Final Results

RNS Number : 6009I

JPMorgan US Discovery IT PLC

15 March 2010

 



LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN US DISCOVERY INVESTMENT TRUST PLC

AUDITED FINAL RESULTS FOR THE YEAR ENDED 31ST DECEMBER 2009

Chairman's Statement

Performance

I am delighted to report that 2009 was an excellent year for the Company. As a result of strong stock selection, the Company's Net Asset Value ('NAV') rose by 29.0% compared to a rise of only 12.9% for the Russell 2000 index (in sterling terms), the Company's benchmark. The total return to shareholders was +40.3%. These results were achieved despite all the fears over the economy and corporate profits as well as after the negative effects of the weak US dollar (the value of the US dollar relative to sterling reduced the value of our assets by some 14% over the year).

US equities experienced a strong rebound in the latter half of 2009 with the Russell 2000 index, in US dollar terms, rising 27.2% in the year and the broader indices showing similar increases. Global markets benefited from the unprecedented actions of the central banks and governments in lowering interest rates and making credit easily available. The increase in equities does however mask a difficult year for fund managers and in the Investment Manager's Report, Glenn Gawronski describes the background that he and his team have had to contend with and how the portfolio was positioned to take advantage of the value that was created in the early part of 2009 as markets hit their lows.

Given the level of outperformance that has been achieved relative to our benchmark, it would be usual to ask whether too much risk had been introduced into the portfolio. The Board, however, pays close attention to the construction of the portfolio, receiving detailed reporting and risk analysis, and can confirm that the levels of risk, at both the stock and sector level, have, in fact, been reduced since Glenn and his team took over in November 2008. Before joining JPMorgan Asset Management ('JPMAM'), Glenn worked as a credit analyst, which has proved to be an invaluable discipline in this environment when analysing companies and ensuring that managements are good stewards of capital. In addition, none of the portfolio's outperformance has been achieved through the use of structural gearing (please see comments on gearing below).

Discount Management

The Board is pleased to report that we were able to maintain a relatively stable share price discount to NAV through most of the year by using our share buyback authority. At year end, the shares closed on a discount of 6.0% which compares well with the US Smaller Companies' sector average of 14.4%. Day to day management of the discount has been difficult as markets and currencies have been volatile and our shares have lacked liquidity. The Board, however, remains committed to targeting a discount of around 9% over the long term, which compares with the 12 month average investment trust discount of 8.7%.

For the past several years, the Board has been authorised at the AGM to repurchase the Company's shares for cancellation or alternatively hold them in Treasury for re-issue at a limited discount to NAV to enhance the liquidity of the Company's shares. The Board continues to seek the authority to repurchase shares for cancellation so that we can continue to support a stable discount. We will not, however, be seeking the authority to reissue shares from Treasury. During the three years that we have had this power we have never exercised it and we no longer see the benefits of using it for existing shareholders.

During the year the Company repurchased 91,800 shares for cancellation, representing 1.6% of the shares in issue at the beginning of the year, and bought 307,457 shares into Treasury. All of the 457,457 shares held in Treasury were cancelled in December following the Board decision on Treasury shares.

Currency Hedging

The Company's underlying assets are denominated in US dollars and through the fact we report our valuations in sterling for calculating the NAV we are exposed to currency fluctuations. The Board has the authority to reduce or eliminate the exposure to fluctuating currencies through the use of currency hedging. We review our policy on this matter regularly; to date we have not carried out any hedging and have no plans to do so in the immediate future.

Gearing

At the end of January 2009 our gearing facility expired and in common with a number of investment trusts and many small companies, the Company was unable to find a bank prepared to commit to a loan facility. Fortunately this coincided with a period when the Board and the investment team did not want to be geared given the uncertainties that prevailed in the market. As we are committed to using gearing in the medium/long term, we have recently signed an agreement with ING giving us a revolving credit facility of US$8million which we will use as and when opportunities arise.

Board of Directors

The Directors carried out their annual evaluation of the Board, its Committees, the Directors and the Chairman in January. This was considered to be an efficient way to evaluate their continuing effectiveness.

Having served as a Director for more than nine years, in accordance with best practice, Alan Kemp will stand for annual re-election at this year's AGM. The Board does not believe that length of service in itself should disqualify a Director from seeking re-election nor does it believe it compromises his independence. In proposing Alan's re-election it has taken into account the ongoing requirements of the Combined Code, including the need to refresh the Board and its Committees. Alan is a very experienced investment professional who continues to make a strong contribution to the Board as well as chairing the Audit Committee and the Board recommends to shareholders that he should be re-elected.

In my absence, the Nomination Committee reviewed my own performance and confirmed its recommendation that I continue as Chairman. I shall therefore stand for re-election at the forthcoming AGM.

Manager

At the end of the year the Management Engagement Committee carried out a formal detailed review of the Manager. This covered the investment management, company secretarial, administrative and marketing services provided to the Company by JPMAM and included their investment performance record, fee structure, management processes, investment style, resources and risk control mechanisms. After full consideration, the Board concluded that the continued appointment of the Manager on the terms agreed for provision of those services is in the interests of shareholders as a whole.

Continuation Vote

Included in the agenda for this year's AGM is a resolution to continue the Company's existence as an investment trust for a further five years. There is no doubt that equity markets have been disappointing over the past 5 years and the Company has produced some poor results in that period. However, with the changes that were made in late 2008, both to the investment team and the strategy, the returns to shareholders have been strong in 2009, and have, in part, restored some of the longer term track record of the Company. The US smaller companies sector over the long term has proved to be a more rewarding area for shareholders than the large cap sector, as it always offers exciting growth companies that are not dependent on the economy. Much has been made of the "lost decade" for equities, however if you invested £100 in the Russell 2000 Index ten years ago it would now be worth £137 whereas the same £100 invested in the large cap S&P 500 index would only be worth £91. Based on the Board's belief that Glenn and his investment team can continue to identify those opportunities, I would urge shareholders to vote in favour of this resolution.

Proposed Name Change

At the AGM the Board will recommend that the name of the Company is changed to: JPMorgan US Smaller Companies Investment Trust plc to reflect more accurately the Company's investment objective, which is to achieve long term capital growth through investing in the US smaller companies sector (companies that are in the bottom 10% of the US market by market capitalisation). It is felt that the word "Discovery" is confusing and implies that the Company would be investing in early stage companies and unquoted investments.

Annual General Meeting

This year's AGM will be held at The Library, JPMorgan, 60 Victoria Embankment, London EC4Y OJP on Wednesday 21st April 2010 at 12.00 noon.

Outlook

At the time of writing my statement in 2009, markets were hitting their low points, creating some genuine value, particularly in small cap. After the bounce from those low levels, for equity markets to continue to make progress in 2010, we need the support of recovering economic growth which, at the time of writing, still looks uncertain. Despite the uncertainties over the outlook for global economic recovery, US small cap stocks as an asset class appear reasonably valued and should provide scope for our manager's stock picking disciplines to generate good returns. Furthermore the sector continues to offer some exciting growth opportunities which are not dependent on economic recovery.

Davina Walter

Chairman, 15th March 2010

Investment Manager's Report

Market Review

Looking back on 2009, we saw several distinct periods of market activity for US equities. During the period from January to early March, US equity markets retested lows, as economic data provided few causes for optimism. There was sobering news in terms of US unemployment, manufacturing activity, continued pressure on housing prices and uncertainty relating to the sustainability of the entire financial system. Investors responded by reducing their appetite for risk and markets ultimately reached new cyclical lows on 9th March.

The significant market rally from the March lows through September was driven by unprecedented worldwide government stimuli, effectively zero percent short term interest rates, and a deceleration in the pace of economic deterioration. With the possibility of a systematic failure of the financial system off the table, investors considered the equity markets oversold and once again began to embrace risk with economically sensitive businesses, highly leveraged companies and low quality stocks leading the rally.

Since the end of September, US equity markets have extended the rebound from the March lows, albeit at a less breakneck pace. Several trends emerged in the final quarter of the year that were different from the meteoric rally earlier in the year. The market became more discerning in recognising winners and losers and company specific news became more important. Higher quality stocks, as measured by return on invested capital, have outperformed lower quality stocks, and larger stocks have outperformed smaller stocks.

Investment Performance

For the year ending 31st December 2009, the total return on net assets was +29.0%, a strong performance relative to the benchmark, the Russell 2000 index, which rose 12.9%, both in sterling terms. The Company's outperformance was driven by superior stock selection and not by gearing the portfolio or taking large sector bets.

Portfolio Positioning

Since taking responsibility for the portfolio in late 2008, it has been reshaped, while remaining true to our bottom-up fundamental analysis. The number of stocks in the portfolio has been expanded from 65 in November 2008 to 87 at the end of December 2009, reducing the portfolio's concentration, while upgrading it from a standpoint of quality. Our sector overweight positions in the Consumer Discretionary, Technology and Auto & Transportation sectors have been materially reduced. On the other hand, the portfolio remains underweight in the Producer Durables and Materials & Processing sectors. We have found some opportunities in the Energy sector and are now roughly neutral in that sector. Finally, the portfolio's significant underweight positions in the Financial Services and Utility sectors have been reduced.

Since November 2008, our strategy has outperformed the Russell 2000 Index. The majority of the out-performance has resulted from stock selection, though sector weights have contributed positively as well. As we sold out of some holdings and added new positions, the portfolio has shifted away from companies that possessed severe enterprise risk due to impaired balance sheets and/or inconsistent cash flows. New investments have been made in companies that generate sustainable earnings and more consistent cash flows as a result of our investment process. This is illustrated by the change in the risk profile since November 2008 (as measured by Barra), as the portfolio has lower earnings variation, lower leverage, lower volatility and a higher earnings yield.

Significant Contributors to Portfolio Performance

Calamos, an asset manager with over $23 billion in assets under management and a strong long-term track record in growth investing, contributed positively to overall results in the year with its shares returning approximately 59%. This strong performance reflected the robust rebound in the equity markets.

Switch and Data Facilities ('SDXC') provides network neutral interconnection and collocation services to internet dependent businesses, including telecommunication carriers, internet service providers and online content providers.  During the year, SDXC rose 140% as its primary competitor, Equinix, announced a plan to acquire it for approximately $700m in a deal that would unite the two data center facility operators and achieve cost synergies and scale.  As a result of the stock price appreciation, we sold out of this position during the year.

SuccessFactors provides on-demand performance and employee software solutions to help organisations optimise their performance.  During 2009, it returned 189%, driven by solid financial results, including continued revenue growth and the company's first full year of positive operating cash flows.  Also driving performance was increased investor optimism about a recovery in the overall enterprise software spending environment in general, which bodes well for SFSF given its leading position in human capital management and performance management software.

Market Outlook

Since the March 2009 lows, we have witnessed a spectacular rally in equities. However, we think the market has become more discriminating in its evaluation of macroeconomic news, ballooning government balance sheets and company specific data points. At the margin, investors appear more measured in their approach to risk and we anticipate more muted stock market gains relative to last year's heady performance.

As the economy continues to heal and with stock valuations relatively reasonable, stock selection will be more important than ever. With the Russell 2000 index close to 30% below July 2007 highs and the ten year treasury yield hovering around 3.7% versus the earnings yield on the Russell 2000 in excess of 5%, investors may continue to increase their risk appetite despite the potential for a slow, uneven recovery. We plan to remain disciplined with regards to our investment strategy: identify companies with a sustainable competitive advantage, durable business models, solid management teams and buy those companies at a discount to their intrinsic value. Our sector weights will continue to reflect our bottom-up investment analysis and disciplined approach to portfolio construction. 

Glenn Gawronski

Investment Manager, 15th March 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 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 to NAV. 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 tactically, within a strategic range set by the Board.

• 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 842 of the Income and Corporation Taxes Act 1988 ('Section 842'). Details of the Company's approval are given under "Business of the Company" above. Were the Company to breach Section 842, it might lose investment trust status and, as a consequence, gains within the Company's portfolio would be subject to Capital Gains Tax. The Section 842 qualification criteria are continually monitored by JPMAM and the results reported to the Board each month. The Company must also comply with the provisions of the Companies Act 1985 and 2006 and, as its shares are listed on the London Stock Exchange, the UKLA Listing Rules. A breach of the Companies Act 1985 could result in the Company and/or the Directors being fined or the subject of criminal proceedings. Breach of the UKLA Listing Rules could result in the Company's shares being suspended from listing which in turn would breach Section 842. The Board relies on the services of its Company Secretary, JPMAM, and its professional advisers to ensure compliance with the Companies Act 1985 and 2006 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 report within 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 within the Annual Report.

• Foreign currency: The Company has exposure to foreign currency as part of the risk reward inherent in a company that invests overseas. The income and capital value of the the Company's investments can be affected by exchange rate movements as the majority of the Company's assets and income are denominated in currencies other than sterling which is the reporting currency. The Company may be exposed to currency risk due to exchange rate movement in the period between investment trade date and the date of settlement. This exposure is short term and therefore the risk is not significant.

• Financial: The financial risks faced by the Company include market price risk, interest rate risk, foreign currency risk, liquidity risk and credit risk. Further details are disclosed 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 period.

Directors' Responsibilities

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

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

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

           uncertainties that they face.

For and on behalf of the Board

Davina Walter

Chairman

15th March 2010

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.jpmusdiscovery.co.uk

For further information please contact:

Jonathan Latter

For and on behalf of

JPMorgan Asset Management (UK) Limited, Secretary

020 7742 6000

Income Statement

for the year ended 31st December 2009

		2009			2008
		Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Gains/(losses) on investments held at  fair value  through profit or loss		-	9,970	9,970	-	(20,814)	(20,814)
Net foreign currency (losses)/gains		-	(238)	(238)	-	5	5
Income from investments		259	-	259	130	-	130
Other interest receivable and similar income		63	-	63	167	-	167
Gross return/(loss)		322	9,732	10,054	297	(20,809)	(20,512)
Management fee		(36)	(325)	(361)	(48)	(430)	(478)
Performance fee (charge)/writeback		-	(200)	(200)	-	431	431
VAT recoverable		-	-	-	228	13	241
Other administrative expenses		(279)	-	(279)	(287)	-	(287)
Net return/(loss) on ordinary activities  before finance costs and taxation		7	9,207	9,214	190	(20,795)	(20,605)
Finance costs		(1)	(7)	(8)	(5)	(43)	(48)
Net return/(loss) on ordinary activities  before taxation		6	9,200	9,206	185	(20,838)	(20,653)
Taxation		(41)	-	(41)	(19)	-	(19)
Net (loss)/return on ordinary activities    after taxation		(35)	9,200	9,165	166	(20,838)	(20,672)
(Loss)/return per share (note 2)		(0.62)p	161.82p	161.20p	2.53p	(317.85)p	(315.32)p

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 December 2009

	Called up share capital £'000	Capital redemption reserve £'000	Capital reserves £'000	Revenue reserve £'000	Total £'000
At 31st December 2007	2,098	1,044	69,630	(4,861)	67,911
Repurchase and cancellation of the Company's own shares	(442)	442	(11,429)	-	(11,429)
Purchase of shares into Treasury	-	-	(1,335)	-	(1,335)
Cancellation of shares held in Treasury	(148)	148	-	-	-
Net (loss)/return on ordinary activities	-	-	(20,838)	166	(20,672)
At 31st December 2008	1,508	1,634	36,028	(4,695)	34,475
Repurchase and cancellation of the Company's own shares	(23)	23	(614)	-	(614)
Repurchase of shares into Treasury	-	-	(1,627)	-	(1,627)
Cancellation of shares held in Treasury	(114)	114	-	-	-
Net return/(loss) on ordinary activities	-	-	9,200	(35)	9,165
At 31st December 2009	1,371	1,771	42,987	(4,730)	41,399

 

Balance Sheet

at 31st December 2009

		2009 £'000	2008 £'000
Fixed assets
Investments held at fair value through profit or loss		40,860	32,121
Investments in liquidity funds held at fair value through profit or loss		1,148	-
		42,008	32,121
Current assets
Debtors		59	951
Cash and short term deposits		43	2,132
		102	3,083
Creditors: amounts falling due within one year		(578)	(729)
Net current (liabilities)/assets		(476)	2,354
Total assets less current liabilities		41,532	34,475
Provision for liabilities and charges		(133)	-
Total net assets		41,399	34,475
Capital and reserves
Called up share capital		1,371	1,508
Capital redemption reserve		1,771	1,634
Capital reserves		42,987	36,028
Revenue reserve		(4,730)	(4,695)
Shareholders' funds		41,399	34,475
Net asset value per share (note 3)		755.2p	586.2p

The Company's registration number is 552775.

Cash Flow Statement

for the year ended 31st December 2009

		2009 £'000	2008 £'000
Net cash (outflow)/inflow from operating activities		(110)	195
Returns on investments and servicing of finance
Interest paid		(8)	(49)
Net cash outflow from returns on investments   and servicing of finance		(8)	(49)
Capital expenditure and financial investment
Purchases of investments		(29,863)	(33,015)
Sales of investments		29,975	49,946
Other capital charges - handling fees		(8)	(7)
Net cash inflow from capital   expenditure and financial investment		104	16,924
Net cash (outflow)/inflow before financing		(14)	17,070
Financing
Repurchase of shares into Treasury		(1,627)	(1,335)
Repurchase and cancellation of the Company's own shares		(212)	(14,570)
Net cash outflow from financing activity		(1,839)	(15,905)
(Decrease)/increase in cash for the year		(1,853)	1,165

Notes to the Accounts

for the year ended  31st December 2009

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' (the 'SORP') issued by the Association of Investment Companies (the 'AIC') in January 2009. All of the Company's operations are of a continuing nature.

2.             (Loss)/return per share

The revenue loss per share is based on the revenue loss attributable to the ordinary shares of £35,000 (2008: £166,000 return) and on the weighted average number of shares in issue during the year of 5,685,496 (2008: 6,555,908).

The capital return per share is based on the capital return attributable to the ordinary shares of £9,200,000 (2008: £20,838,000 loss) and on the weighted average number of shares in issue during the year of 5,685,496 (2008: 6,555,908).

The total return per share is based on the total return attributable to the ordinary shares of £9,165,000 (2008: £20,672,000 loss) and on the weighted average number of shares in issue during the year of 5,685,496 (2008: 6,555,908).

3.             Net asset value per share

	Net asset value per share		Net assets attributable
	2009 pence	2008 pence	2009 £'000	2008 £'000
Ordinary shares	755.2	586.2	41,399	34,475

Net asset value per share is based on the net assets attributable to the ordinary shareholders of 41,399,000 (2008: £34,475,000)

and on the 5,482,110 (2008: 5,881,367) shares in issue at the year end, excluding shares held in Treasury.

4.           Status of announcement

2008 Financial Information

The figures and financial information for 2008 are extracted from the published Annual Report and Accounts for the year ended 31st December 2008 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 237(2) or section 237(3) of the Companies Act 1985.

2009 Financial Information

            The figures and financial information for 2009 are extracted from the Annual Report and Accounts for the year ended 31st December 2009 and do not constitute the statutory accounts for the year.  The Annual Report and Financial 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.

Annual Report and Accounts

The Annual Report and Accounts will be posted to shareholders on or around 22nd March 2010 and will shortly be available on the Company's website (www.jpmusdiscovery.co.uk) or in hard copy format from the Company's Registered Office, Finsbury Dials, 20 Finsbury Street, London EC2Y 9AQ

JPMORGAN ASSET MANAGEMENT (UK) LIMITED

 

END

 

 

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