Half Yearly Report

RNS Number : 9221D

JPMorgan Smaller Cos IT PLC

30 March 2011

 



LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN SMALLER COMPANIES INVESTMENT TRUST PLC

UNAUDITED HALF YEAR RESULTS FOR THE SIX MONTHS

ENDED 31ST JANUARY 2011

Chairman's Statement

Investment Performance

As equity markets continued to recover strongly during the first six months of the Company's financial year against a background of variable economic news, the Company benefited from its well positioned portfolio. I am pleased to report that the Company produced a strong return of +46.4% for shareholders in the six months period. The total return on the Company's net assets was +36.6%. This compares very positively with the FTSE Small Cap (excluding Investment Trusts) Index return of +19.4%. The share price of the Company's ordinary shares rose from 368p at the start of the period to 528.5p at 31st January 2011. The outperformance against your Company's benchmark was due in part to a strong focus and overweight position in the oil and gas sector and in particular in a number of early stage oil companies listed on AIM. This overweight exposure has been reduced and continues to be monitored carefully by the Board. The Investment Managers provide a detailed commentary on markets, the portfolio's construction and the outlook for the remainder of the financial year in their report.

Share Repurchases

During the six months to 31st January 2011, the Company has continued to use the authority given by shareholders to repurchase its shares in the market to help maintain an orderly market for the Company's shares, thereby reducing the volatility of the discount. The Company repurchased a total of 119,752 ordinary shares for cancellation for a total consideration of £546,000 representing 0.6% of the issued share capital at the beginning of the year. The shares were repurchased at an average discount of 18% and added approximately 0.6p per share to the net asset value for continuing shareholders. Since the period end, the Company has repurchased no further shares.

Gearing and New Loan Facility

Gearing levels increased during the period from 105.5% at the beginning of the period to to 107.6% at 31st January 2011. A flexible loan facility of £10 million is currently in place with ING Bank N.V., which expires in April 2011. The Board has agreed the renewal of this facility, which can continue to be used tactically as investment opportunities arise, with the aim of enhancing returns. At the end of January 2011, £9 million had been drawn on the facility.

Outlook

At the macro economic level, the number of headwinds facing investors has increased. There is now the turmoil in the Middle East and the aftermath of the earthquake in Japan as well as the prospect of inflation and increases in interest rates. However, companies in the portfolio are generally enjoying strong operating results and are well positioned to take advantage of the gradual recovery of the world economy. The Board supports the Investment Managers' philosophy of remaining focused on investing in stocks with significant growth prospects and strong financial characteristics. There is also the expectation of increased corporate activity in the small cap sector.

Strone Macpherson

Chairman                                              

30 March 2011

Investment Managers' Report

Market Background

In the first half of your Company's financial year, stock markets continued to provide strong returns, in particular in the smaller companies arena, which outperformed the larger capitalisation companies. In the UK the macro recovery continued. Manufacturing output continued its upward trend, private sector employment rose, and capital expenditure spending plans also rose sharply. While the poor GDP data in the fourth quarter of calendar 2010 surprised, this looks like a snow-driven anomaly in the gradual recovery taking place in the UK economy.

Fears of a US economic pause, which caused jitters over the summer, were misplaced, and this combined with the second round of quantitative easing in the US, helped to drive stock markets upwards. Likewise, over the last six months it became evident that fears of a substantial slowdown in China were unjustified, and Chinese demand continued to be a strong driver of global growth. While the so-called peripheral countries of Europe continued to produce economic shocks, the strong European export market confirmed the recovery in core Europe.

Portfolio Construction

As discussed in the last Annual Report, your Company was well-placed to benefit from the growing evidence of the global recovery in the period, and this positioning led to a very strong performance over the six months. While the FTSE Smaller Companies (ex Investment Trusts) Index continued to show strong momentum, climbing 19.4% over the six months, your portfolio produced a very strong total return on net assets of 36.6% in the period, outperforming its benchmark by 17.2%. Stock selection, sector selection and gearing all contributed to performance.

The most notable returns came from three sectors; Oil & Gas Producers, Chemicals and the broader Industrials sector. The overweight position we have maintained for the last two years in early stage oil companies was extremely positive, the most significant performers being Nautical Petroleum, Cove Energy and Bowleven, as each of these companies made significant oil and/or gas discoveries. In the Chemicals sector, both Elementis and Yule Catto continued to produce strong returns, and the latter participated in a large acquisition which was very well received by the stock market. In the Industrials space, we owned a number of good performers which benefited from the global recovery, including Renishaw, Fenner and Oxford Instruments.

On the negative side, the largest detractor from performance was our holding in Healthcare Locums. Following its suspension, we have taken the precaution of writing down the value of this stock. In addition, we lost performance by not owning Northern Foods (where there was a bidding war to acquire the company) and F&C Asset Management where, again, corporate activity (a 'quasi-bid' to change management) drove up the shares.

Portfolio changes were generally not large in the period. The Oil & Gas exposure increased mainly due to strong performance by the stocks held, and Oil Equipment & Services increased due to a reclassification of Cape, a large holding for your Company, into the sector. The largest sector change over the period was the increase in the underweight of the Real Estate sectors, where we now significantly deviate from the benchmark.

Market Outlook

We remain positive on the outlook for smaller companies over the second half of your Company's financial year. Looking at the economic backdrop, the recovery in the US continues, as evidenced by recent upgrades to forecast GDP growth in the US. This, combined with on-going export growth in Germany, the key driver of Europe, and with China's continued rapid expansion, provides a positive backdrop. Recent headwinds from the current upheaval in North Africa and the Middle East, and the tragic events in Japan, should have little direct investment impact on our companies, but have led to greater volatility in investment markets and we will continue to monitor the broader economical effects.

In the UK, recent positive data in both manufacturing and services suggests that the recovery is ongoing. Above target inflation will bring interest rate rises, but we expect them to be slow and measured, and currently remain sanguine on the inflation outlook. The Government's austerity measures will begin to bite this year, and we expect pressure on the consumer to grow.

We therefore remain positioned largely for growth outside the UK, and continue to be wary of consumer exposure within the portfolio. A number of companies have exited the recession stronger than they entered it and, despite rising raw material prices, a number have higher margins than before. This is testament both to management actions and to the rebound in global growth. At this early stage of the current economic cycle while mindful of the broader economic risks we remain excited by the growth opportunities of the companies within the portfolio, and in addition continue to expect further corporate activity (i.e. bids for companies) if the market does not rerate them.

Georgina Brittain

Kent Kwan

Investment Managers                                                                                                     

30 March 2011

Interim Management Report

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

Principal Risks and Uncertainties

The principal risks and uncertainties faced by the Company fall into the following broad categories: investment and strategy; discount; political; corporate governance and shareholder relations; market; accounting, legal and regulatory; 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 31st July 2010.

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.

Going Concern

The Directors believe, having considered the Company's investment objectives, risk management policies, capital management policies and procedures, nature of the portfolio and expenditure projections, that the Company has adequate resources, an appropriate financial structure and suitable management arrangements in place to continue in operational existence for the foreseeable future. For these reasons, they consider there is reasonable evidence to continue to adopt the going concern basis in preparing the accounts.

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 year financial report has been prepared in accordance with the Accounting Standards Board's Statement 'Half Yearly Financial Reports'; and

(ii)         the half year 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

Strone Macpherson

Chairman                                                                                                                      

30 March 2011

For further information, please contact:

Divya Amin

For and on behalf of

JPMorgan Asset Management (UK) Limited, Secretary

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.jpmsmallercompanies.co.uk

Income Statement

for the six months ended 31st January 2011

	(Unaudited)			(Unaudited)				(Audited)
	Six months ended			Six months ended				Year ended
	31st January 2011			31st January 2010				31st July 2010
	Revenue	Capital	Total	Revenue	Capital	Total	Revenue		Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000		£'000	£'000
Gains on investments held at
fair value through profit or loss	-	29,568	29,568	-	16,818	16,818	-		19,117	19,117
Income from investments	1,152	-	1,152	881	-	881	2,185		-	2,185
Other interest receivable and
similar income (note 3)	4	-	4	170	-	170	170		-	170
Gross return	1,156	29,568	30,724	1,051	16,818	17,869	2,355		19,117	21,472
Management fee	(214)	(214)	(428)	(185)	(185)	(370)	(373)		(373)	(746)
VAT recoverable on management
fees (note 3)	-	-	-	178	20	198	178		20	198
Other administrative expenses	(130)	-	(130)	(161)	-	(161)	(340)		-	(340)
Net return on ordinary activities
before finance costs and
taxation	812	29,354	30,166	883	16,653	17,536	1,820		18,764	20,584
Finance costs	(47)	(47)	(94)	(39)	(39)	(78)	(96)		(96)	(192)
Net return on ordinary activities
before taxation	765	29,307	30,072	844	16,614	17,458	1,724		18,668	23,392
Taxation	(1)	-	(1)	(1)	-	(1)	(1)		-	(1)
Net return on ordinary activities
after taxation	764	29,307	30,071	843	16,614	17,457	1,723		18,668	20,391
Return per share (note 5)	4.05p	155.20p	159.25p	4.30p	84.74p	89.04p	8.92p		96,65p	105.57p

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 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
Six months ended	share	Share	redemption	Capital	Revenue
31st January 2011	capital	premium	reserve	reserves	reserve	Total
(Unaudited)	£'000	£'000	£'000	£'000	£'000	£'000
At 31st July 2010	4,735	18,360	1,931	61,846	2,588	89,460
Repurchase and cancellation of the
Company's own shares	(30)	-	30	(546)	-	(546)
Net return on ordinary activities	-	-	-	29,307	764	30,071
Dividends appropriated in the period	-	-	-	-	(1,604)	(1,604)
At 31st January 2011	4,705	18,360	1,961	90,607	1,748	117,381
	Called up		Capital
Six months ended	share	Share	redemption	Capital	Revenue
31st January 2010	capital	premium	reserve	reserves	reserve	Total
(Unaudited)	£'000	£'000	£'000	£'000	£'000	£'000
At 31st July 2009	4,903	18,360	1,763	45,564	2,426	73,016
Repurchase and cancellation of the
Company's own shares	(15)	-	15	(212)	-	(212)
Net return on ordinary activities	-	-	-	16,614	843	17,457
Dividends appropriated in the period	-	-	-	-	(1,561)	(1,561)
At 31st January 2010	4,888	18,360	1,778	61,966	1,708	88,700
	Called up		Capital
Year ended	share	Share	redemption	Capital	Revenue
31st July 2010	capital	premium	reserve	reserves	reserve	Total
(Audited)	£'000	£'000	£'000	£'000	£'000	£'000
At 31st July 2009	4,903	18,360	1,763	45,564	2,426	73,016
Repurchase and cancellation of the
Company's own shares	(168)	-	168	(2,386)	-	(2,386)
Net return on ordinary activities	-	-	-	18,668	1,723	20,391
Dividends appropriated in the year	-	-	-	-	(1,561)	(1,561)
At 31st July 2010	4,735	18,360	1,931	61,846	2,588	89,460

Balance Sheet

at 31st January 2011

	(Unaudited)	(Unaudited)	(Audited)
	31st January 2011	31st January 2010	31st July 2010
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	126,330	93,849	94,396
Investments in liquidity funds held at fair value through
profit or loss	-	715	1,305
Total investments	126,330	94,564	95,701
Current assets
Debtors	262	1,760	734
Cash and short term deposits	494	82	271
	756	1,842	1,005
Creditors: amounts falling due within one year	(9,705)	(7,706)	(7,246)
Net current liabilities	(8,949)	(5,864)	(6,241)
Total assets less current liabilities	117,381	88,700	89,460
Total net assets	117,381	88,700	89,460
Capital and reserves
Called up share capital	4,705	4,888	4,735
Share premium	18,360	18,360	18,360
Capital redemption reserve	1,961	1,778	1,931
Capital reserves	90,607	61,966	61,846
Revenue reserve	1,748	1,708	2,588
Shareholders' funds	117,381	88,700	89,460
Net asset value per share (note 6)	623.7p	453.6p	472.3p

Cash Flow Statement

for the six months ended 31st January 2011

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st January 2011	31st January 2010	31st July 2010
	£'000	£'000	£'000
Net cash inflow from operating activities (note 7)	549	350	1,501
Net cash outflow from returns on investments and
servicing of finance	(94)	(85)	(199)
Net cash (outflow)/inflow from capital expenditure
and financial investment	(81)	1,546	2,872
Dividends paid	(1,604)	(1,561)	(1,561)
Net cash inflow/(outflow) from financing	1,453	(268)	(2,442)
Increase/(decrease) in cash for the period	223	(18)	171
Reconciliation of net cash flow to movement in
net debt
Net cash movement	223	(18)	171
Net repayment of loans	(2,000)	-	-
Movement in net debt in the period	(1,777)	(18)	171
Net debt at the beginning of the period	(6,729)	(6,900)	(6,900)
Net debt at the end of the period	(8,506)	(6,918)	(6,729)
Represented by:
Cash and short term deposits	494	82	271
Debt falling due within one year	(9,000)	(7,000)	(7,000)
Net debt	(8,506)	(6,918)	(6,729)

Notes to the Accounts

for the six months ended 31st January 2011

1.             Financial statements

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

                The figures and financial information for the year ended 31st July 2010 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 498(2) or 498(3) of the Companies Act 2006.

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 and Venture Capital Trusts' issued in January 2009.

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

                The accounting policies applied to these half year accounts are consistent with those applied in the accounts for the year ended 31st July 2010.

3.             VAT on management fee

                The comparative results for the six months ended 31st January 2010 and the year ended 31st July 2010 include VAT recoverable on management fees amounting to £198,000 plus interest receivable thereon amounting to £162,000, following HM Revenue & Custom's acceptance in 2007 that VAT was not chargeable on investment trust management fees.

4.             Dividends

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st January 2011	31st January 2010	31st July 2010
	£'000	£'000	£'000
Unclaimed dividends refunded to the Company1	-	(8)	(8)
Final dividend in respect of the year ended 31st July 2010
of 8.5p (2009: 8.0p)	1,604	1,569	1,569
	1,604	1,561	1,561

                1Represents dividends which remain unclaimed after a period of 6 years and thereby become the property of the Company.

                No interim dividend has been declared in respect of the six months ended 31st January 2011 (2010: nil).

5.             Return per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st January 2011	31st January 2010	31st July 2010
	£'000	£'000	£'000
Return per share is based on the following:
Revenue return	764	843	1,723
Capital return	29,307	16,614	18,668
Total return	30,071	17,457	20,391
Weighted average number of shares in issue:	18,883,070	19,605,452	19,316,003
Revenue return per share	4.05p	4.30p	8.92p
Capital return per share	155.20p	84.74p	96.65p
Total return per share	159.25p	89.04p	105.57p

6.             Net asset value per share

                Net asset value per share is calculated by dividing shareholders' funds by the number of shares in issue at 31st January 2011 of 18,820,271 (31st January 2010: 19,553,550 and 31st July 2010: 18,940,023).

7.             Reconciliation of net return on ordinary activities before finance costs and taxation to net cash inflow from operating activities

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st January 2011	31st January 2010	31st July 2010
	£'000	£'000	£'000
Net return on ordinary activities before finance cost and taxation	30,166	17,536	20,584
Add back capital return before finance costs
and taxation	(29,354)	(16,653)	(18,764)
Scrip dividends received as income	-	(10)	(37)
(Increase)/decrease in accrued income	(3)	42	68
Increase in other debtors	(4)	(376)	(3)
(Decrease)/increase in accrued expenses	(41)	(23)	7
Tax on unfranked investment income	(1)	(1)	(1)
Expenses charged to capital	(214)	(165)	(353)
Net cash inflow from operating activities	549	350	1,501

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 interim report will shortly be submitted to the National Storage Mechanism and will be available for inspection at www.hemscott.com/nsm.do

The interim report will also shortly be available on the Company's website at www.jpmsmallercompanies.co.uk where up to date information on the Company, including daily NAV and share prices, factsheets and portfolio information can also be found.

 

END

 

 

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