Half-year Report

RNS Number : 3070O

JPMorgan US Smaller Co. IT

17 August 2017

 

LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMorgan US Smaller Companies Investment Trust plc

Half Year Report & Accounts for the six months ended 30th June 2017

Legal Entity Identifier:  549300MDD7SOXDMBN667

Information disclosed in accordance with the DTR 4.2.2

The Directors of JPMorgan US Smaller Companies Investment Trust plc announce the Company's results for the the six months ended 30 June 2017.

CHAIRMAN'S STATEMENT

Performance

Whilst the Company's net asset value (NAV) only increased by a modest 1.6% for the first six months of 2017, it compares favourably with the Russell 2000 index (the Company's benchmark) which fell 0.2% in sterling terms. These returns were hampered by a recovery in sterling against US dollar as the NAV increased 7.5% in local currency which compares with a rise of 5.0% in the Russell 2000 index.

Currently the financial press is full of stories about active managers consistently failing to beat their benchmarks (and indeed in some cases apparently not even having a benchmark), and related to this subject, there has been a huge debate on management fees. The strong outperformance achieved by the JPMorgan team since 2009 strongly supports engaging an active manager in the US small cap sector. Since 31st December 2008, when the team in New York took over running the portfolio, the NAV has increased by 391.8% whilst the Russell 2000 index has risen by 256.9%. The NAV naturally includes all costs and fees incurred in the management of these assets whilst the index has no costs to absorb.

Discount and Premium

During the six month period to 30th June 2017 the share price fell by 1.8% as this was compared to an increase of 1.6% in NAV the modest premium to NAV at year end shifted to a 1.5% discount. As we have written in the past, aligning our share price movement with the change in the NAV is always going to be a challenge as it is more art than science. The relationship between our share price and the NAV is monitored on a daily basis by the Board and our professional advisers and to help with the management of the discount and premium we have in place the authority to repurchase up to 14.99% of the Company's issued share capital and to issue up to 10%. These authorities have been used during the first six months of 2017 and a total of 165,000 shares have been purchased into Treasury at an average discount of 8.5%. The Company currently holds 1.23% of its shares in Treasury, having issued 850,000 shares from Treasury since the year end at an average premium of 1.5%.

Outlook

I will leave the US market outlook to the experts, as set out on page 6 of the Half Year Report and Accounts, and instead remind investors why the Board hopes the Company can continue to deliver superior investment returns over the long term. 'People' is undoubtedly the key factor and with Don San Jose and his co-head Dan Percella, the Company has two experienced US small cap managers who, along with three other experienced members of the team, have built a strong team culture around them within the New York-based group. The team has a clearly defined investment philosophy and a disciplined investment process. Over the long term, the US economy has a long history of creating exciting growth prospects in the small cap sector and our Company should continue to take advantage of these opportunities for the reasons set out above.

Davina Walter

Chairman                                                                                                                                        

17th August 2017

INVESTMENT MANAGERS' REPORT

Market Review

The first half of 2017 marked another period of positive returns for US equities, buoyed by strong earnings, benign inflation and synchronized global growth.

In a change of pace from 2016, we saw a reversal of market leadership as the so-called 'Trump trade' unwound as initial investor enthusiasm for reform faded with lack of progress on taxes, health care, regulation and infrastructure. As the year progressed, cyclicals ebbed in favour of defensive sectors. Almost everything that worked post-election reversed: small caps lagged large, growth outpaced value, energy and bank stocks underperformed while health care and technology outperformed.

Despite Washington's lack of progress on pro-growth policy items, measures of 'soft' data, including consumer and business confidence, have remained near post-election highs. At the same time the trajectory of the US economy remains largely unchanged since the election, highlighting a disconnect between 'soft' and 'hard' data. While there is still hope that meaningful tax and regulatory reforms can accelerate economic growth, Congress's inability to pass healthcare reform may set the stage for disappointments on other agenda items as well.

Central bank policy has also been a hot topic as the Federal Reserve appeared willing to look past softer inflation readings with respect to future rate hikes, and is prepared to begin reducing the balance sheet this fall. The ECB also became more hawkish as economic activity in the region has improved, which further pressured an already-weakening US dollar.

For the six month period the markets seemed to shrug all concerns aside as strong corporate earnings helped offset the lack of policy initiatives. Large caps, as measured by the S&P 500 Index, rallied +3.9% to outperform more domestically focused small caps which returned -0.2%, as measured by the Russell 2000 Index. Currency, which had a positive impact on absolute returns in 2016, has resulted in more muted returns for GBP investors so far in 2017 as the US dollar weakened.

Performance

For the six months ended 30th June 2017, the total return on net assets was +1.6%. The portfolio's return was ahead of its benchmark, the Russell 2000 Index, which returned -0.2%. Over the period, the primary driver of the Company's outperformance was superior stock selection across a number of sectors. In particular, our holdings in the materials & processing, consumer staples, financials and technology sectors outperformed their benchmark peer groups and added the most value over the period.

Within materials & processing, our preference for the more stable packaging companies proved beneficial. In particular, shares of AptarGroup rallied significantly as they reported better than expected results with strength in its key business areas including pharmaceuticals. The company is a leading manufacturer and designer of dispensing solutions sold into the Beauty & Home, Food & Beverage, and Pharmaceutical industries. We continue to like AptarGroup given their disciplined management team and strong balance sheet. Additionally, we believe they do not get the credit they deserve for their pharmaceutical business, which is a high quality franchise, and is the majority of their profits, yet only about 30% of their sales. Another top contributor in the sector was Cabot Microelectronics, a leading provider of slurries and pads that enable chemical mechanical planarization during the fabrication of integrated circuits. The company reported strong earnings, with continued strong growth in management's three strategic growth areas: tungsten slurries, dielectric slurries and pads. With a solid net cash balance sheet, a high teens return on invested capital, limited capital intensity and a consumables-based business model, we believe Cabot is a high quality way to invest in the semiconductor space.

In the consumer staples sector, AdvancePierre Foods was the top contributor to relative performance. The company, which provides value-added protein and handheld convenience products, saw its share price rally after it agreed to be acquired by Tyson Foods. We exited our position during the period.

Despite financials lagging the market over the period, our holdings held up better than their peers and so we enjoyed a strong relative contribution in this sector. A handful of names in the sector proved beneficial including Realogy Holdings, HFF and Corelogic.

Within technology, our names significantly outperformed with Guidewire Software and Q2 Holdings adding the most value. Guidewire, which provides software to the insurance industry, reported strong earnings which exceeded analyst expectations. Better than expected licensing revenue and lower than expected expenses drove the results. Through a combination of industry-leading innovation and a strong customer-first culture, we believe the company is positioned to be the long term winner in its served market. Q2 is a market leading provider of cloud-based virtual banking solutions to regional and community financial institutions in the US. The company reported another strong quarter of results, driven by a combination of good execution, elevated customer optimism and secular tailwinds as banking activity continued to shift from branches to digital channels. With a predictable business model, strong competitive position, and the continuing shift to digital banking, Q2 remains a core technology holding for us.

While the portfolio enjoyed strong stock selection across most sectors, our stock picking in the consumer discretionary space proved more challenging. In particular, our overweight exposure to the restaurant space detracted the most from our relative performance. Within this area, Brinker, Zoe's Kitchen and Papa Johns all suffered share price declines over the period as investor sentiment turned very negative on the space. Impacting performance was weakness in same store sales as well as concerns about margin compression due to higher labour costs. At this time, we don't see any structural reasons to exit these names; however we continue to monitor the situation closely.

Another top detractor over the period was Chico's Fas. The women's apparel company reported a tough quarter as they missed on sales and earnings per share. The company also reduced its outlook.

Positioning

As we have mentioned previously, our sector weights remain a byproduct of our bottom-up investment analysis and our disciplined approach to portfolio construction. We adhere to a consistent investment process, which focuses on identifying companies that possess a sustainable competitive advantage, have a durable business model, and are overseen by a competent management team with a track record of success. Finally, we seek to acquire equity stakes in these businesses when they trade at a discount to what we would deem to be their intrinsic value.

Not much has changed in terms of sector exposure over this period. Financials, consumer discretionary and producer durables are the largest sectors by absolute weight and account for approximately 60% of the portfolio's overall allocation.

While financials remains the portfolio's largest allocation, it's at an underweight position relative to our benchmark. We have reduced the underweight by over 1% during the period as we have found some new names such as Washington Trust Bancorp to add to the portfolio. Within financials, we continue to have significant exposure to the regional banks. In the consumer discretionary space, we have trimmed or sold out of some names, but still maintain a sizeable overweight position relative to our benchmark.

One area where we have been successful finding compelling investment ideas more recently has been technology. While still at a significant underweight position relative to our benchmark, this underweight has been reduced by nearly 2% over the last few months. New names added in this sector include Tableau and MicroStrategy.

Healthcare, as noted in previous commentaries, is another area where we continue to be challenged to find companies that meet our investment criteria. We have brought this underweight down in the last few quarters by adding to existing holdings as well as finding new opportunities. At this time, we remain at a moderate underweight of approximately 1.5% in the healthcare sector.

With regards to the Company's level of gearing, which was 5.3% as of 30th June 2017, it has increased slightly from six months ago, when it was 4.1%. As always, we will look to add or trim our gearing opportunistically.

Outlook

With markets flirting with all-time highs, investors have grown increasingly concerned with valuations. In our view, compared with historic measures, US stocks are trading somewhat above long run equilibrium but not excessively so. Relative to bonds, equities still look attractive with the earnings yield (inverse of P/E) well ahead of the bond yield.

At the time of writing this report, Wall Street's 2017 estimates stand at 7% earnings growth for small caps, as measured by the Russell 2000 Index. Absent the passage of meaningful pro-growth policy reforms, we expect US economic growth to remain at levels consistent with its post-recovery average. While we consider the odds of a near-term recession to be low, we remain cognizant of the inherent risks of a fluid geopolitical environment globally. We will also be paying close attention to the unwinding of the greatest monetary experiment in history. As the Fed and other central banks around the world start to reduce their balance sheets we need to be vigilant for potential unintended consequences. An area of obvious concern would be companies with excessive leverage, although some of the egregious examples in energy and M&A related health care have already corrected.

We think stock prices can continue to move higher, albeit at a slower pace and with the occasional episodes of volatility that are an inevitable fact of life for equity investors.

With fewer overwhelming macroeconomic trends expected in the year ahead, company fundamentals should emerge as critical factors in driving stock performance. We remain focused on finding companies with durable franchises, good management teams and stable earnings, that trade at a discount to their intrinsic value.

Don San Jose

Dan Percella

Investment Managers                                                                                                                     

17th August 2017

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 remain unchanged and fall into the following broad categories: investment and strategy; loss of investment team or investment manager; discount; market; political and economic; accounting, legal and regulatory; corporate governance and shareholder relations; operational; cybercrime; foreign currency; going concern; 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 December 2016.

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.

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 and, more specifically, that there are no material uncertainties pertaining to the Company that would prevent its ability to continue in such operational existence for at least twelve months from the date of the approval of this half yearly financial report. 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 FRS 104 'Interim Financial Reporting' and gives a true and fair view of the state of affairs of the Company, and of the assets, liabilities, financial position and net return of the Company as at 30th June 2017 as required by the UK Listing Authority Disclosure and Transparency Rules 4.2.4R; 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.

In order to provide these confirmations, and in preparing these financial statements, the Directors are required to:

•   select suitable accounting policies and then apply them consistently;

•   make judgements and accounting estimates that are reasonable and prudent;

•   state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

•   prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business;

and the Directors confirm that they have done so.

For and on behalf of the Board

Davina Walter

Chairman                                                                                                                                        

17th August 2017

STATEMENT OF COMPREHENSIVE INCOME

for the six months ended 30th June 2017

	(Unaudited)			(Unaudited)			(Audited)
	Six months ended			Six months ended			Year ended
	30th June 2017			30th June 2016			31st December 2016
	Revenue	Capital	Total	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Gains on investments held at air value through profit or loss	-	2,061	2,061	-	21,509	21,509	-	52,175	52,175
Net foreign currency gains/(losses) on cash and loans	-	454	454	-	(946)	(946)	-	(1,736)	(1,736)
Income from investments	1,242	-	1,242	1,037	-	1,037	2,279	-	2,279
Interest receivable	42	-	42	15	-	15	38	-	38
Gross return	1,284	2,515	3,799	1,052	20,563	21,615	2,317	50,439	52,756
Management fee	(86)	(776)	(862)	(60)	(540)	(600)	(134)	(1,208)	(1,342)
Other administrative expenses	(207)	-	(207)	(217)	-	(217)	(438)	-	(438)
Net return on ordinary activities before finance costs and taxation	991	1,739	2,730	775	20,023	20,798	1,745	49,231	50,976
Finance costs	(15)	(133)	(148)	(9)	(77)	(86)	(20)	(182)	(202)
Net return on ordinary activities before taxation	976	1,606	2,582	766	19,946	20,712	1,725	49,049	50,774
Taxation	(188)	-	(188)	(148)	-	(148)	(336)	-	(336)
Net return on ordinary activities after taxation	788	1,606	2,394	618	19,946	20,564	1,389	49,049	50,438
Return per share (note 3)	1.40p	2.86p	4.26p	1.11p	35.82p	36.93p	2.51p	88.76p	91.27p

STATEMENT OF CHANGES IN EQUITY

for the six months ended 30th June 2017

	Called up		Capital
	share	Share	redemption	Capital	Revenue
	capital	premium	reserve	Reserves1	Reserve1	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Six months ended 30th June 2017 (Unaudited)
At 31st December 2016	1,424	8,998	1,851	141,567	(16)	153,824
Shares issued from Treasury	-	2,349	-	65	-	2,414
Repurchase of shares into Treasury	-	-	-	(420)	-	(420)
Net return on ordinary activities	-	-	-	1,606	788	2,394
At 30th June 2017	1,424	11,347	1,851	142,818	772	158,212
Six months ended 30th June 2016 (Unaudited)
At 31st December 2015	1,424	8,046	1,851	93,889	(1,405)	103,805
Repurchase of shares into Treasury	-	-	-	(2,475)	-	(2,475)
Net return on ordinary activities	-	-	-	19,946	618	20,564
At 30th June 2016	1,424	8,046	1,851	111,360	(787)	121,894
Year ended 31st December 2016 (Audited)
At 31st December 2015	1,424	8,046	1,851	93,889	(1,405)	103,805
Shares issued from Treasury	-	952	-	1,671	-	2,623
Repurchase of shares into Treasury	-	-	-	(3,042)	-	(3,042)
Net return on ordinary activities	-	-	-	49,049	1,389	50,438
At 31st December 2016	1,424	8,998	1,851	141,567	(16)	153,824

¹  These reserves form the distributable reserves of the Company and may be used to fund distributions of profits to investors via dividend payments.

STATEMENT OF FINANCIAL POSITION

at 30th June 2017

	(Unaudited)	(Unaudited)	(Audited)
	30th June 2017	30th June 2016	31st December 2016
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	166,673	132,089	160,194
Current assets
Derivative financial assets	1	-	-
Debtors	1,396	233	651
Cash and cash equivalents	6,367	4,788	9,408
	7,764	5,021	10,059
Current liabilities
Creditors: amounts falling due within one year1	(16,225)	(15,211)	(16,429)
Derivative financial liabilities	-	(5)	-
Net current liabilities	(8,461)	(10,195)	(6,370)
Total assets less current liabilities	158,212	121,894	153,824
Net assets	158,212	121,894	153,824
Capital and reserves
Called up share capital	1,424	1,424	1,424
Share premium	11,347	8,046	8,998
Capital redemption reserve	1,851	1,851	1,851
Capital reserves	142,818	111,360	141,567
Revenue reserve	772	(787)	(16)
Total shareholders' funds	158,212	121,894	153,824
Net asset value per share (note 4)	281.2p	222.0p	276.7p

¹  At 30th June 2017, the Company had drawn down US$20.0m (GBP £15.0m equivalent) on its loan facility with Scotiabank.

STATEMENT OF CASH FLOWS 

for the six months ended 30th June 2017

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th June 2017	30th June 2016	31st December 2016
	£'000	£'000	£'000
Net cash outflow from operations before dividends and interest	(1,074)	(858)	(1,801)
Dividends received	1,198	897	1,687
Interest received	48	15	32
Overseas tax recovered	13	8	7
Interest paid	(136)	(66)	(164)
Net cash inflow/(outflow) from operating activities	49	(4)	(239)
Purchases of investments	(25,713)	(11,742)	(29,098)
Sales of investments	20,890	15,261	34,985
Settlement of forward currency contracts	5	(8)	6
Overseas tax recovered on capital events	75	-	-
Net cash (outflow)/inflow from investing activities	(4,743)	3,511	5,893
Shares re-issued from Treasury	2,414	-	2,623
Repurchase of shares into Treasury	(420)	(2,475)	(3,042)
Net cash inflow/(outflow) from financing activities	1,994	(2,475)	(419)
(Decrease)/increase in cash and cash equivalents	(2,700)	1,032	5,235
Cash and cash equivalents at start of period	9,407	3,298	3,298
Foreign exchange (losses)/gains	(340)	458	874
Cash and cash equivalents at end of period	6,367	4,788	9,407
(Decrease)/increase in cash and cash equivalents	(2,700)	1,032	5,235
Cash and cash equivalents consist of:
Cash and short term deposits	7	3	-
Bank overdraft	-	-	(1)
Cash held in JPMorgan US Dollar Liquidity Fund	6,360	4,785	9,408
Total	6,367	4,788	9,407

NOTES TO THE FINANCIAL STATEMENTS 

FOR THE SIX MONTHS ENDED 30TH JUNE 2017

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 December 2016 are extracted from the latest published financial statements of the Company and do not constitute statutory accounts for that year. Those financial statements have been delivered to the Registrar of Companies, including 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 financial statements have been prepared in accordance with the Companies Act 2006, FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' of the 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 revised 'SORP') issued by the Association of Investment Companies in November 2014 and updated in January 2017.

FRS 104, 'Interim Financial Reporting', issued by the Financial Reporting Council ('FRC') in March 2015 has been applied in preparing this condensed set of financial statements for the six months ended 30th June 2017.

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

The accounting policies applied to this condensed set of financial statements are consistent with those applied in the financial statements for the year ended 31st December 2016.

3.  Return per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th June 2017	30th June 2016	31st December 2016
	£'000	£'000	£'000
Return per share is based on the following:
Revenue return	788	618	1,389
Capital return	1,606	19,946	49,049
Total return	2,394	20,564	50,438
Weighted average number of shares in issue	56,210,630	55,679,115	55,258,808
Revenue return per share	1.40p	1.11p	2.51p
Capital return per share	2.86p	35.82p	88.76p
Total return per share	4.26p	36.93p	91.27p

4. Net asset value per share

	(Unaudited)	(Unaudited)	(Audited)
	30th June 2017	30th June 2016	31st December 2016
Net assets (£'000)	158,212	121,894	153,824
Number of shares in issue	56,271,928	54,900,928	55,586,928
Net asset value per share	281.2p	222.0p	276.7p

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 FUNDS LIMITED

17th August 2017

For further information, please contact:

Lucy Dina,

For and on behalf of

JPMorgan Funds Limited            

020 7742 4000

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 will shortly be available on the Company's website at www.jpmussmallercompanies.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

 

 

IR BBGDILBBBGRR