closer to 50% - this would make the yield on the Japanese market more comparable with other developed equity markets and might help to entice domestic investors, still net sellers (and in many cases chasing higher yields elsewhere) back into the Japanese market.

In valuation terms, Japan has converged with both the rest of Asia and other global developed equity markets in PE terms. The Price/Book Value (P/BV) multiple for the market is back to the lows seen in 2003. The yield on equities has recently moved above 10 year Japanese Government Bonds, which has historically proved to be a good entry point into Japanese equities. However, we are still some way from a bottoming in global lead indicators and the earnings outlook remains very uncertain. General Electric's recent earnings disappointment raises further concern that the contraction in credit markets is affecting the broader economic growth outlook, particularly in the case of US consumers.

It should, however, be noted that over 50% of Japan's exports currently go to Asian markets and that China is now Japan's biggest trading partner. This should be seen as a structural long term positive for corporate Japan and the market's decline of the last 6 months is leading to opportunities to buy Japanese companies with exposure to Asian growth trends at very reasonable valuation multiples. 

In conclusion, considerable uncertainty remains in both the economic and earnings outlook and it remains a very challenging market environment. Analysts' estimates imply 8% earnings growth over the next 12 months, although that has come down from 10% and will likely fall a little further in the next few months. The portfolio has a bias to companies that we believe are likely to grow their earnings at double digit rates in an environment where earnings growth is becoming harder to come by. The portfolio trades on PE multiples broadly in line with the market.

James Elliot

Nicholas Weindling 

Investment Managers 16th May 2008

JPMorgan Japanese Investment Trust plc

Unaudited figures for the six months ended 31st March 2008

Income Statement 

	(Unaudited) Six months ended 31st March 2008			(Unaudited) Six months ended  31st March 2007			(Audited) Year ended 30th September  2007
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Losses from investments held at fair value through profit or loss	-	(68,446)	(68,446)	-	(13,056)	(13,056)	-	(67,960)	(67,960)
Net foreign currency (losses)/gains	-	(1,551)	(1,551)	-	4,058	4,058	-	4,878	4,878
Income from investments	3,868	-	3,868	3,739	-	3,739	6,648	-	6,648
Other interest receivable and similar income	49	-	49	317	-	317	420	-	420
	_______	________	_______	_______	________	_______	_______	_______	_______
Gross return/(loss)	3,917	(69,997)	(66,080)	4,056	(8,998)	(4,942)	7,068	(63,082)	(56,014)
Management fee	(253)	(1,012)	(1,265)	(321)	(1,284)	(1,605)	(621)	(2,483)	(3,104)
Other administrative expenses	(341)	-	(341)	(200)	-	(200)	(415)	-	(415)
	_______	_______	_______	_______	_______	_______	_______	_______	_______
Net return/(loss) on ordinary activities before finance costs and taxation	3,323	(71,009)	(67,686)	3,535	(10,282)	(6,747)	6,032	(65,565)	(59,533)
Finance costs	(20)	(83)	(103)	(59)	(237)	(296)	(131)	(524)	(655)
	_______	_______	_______	_______	_______	_______	_______	_______	_______
Net return/(loss) on ordinary activities before taxation	3,303	(71,092)	(67,789)	3,476	(10,519)	(7,043)	5,901	(66,089)	(60,188)
Taxation	(538)	267	(271)	(865)	603	(262)	(465)	-	(465)
	______	_______	_______	______	_______	_______	_______	_______	_______
Net return/(loss) on ordinary activities after taxation	2,765	(70,825)	(68,060)	2,611	(9,916)	(7,305)	5,436	(66,089)	(60,653)
	=====	=====	=====	=====	=====	=====	=====	=====	=====
Return/(loss) per share	1.58p	(40.52)p	(38.94)p	1.41p	(5.35)p	(3.94)p	2.96p	(35.97)p	(33.01)p

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the period. 

The 'Total' column of this statement is the profit and loss account of the Company and the 'Revenue' and 'Capital' columns represent supplementary information. 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 Japanese Investment Trust plc

Unaudited figures for the six months ended 31st March 2008

Reconciliation of Movements in Shareholders' Funds

Six months ended 31st March 2008 (unaudited)	Called up Share capital £'000	Other reserve  £'000	Capital redemption reserve £'000	Capital reserve  £'000	Revenue reserve £'000	Total £'000
At 30th September 2007	44,176	166,791	4,786	210,645	5,372	431,770
Shares bought back and cancelled	(669)		669	(5,252)	-	(5,252)
Total (loss)/return from ordinary activities	-	-	-	(70,825)	2,765	(68,060)
Dividend appropriated in the period	-	-	-	-	(4,897)	(4,897)
	_______	________	________	_______	_______	________
At 31st March 2008	43,507	166,791	5,455	134,568	3,240	353,561
Six months ended 31st March 2007 (unaudited)	Called up Share capital £'000	Other reserve £'000	Capital redemption reserve £'000	Capital reserve  £'000	Revenue reserve £'000	Total £'000
At 30th September 2006	46,380	166,791	2,582	296,059	(64)	511,748
Shares bought back and cancelled	(8)	-	8	(78)	-	(78)
Total (loss)/return from ordinary activities	-	-	-	(9,916)	2,611	(7,305)
	_______	_______	________	_______	_______	________
At 31st March 2007	46,372	166,791	2,590	286,065	2,547	504,365
Year ended 30th September 2007 (Audited)	Called up Share capital £'000	Other reserve £'000	Capital redemption reserve £'000	Capital reserve  £'000	Revenue reserve £'000	Total £'000
At 30th September 2006	46,380	166,791	2,582	296,059	(64)	511,748
Shares bought back and cancelled	(2,204)	-	2,204	(19,325)	-	(19,325)
Total (loss)/return from ordinary activities	-	-	-	(66,089)	5,436	(60,653)
	_______	_______	________	_______	_______	________
At 30th September 2007	44,176	166,791	4,786	210,645	5,372	431,770

JPMorgan Japanese Investment Trust plc

Unaudited figures for the six months ended 31st March 2008

Balance Sheet	(Unaudited) 31st March 2008 £'000	(Unaudited)    31st March 2007 £'000	(Audited) 30th September 2007 £'000
Fixed assets
Investments at fair value through profit or loss	369,028	578,580	485,058
Current assets
Debtors	4,105	8,083	26,976
Derivative financial instrument	-	-	1
Cash at bank and in hand	7,471	2,111	203
	______	______	______
	11,576	10,194	27,180
Creditors: amounts falling due within one year	(27,043)	(84,409)	(80,468)
	______	______	______
Net current liabilities	(15,467)	(74,215)	(53,288)
Total assets less current liabilities	353,561	504,365	431,770
	______	______	______
Total net assets	353,561	504,365	431,770
	______	______	______
Capital and reserves
Called up share capital	43,507	46,372	44,176
Other reserve	166,791	166,791	166,791
Capital redemption reserve	5,455	2,590	4,786
Capital reserve	134,568	286,065	210,645
Revenue reserve	3,240	2,547	5,372
	______	______	______
Shareholders' funds	353,561	504,365	431,770
	=====	=====	=====
Net asset value per share	203.2p	271.9p	244.3p

Cash Flow Statement	(Unaudited) Six months ended 31st March 2008 £'000	(Unaudited) Six months ended  31st March 2007 £'000	(Audited) Year ended  30th September 2007 £'000
Net cash inflow from operating activities	1,110	965	3,030
Net cash outflow from returns on investments and servicing of finance	(102)	(272)	(663)
Net cash inflow/(outflow) from capital expenditure and financial investment	60,789	(14,963)	14,624
Dividend paid	(4,897)	-	-
Net cash (outflow)/inflow from financing	(50,110)	11,445	(18,378)
	_______	_______	_______
Increase/(decrease) in cash for the period	6,790	(2,825)	(1,387)
	_______	_______	_______

Reconciliation of net cash flow to movement in net debt
Net cash movement	6,790	(2,825)	(1,387)
Loans repaid/(drawn down) in the period	44,147	(11,523)	(303)
Exchange movements	(1,551)	4,058	4,878
	_______	_______	_______
Movement in net debt in the period	49,386	(10,290)	3,188
Net debt at the beginning of the period	(62,135)	(65,323)	(65,323)
Net debt at the end of the period	(12,749)	(75,613)	(62,135)
	_______	_______	_______
Represented by:
Cash at bank and in hand	7,471	2,111	203
Debt falling due within one year	(20,220)	(77,724)	(62,338)
	_______	_______	_______
Net debt at the end of the period	(12,749)	(75,613)	(62,135)
	_______	_______	_______

  Notes to the Accounts

1. Financial Statements

The information contained within the financial statements in this preliminary announcement has not been audited or reviewed by the Company's auditors.

The figures and financial information for the year ended 30th September 2007 are extracted from the latest published accounts of the Company and do not constitute statutory accounts for that year. Those accounts have been delivered to the Registrar of Companies and included the report of the auditors which was unqualified and did not contain a statement under either section 237(2) or 237(3) of the Companies Act 1985.

2. Accounting Policies

The accounts have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice ('UK GAAP') and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies' dated 31st December 2005.

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

The accounting policies applied to these interim accounts are consistent with those applied in the accounts for the year ended 30th September 2007.

3. Return/(loss) per share

	(Unaudited) Six months ended  31st March 2008 £'000	(Unaudited) Six months ended  31st March 2007 £'000	(Audited) Year ended  30th September 2007 £'000
Return/(loss) per share is based on the following:
Revenue return	2,765	2,611	5,436
Capital loss	(70,825)	(9,916)	(66,089)
Total loss	(68,060)	(7,305)	(60,653)
Weighted average number of shares in issue	174,764,457	185,503,457	183,714,823
Revenue return per share	1.58p	1.41p	2.96p
Capital loss per share	(40.52)p	(5.35)p	(35.97)p
Total loss per share	(38.94)p	(3.94)p	(33.01)p

4. Net asset value per share

Net asset value per share is calculated by dividing the funds attributable to ordinary shareholders by the number of ordinary shares in issue at 31st March 2008 of 174,028,919 (31st March 2007: 185,489,919 and 30th September 2007: 176,703,919).

5. Reconciliation of total loss on ordinary activities before finance costs and taxation to net cash inflow from operating activities.

	(Unaudited) Six months ended  31st March 2008 £'000	(Unaudited) Six months ended  31st March 2007 £'000	(Audited) Year ended  30th September 2007 £'000
Total loss on ordinary activities before finance costs and taxation	(67,686)	(6,747)	(59,533)
Capital loss before finance costs and taxation	71,009	10,282	65,565
Increase in net debtors and accrued income	(930)	(1,024)	(54)
Overseas taxation	(271)	(262)	(465)
Expenses charged to capital	(1,012)	(1,284)	(2,483)
Net cash inflow from operating activities	1,110	965	3,030

JPMORGAN ASSET MANAGEMENT (UK) LIMITED

16TH MAY 2008

 

END

 

 

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