Half-year Report

RNS Number : 5219J

JPMorgan US Smaller Co. IT

24 August 2021

 

LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMorgan US Smaller Companies Investment Trust plc

Half Year Report & Accounts for the six months ended 30th June 2021

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 six months ended 30 June 2021.

CHAIRMAN'S STATEMENT

Performance

The first six months of the financial year saw a continuation of the recovery in the Company's benchmark index from the Covid sell-off seen in early 2020. The roll-out of a number of successful vaccines and their broad take-up among the US population has seen economic activity recover and equity prices continue to rise, albeit at a more muted pace than the rapid bounce back we saw in the second half of 2020.

The Company's benchmark index, the Russell 2000 Index expressed in sterling, rose 16.2% over the six months to 30th June 2021. This compares with a Net Asset Value return for the Company of +10.9%. When the move from a small premium to a small discount is taken into account, shareholder returns were +7.8% in the six month period.

While any period of underperformance is unwelcome, this is not necessarily unexpected given the stocks that drove the index rally versus the nature of the assets held in the portfolio. A full explanation of the Company's performance in the period is set out in the Investment Managers' Report on pages 9 and 10. The Company's track record remains strong when compared with the benchmark over longer time periods. Given the Investment Team's record of consistent performance, the Board remains confident in the team's ability to deliver value over the longer term.

Premium and Discount to Net Asset Value

Having begun the half-year trading at a premium to Net Asset Value (NAV) of 2.1%, the Company's shares traded at a premium for much of the period, averaging a premium of 1.2% over the six months. Towards the end of the period a small discount emerged and the Company's shares closed the six months with a discount of 0.80%.

Share Issuance

The Company took advantage of the premium rating and demand for its shares resulted in the issue of some 5.5 million new shares in the six month period raising some £23.5 million of net proceeds. The demand for these new shares came largely from retail investors and I would like to take this opportunity to welcome them to the Company's shareholder register.

The Company's policy remains one of issuing shares at a premium to NAV, if demand is present as such issuance enhances the NAV to shareholders as a whole, improves secondary market liquidity and prevents the emergence of an excessive short term spike in premium levels which may not be in shareholders' long term interests. At the same time, the Company remains willing to acquire shares at anything wider than a modest discount to NAV as our buyback activity in previous periods will confirm.

Gearing

Having renewed the Company's $25 million gearing facility in 2020, the Company exercised the option to increase the gearing by $5 million to $30 million. At the same time, the Company undertook the exercise of amending its current loan facility to accommodate the impending retirement of the LIBOR benchmark which has been the benchmark for short term loans for many years.

Reorganisation of the Investment Team

J.P.Morgan Asset Management (JPMAM) has announced that, with effect from 1st October 2021, Don San Jose will take on the additional role of Chief Investment Officer of the U.S. Value team and his Small Cap team that manages the portfolio for the Company will also move across to this group on that date. The Board would like to offer their congratulations to Don on his new role. The Board has received assurances from Don and other senior representatives of JPMAM that this reorganisation will not change the way that Don and his team manage the Company's portfolio. CIOs in JPMAM have traditionally continued to manage portfolios alongside their role. Don will remain the lead manager with the strong support from Dan Percella and Jon Brachle, and the Company's assets will continue to be run using the same investment approach as before, focusing on quality companies in the small cap space that trade at a discount to their intrinsic value.

Outlook

The first six months of 2021 has seen both small cap and large cap US equities continue to rise. The S&P 500 Index hit new all-time highs at the end of the period, while the small cap market has risen at a more measured rate. These broad market indices hide some interesting rotation between sectors and the period under review is the first extended period for some time in which value stocks have outperformed the growth stocks that have led much of the recent rise in equity markets.

With high equity prices come concerns about valuation levels, but the Investment Team's core approach looks through these simplistic value and growth distinctions to find quality businesses at attractive prices. We remain confident that there continues to be a large number of such investment opportunities and therefore we remain positive about the outlook for the Company.

David Ross

Chairman    24th August 2021

INVESTMENT MANAGERS' REPORT

Market Review

Following a record 4th quarter last year, the Russell 2000 Index is up +17.5% in US dollar terms and +16.2% in sterling terms for the first half of 2021. Small cap stocks have now risen for five consecutive quarters, driven by optimism around vaccine roll-outs and the economic recovery. However, the highest returns have been concentrated in unprofitable and lower quality stocks driven in part by unprecedented retail trading activity.

Despite occasional pullbacks due to inflation fears, a confluence of encouraging economic data, strong corporate earnings, a drop in infections, and fresh spending programs from the Biden administration helped drive markets higher. Meanwhile, oil prices surged, hitting their highest level in over a year as the US economy grew by an annualised rate of 6.4% in the first quarter. Investors also cheered strong first quarter earnings that came in well above heightened expectations. While inflation fears saw a resurgence in May, comments from policymakers that the spike in inflation is transitory calmed investors and helped lift equity markets. Although favourable economic data and enormous fiscal stimulus have kept investor spirits high, rising inflation and the new variant of COVID-19 remain as potential areas of concern.

In terms of style and market capitalisation, value significantly outperformed growth, while small cap stocks outperformed large caps.

Performance

The Company's net asset value increased by 10.9% in the first half of 2021. The Trust underperformed its benchmark, the Russell 2000 Index (Net), which rose by 16.2% in sterling terms. While stock selection was the primary driver of the performance challenges, gearing helped dampen some of the underperformance. Quality continued to struggle, with non-earners and low quality names outperforming by a wide margin, a challenging backdrop for our style and process. With regard to relative performance, the consumer discretionary, technology and basic materials sectors detracted the most.

Within consumer discretionary, our lack of exposure to AMC Entertainment was the largest detractor. The movie theatre chain has outperformed this year as a result of the 'meme stock' phenomenon which saw large numbers of retail investors pile into stocks with high short interest, driving their prices up significantly. We believe that movie theatre attendance will remain in secular decline due to changing consumer behaviour and greater availability of high quality movies through streaming services.

Within technology, our overweight position in Q2 proved lacklustre. The company is a leading provider of cloud-based digital banking and lending solutions to regional and community financial institutions in the US. As the economy continues to reopen, high growth, high multiple stocks were sold in favour of value and cyclical stocks. Q2 was a casualty of this, however, we believe both near and long term fundamentals are strong. The company stands to benefit from COVID-driven acceleration in digital transformation in the long term.

Among individual names, our exposure to IAA, one of the largest automotive salvage auction companies, detracted from performance. The stock had been an outperformer last year, so it is reasonable to see some profit taking. Expectations were also high going into 2020 4Q earnings. We still like the name and the company should benefit as miles driven continues to increase.

On the other hand, our stock selection as well as sector allocation within the health care and utilities sectors contributed to performance.

Within health care, our overweight position in Progyny proved beneficial. Progyny is a fertilization benefits management company. The stock outperformed after the company reported better than expected first quarter results and raised guidance. Management sounded optimistic regarding the upcoming selling season.

Among individual names, our exposure to Western Alliance within financials was the largest contributor for the period. Western Alliance is a US regional bank that operates in the Southwest. Banks continued to rally in the first quarter, with vaccine optimism leading to expectations of better economic growth. Additional federal stimulus efforts should also support consumers and the economy in 2021. We've continued to trim some of our bank positions on strength, but still have material exposure to the sector.

Within industrials, our exposure to Welbilt contributed to performance. The company manufactures commercial food preparation equipment. In April, shares of Welbilt rose after Middleby announced that it would be acquiring the company for cash and stock. On 1st June, an Italian company, Ali Group, made a competing all-cash offer, which Welbilt accepted.

Our exposure to Hayward Holdings also proved beneficial. Hayward is a leading manufacturer of residential pool equipment. Shares rose after a much better than expected first quarter earnings report, with sizeable growth in both revenue and profitability. We continue to like the stock as it remains one of the most attractively valued names on strong residential pool repair and remodel trends.

Portfolio Positioning

With regard to our portfolio positioning, we continue to focus on finding companies with durable franchises, good management teams and stable earnings that trade at a discount to intrinsic value. We continue to believe that smaller companies are worth investing in for long term investors as they include innovative companies that serve market niches and thereby can be a way to get in early on innovation.

This year, we have added slightly more cyclicality to the portfolio in select names across consumer discretionary and industrials while also adding to other names we like on weakness with strong secular tailwinds. Most of our trims have been in high market capitalisation names or ones related to M&A activity. We have also taken some profits in several bank positions on strength. On the new idea front, we remain active, adding nine new names to the portfolio this year. However, the portfolio's positioning remains relatively unchanged. Our main exposures are in the industrials and financials sectors making up over 40% of the portfolio. These sectors also represent our top sector overweights.

On the other hand, our largest underweight is in the health care sector. The underweight is primarily a result of our lack of exposure to biotechnology stocks.

Market Outlook

While the economic recovery is well underway, we recognise that this won't be linear. Uncertainties surrounding the impact of the Delta variant, speed of vaccinations, and inflation pose potential risks. Despite the risk-on rally of lower quality stocks, we remain confident that fundamentals will return into favour as we move deeper into the recovery. We are staying true to our process, focusing on quality businesses at reasonable relative valuations, taking advantage of any weakness as opportunities to add to the names we think will benefit the most in the long term.

We continue to expect a strong rebound in company earnings for the remainder of 2021. We believe that the companies we invest in will be able to navigate inflationary pressures from higher prices well and future upside should be driven by earnings going forward.

Don San Jose

Jon Brachle

Dan Percella

Investment Managers    24th August 2021

INTERIM MANAGEMENT REPORT

The Company is required to make the following disclosures in its Half Year Report:

Principal and Emerging Risks and Uncertainties

The emergence of the virus Covid-19 (Coronavirus) had created, and possibly will continue to create, significant uncertainty for markets, and therefore risk to the value of investments and volatility. Other than this, the principal risks and uncertainties faced by the Company fall into the following broad categories: investment and strategy; loss of investment team or investment managers; discount; market; accounting, legal and regulatory; corporate governance and shareholder relations; operational; cybercrime; foreign currency; financial; political and economic; climate change; and global pandemics (identified as an emerging risk). Information on each of these areas is given in the Business Review within the Annual Report and Financial Statements for the year ended 31st December 2020.

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, and the actual and potential economic and operational impact of Covid-19, 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 12 months from the date of the approval of this half yearly financial report. In reaching that view, the Directors have considered the impact of the current Covid-19 pandemic on the Company's financial and operational position. 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 2021 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

David Ross

Chairman      24th August 2021

STATEMENT OF COMPREHENSIVE INCOME

FOR THE SIX MONTHS ENDED 30TH JUNE 2021

	(Unaudited)			(Unaudited)			(Audited)
	Six months ended			Six months ended			Year ended
	30th June 2021			30th June 2020			31st December 2020
	Revenue	Capital	Total	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Gains/(losses) on investments
held at fair value through
profit or loss	-	26,175	26,175	-	(9,624)	(9,624)	-	30,977	30,977
Net foreign currency
gains/(losses) on cash and
loans	-	95	95	-	(851)	(851)	-	213	213
Income from investments	1,555	-	1,555	1,458	-	1,458	2,894	-	2,894
Interest receivable	16	-	16	55	-	55	68	-	68
Gross return/(loss)	1,571	26,270	27,841	1,513	(10,475)	(8,962)	2,962	31,190	34,152
Management fee	(222)	(888)	(1,110)	(160)	(639)	(799)	(329)	(1,314)	(1,643)
Other administrative expenses	(189)	-	(189)	(201)	-	(201)	(402)	-	(402)
Net return/(loss) before
finance costs and taxation	1,160	25,382	26,542	1,152	(11,114)	(9,962)	2,231	29,876	32,107
Finance costs	(27)	(101)	(128)	(37)	(150)	(187)	(55)	(217)	(272)
Net return/(loss) before
taxation	1,133	25,281	26,414	1,115	(11,264)	(10,149)	2,176	29,659	31,835
Taxation	(197)	-	(197)	(191)	-	(191)	(416)	-	(416)
Net return/(loss) after
taxation	936	25,281	26,217	924	(11,264)	(10,340)	1,760	29,659	31,419
Return/(loss) per share (note 3)	1.48p	39.95p	41.43p	1.58p	(19.23)p	(17.65)p	3.00p	50.59p	53.59p

No interim dividend has been declared in respect of the six months ended 30th June 2021 (2020: nil).

All revenue and capital items in the above statement derive from continuing operations.

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 net return on ordinary activities after taxation represents the profit for the period/year and also the total comprehensive income.

STATEMENT OF CHANGES IN EQUITY

FOR THE SIX MONTHS ENDED 30TH JUNE 2021

	Called up		Capital
	share	Share	redemption	Capital	Revenue
	capital	premium	reserve	reserves	reserve1	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Six months ended 30th June 2021 (Unaudited)
At 31st December 2020	1,499	21,970	1,851	209,377	2,142	236,839
Issues of ordinary shares	137	23,354	-	-	-	23,491
Repurchase of shares into Treasury2	-	-	-	(5)	-	(5)
Net return	-	-	-	25,281	936	26,217
Dividends paid in the period (note 4)	-	-	-	-	(1,597)	(1,597)
At 30th June 2021	1,636	45,324	1,851	234,653	1,481	284,945
Six months ended 30th June 2020 (Unaudited)
At 31st December 2019	1,445	13,392	1,851	179,718	1,846	198,252
Issues of ordinary shares	24	3,394	-	-	-	3,418
Repurchase of shares into Treasury	-	-	-	(558)	-	(558)
Net (loss)/return	-	-	-	(11,264)	924	(10,340)
Dividends paid in the period (note 4)	-	-	-	-	(1,464)	(1,464)
At 30th June 2020	1,469	16,786	1,851	167,896	1,306	189,308
Year ended 31st December 2020 (Audited)
At 31st December 2019	1,445	13,392	1,851	179,718	1,846	198,252
Issue of new Ordinary shares	54	8,096	-	-	-	8,150
Repurchase of shares into Treasury	-	-	-	(972)	-	(972)
Reissue of shares from Treasury	-	482	-	972	-	1,454
Net return	-	-	-	29,659	1,760	31,419
Dividends paid in the year (note 4)	-	-	-	-	(1,464)	(1,464)
At 31st December 2020	1,499	21,970	1,851	209,377	2,142	236,839

¹ These reserves form the distributable reserve of the Company and may be used to fund distributions to investors.

² This amount represents Stamp Duty Reserve Tax paid in 2021 in respect of repurchases made in 2020.

STATEMENT OF FINANCIAL POSITION

AT 30TH JUNE 2021

	(Unaudited)	(Unaudited)	(Audited)
	30th June 2021	30th June 2020	31st December 2020
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	304,857	198,950	251,210
Current assets
Debtors	196	837	612
Cash and cash equivalents	2,481	10,500	5,985
	2,677	11,337	6,597
Current liabilities
Creditors: amounts falling due within one year1	(22,589)	(20,979)	(20,967)
Derivative financial liabilities	-	-	(1)
Net current liabilities	(19,912)	(9,642)	(14,371)
Total assets less current liabilities	284,945	189,308	236,839
Net assets	284,945	189,308	236,839
Capital and reserves
Called up share capital	1,636	1,469	1,499
Share premium	45,324	16,786	21,970
Capital redemption reserve	1,851	1,851	1,851
Capital reserves	234,653	167,896	209,377
Revenue reserve	1,481	1,306	2,142
Total shareholders' funds	284,945	189,308	236,839
Net asset value per share (note 5)	435.5p	323.6p	394.9p

¹ At 30th June 2021, the Company had drawn down US$30.0m (GBP £21.7m equivalent) on its loan facility with Scotiabank.

STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED 30TH JUNE 2021

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th June 2021	30th June 2020	31st December 2020
	£'000	£'000	£'000
Net cash outflow from operations before dividends and
interest	(1,294)	(1,027)	(2,070)
Dividends received	1,300	1,252	2,458
Interest received	16	55	68
Overseas tax recovered	50	40	41
Interest paid	(112)	(229)	(323)
Net cash (outflow)/inflow from operating activities	(40)	91	174
Purchases of investments	(66,028)	(55,454)	(105,374)
Sales of investments	36,753	55,192	96,021
Settlement of foreign currency contracts	1	3	4
Net cash outflow from investing activities	(29,274)	(259)	(9,349)
Dividend paid	(1,597)	(1,464)	(1,464)
Issue of ordinary shares	23,891	3,804	8,136
Reissue of shares from Treasury	-	-	1,454
Repurchase of shares into Treasury1	(5)	(558)	(972)
Draw down of bank loans	3,531	3,799	3,800
Net cash inflow from financing activities	25,820	5,581	10,954
(Decrease)/increase in cash and cash equivalents	(3,494)	5,413	1,779
Cash and cash equivalents at start of period/year	5,985	4,605	4,605
Exchange movements	(10)	482	(399)
Cash and cash equivalents at end of period/year	2,481	10,500	5,985
(Decrease)/increase in cash and cash equivalents	(3,494)	5,413	1,779
Cash and cash equivalents consist of:
Cash and short term deposits	3	4	3
Cash held in JPMorgan US Dollar Liquidity Fund	2,478	10,496	5,982
Total	2,481	10,500	5,985

¹ The 2021 amount represents Stamp Duty Reserve Tax paid in 2021 in respect of repurchases made in 2020.

NOTES TO THE FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED 30TH JUNE 2021

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 2020 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 October 2019.

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 2021.

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 2020.

3.  Return/(loss) per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th June 2021	30th June 2020	31st December 2020
	£'000	£'000	£'000
Return/(loss) per share is based on the following:
Revenue return	936	924	1,760
Capital return/(loss)	25,281	(11,264)	29,659
Total return/(loss)	26,217	(10,340)	31,419
Weighted average number of shares in issue	63,281,564	58,579,874	58,620,594
Revenue return per share	1.48p	1.58p	3.00p
Capital return/(loss) per share	39.95p	(19.23)p	50.59p
Total return/(loss) per share	41.43p	(17.65)p	53.59p

4.  Dividend paid

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th June 2021	30th June 2020	31st December 2020
	£'000	£'000	£'000
Final dividend in respect of the year ended 31st December 2020 of 2.5p
(2019: 2.5p)	1,597	1,464	1,464
Total dividends paid in the period/year	1,597	1,464	1,464

The dividend paid in the period/year have been funded from the revenue reserve.

5.   Net asset value per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th June 2021	30th June 2020	31st December 2020
Net assets (£'000)	284,945	189,308	236,839
Number of shares in issue at period/year end	65,431,265	58,508,828	59,969,382
Net asset value per share	435.5p	323.6p	394.9p

JPMORGAN FUNDS LIMITED

24th August 2021

For further information, please contact:

Lucy Dina

For and on behalf of

JPMorgan Funds Limited

020 7742 4000

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.

ENDS

A copy of the 2021 Half Year Report will shortly be submitted to the FCA's National Storage Mechanism and will be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism

The 2021 Half Year 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

 

 

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