Half-year Results

RNS Number : 1677Y

JPMorgan US Smaller Co. IT

17 August 2018

 

LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMorgan US Smaller Companies Investment Trust plc

Half Year Report & FINANCIAL STATEMENTS

 for the six months ended 30th June 2018

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 2018.

CHAIRMAN'S STATEMENT

Performance

Markets for the first six months of 2018 were characterised by a return of volatility as uncertainty over trade policy and interest rates was injected into the outlook. At the end of the first quarter of 2018 markets had sold off but all the lost ground was recovered in the second half of the period with the result the Russell 2000 rose 10.2% in sterling terms to the end of June. The Company's net asset value ('NAV') on a total return basis increased 8.8%, slightly lagging the benchmark as the type of stocks favoured by the investment team were not the ones that benefitted from the recent market moves (please see the Investment Managers' Report for the detail). Meanwhile the share price rose only 2.7% during the period with the result that it moved onto a small discount to NAV.

Discount and Premium

During the six month period to 30th June 2018 the Company's share price (with dividend re-invested) rose by 2.7% compared to an increase of 8.8% in NAV (with dividend re-invested); this resulted in the modest premium to NAV at year end shifting to a 2.6% discount. As has been 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 we have in place the authority to repurchase up to 14.99% of the Company's issued share capital. At the end of June the Company held no shares in Treasury, having issued 319,000 shares from Treasury at a premium to NAV since the year end. However, since the end of June, 135,000 shares have been bought into Treasury. The Company also issued 306,000 new ordinary shares at a premium to NAV during the reporting period.

Gearing

In April 2018 our revolving credit facility with Scotiabank was renewed at US$25m with an option to draw a further US$10m. As at 30th June 2018 US$20m was drawn and the portfolio was 6.7% geared.

Board Succession Planning

The Board has set in place succession plans which we believe will smooth over the discontinuity that can be caused by the retirement of non-executive directors after nine years' service when a board consists of only five directors. We believe the Board has good diversity and the correct balance of skills, and three directors have been appointed since 2012. However, in order to maintain the momentum of refreshing the Board, we have recently started the recruitment process with a view to appointing a new Director during the latter half of 2018. The Board is also reviewing the impact of the revised UK Corporate Governance Code, which will apply to next year's Financial Statements.

Outlook

There is no doubt that US markets are looking 'fairly valued' and therefore forecasting the outlook has become as challenging as predicting what the next utterance from the President will be on his Twitter account. Instead I would like to remind investors why the Board believes the Company can continue to deliver superior investment returns over the long term. 'People' is undoubtedly the key factor and in Don San Jose, Dan Percella and Jon Brachle, the Company has three highly experienced US small cap managers who, along with two 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 2018

INVESTMENT MANAGER'S REPORT

Market Review

Growth continued its strong performance relative to Value, with the Russell 3000 Growth Index® up 7.44% in US$ versus -1.16% for the Russell 3000 Value Index. Large cap stocks also underperformed small cap stocks, with the Russell 2000 Index coming in at 7.66%, materially ahead of the S&P 500.

The U.S. equity markets in the first half of 2018 were up modestly, but showed a significant increase in volatility after an unusually mild 2017. The S&P 500 ended the first half at 2,718, up 2.65% including dividends, but down from the market highs reached in January. The forward P/E for the S&P 500 Index finished the quarter at 16.1x, matching the 25-year average for the index.

The overall economic environment was strong over the course of the first half. Economic growth remained strong with second quarter real GDP up 4.1% year on year, a marked increase from the first quarter. Current consensus estimates indicate continued growth. The Federal Reserve raised interest rates on two occasions during the first six months of the year in March and in June, bringing the Fed Funds target range to 1.75% - 2.00%. The Federal Open Market Committee ('FOMC') raised forecasts for economic growth and inflation and cut the unemployment rate forecast for the next two years. Headline CPI for the month of June met expectations and increased 0.1% to 2.9% year on year, with core up 2.3% year-over-year. Earnings for U.S. public companies were up 27.3% year on year, with a record high level of companies exceeding consensus estimates.

In June, the U.S. administration announced plans to impose a 25% tariff on USD 50 billion worth of annual Chinese imports. This represents a fraction of total trade between the U.S. and China and only 0.3% of U.S. GDP, but the market is still working to get its arms around the potential implications for growth and profitability for global companies. For now the impact is modest, but any future escalation between the U.S. and China or any other major trade partner could affect growth and margins of U.S. companies, particularly large multi-national corporations.

Performance

The Company's net asset value grew by 8.8% in the first six month of 2018. The return was behind the benchmark, the Russell 2000 Index (Net), which rose by 10.2% in GBP. The majority of the underperformance came from sector allocation, while our stock selection added value, which is highlighted in more detail in the following paragraphs. Additionally, the portfolio's gearing was beneficial to the Company's performance during this period.

While small cap companies rallied during the period, lower quality companies which have higher Price/Earnings ratios and growth ratios were leading the market. These stylistic headwinds have generally persisted throughout the first half of the year, hence the conservative nature of our approach has not been rewarded within the small cap space.

With regard to relative performance, our stock selection in the consumer discretionary and financial services sectors weighed on relative returns.

Our investments in the consumer discretionary name LCI Industries hurt our performance. The leading manufacturer of component parts for recreational vehicles and adjacent industries in the US traded lower due to a weak set of first quarter results amidst concerns about the elevated level of recreational vehicle inventory in dealer lots. Rising labour costs as well as concerns around tariffs on steel and aluminum further weighed on margin expectations. The same reasons also impacted the shares in the second quarter. We think channel inventory is slightly elevated in part due to mild over-ordering by dealers last fall, as well as unfavorable weather through April. We feel confident that the retail demand environment remains strong and that excess channel inventory will be alleviated without a dramatic impact on wholesale production.

Within financial services, our overweight in ProAssurance hurt performance. The shares of the risk management and claims defence company underperformed on weaker than expected earnings. ProAssurance has increased its reserves due to higher severity or claims cost inflation as a result of rising 'shock jury awards' in the medical malpractice industry. With losses seemingly likely to tick higher, while the pricing environment remains competitive, returns and profitability have been under pressure. We have seen more consolidation recently in the insurance space and think that the company is an attractive asset strategically.

Among individual names, our exposure to the consumer staples name Spectrum Brands, a diversified consumer products company selling into the home hardware, garden, pet, auto, battery, and appliance channels, was among the largest detractors. The shares underperformed as they missed on revenues delivering negative organic growth, with weakness across all divisions except home hardware. The EBITDA miss was more pronounced coming in below expectations, due to higher input costs and continued issues with their distribution center consolidations in home hardware and global auto care. The company has struggled over the past year, which has led to the CEO being replaced by the chairman. We continue to hold our position in Spectrum Brands as we await many of the companies seemingly transitory items (e.g. distribution consolidations and sale of batteries and appliance) to be resolved however we have reduced our position size.

On the other hand, our stock selection in the technology and producer durables sectors proved beneficial. In particular, our overweight in Q2 Holdings was the largest contributor in the technology space. Q2 Holdings, a provider of cloud-based virtual banking solutions to regional and community financial institutions in the US, was a strong performer over the period. This was the result of a solid earnings report in which the company signed deals with an additional two Tier-1 banks, and projected a very confident tone with regard to the overall end-demand environment. We think the combination of higher interest rates, lower regulatory pressure and a continued shift in preference by consumers toward digital versus branch banking is driving solid pipeline activity for the company. With an expanding product portfolio and stagnant competition, we think Q2 Holdings is poised for continued success both near- and long-term. We continue to find the company's fundamentals to be amongst the most attractive within our technology holdings.

Grubhub, also within the technology space, emerged as one of the top contributors during the period. The web-based food ordering platform rallied after management announced a partnership with Yum! Brands. Grubhub is now the exclusive domestic delivery partner for certain Yum! Brands including KFC and Taco Bell. The partnership provides Grubhub capital for further growth, access to new delivery markets and co-branding opportunities. We view the deal as a positive and continue to like the fundamentals.

On a standalone basis, our investment in the healthcare company Encompass Health added value for the period. Encompass Health, one of the largest providers of post-acute healthcare services in the US, was a top contributor after reporting quarterly earnings in the first quarter. Volumes in both core businesses were strong and the company increased its full year 2018 guidance, which is not typical this early in the year. Additionally, the 2019 reimbursement rate cycle for both Inpatient Rehabilitation Facility and Home Health are generally trending positive to in-line with expectations. We continue to like the shares and feel comfortable with our current positioning.

Portfolio Positioning

With regards to our portfolio positioning, not much has changed as we continue to focus on finding companies with durable franchises, good management teams and stable earnings that trade at a discount to intrinsic value. During the year we were able to find new names to add to the portfolio and the analysts continue to be very productive as 11 names were added. However, the portfolio's positioning remains relatively unchanged. Our largest relative allocations are in the materials & processing and producer durables sectors. This combined with our largest absolute position in financial services, makes up around 50% of the overall portfolio's allocation. In financial services, we have less exposure than the benchmark. This is mainly driven by our underweight allocation to REITs, as we find less compelling opportunities within that space. On a relative basis, our largest underweights include the healthcare and technology sectors. As for healthcare, the underweight is primarily a result of our lack of exposure to biotechnology stocks.

Market outlook

We continue to focus on the fundamentals for the economy and for company earnings. Our core analysts' estimate for 2018 S&P 500 earnings currently projects 23% earnings growth for S&P 500 companies. This represents approximately 16% growth in underlying earnings and roughly 7% from the estimated effects of the Tax Cut and Jobs Act. While subject to revision, this forecast reflects our expectations for continued economic growth in the underlying economy and includes our best analysis of earnings expectations during the year. The implications of trade policy, Federal Reserve policy and the tightening labour market will be integral to investor sentiment and will continue to contribute to increased levels of volatility.

While healthy corporate earnings and sustained strength in economic indicators should provide continued support to the equity market, we are monitoring potential risks that could represent headwinds for U.S. equity performance. In particular, the evolving global trade environment, rising interest rates and the changing shape of the yield curve add to near-term economic uncertainty and could add to market volatility as investors wait for increased clarity.

Don San Jose

Dan Percella

Jon Brachle

Investment Managers                                                                                                                      17th August 2018

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 2017.

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 2018 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 2018

STATEMENT OF COMPREHENSIVE INCOME

for the six months ended 30th June 2018

	(Unaudited)						(Unaudited)			(Audited)
	Six months ended						Six months ended			Year ended
	30th June 2018						30th June 2017			31st December 2017
	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		-		14,968		14,968	-	2,061	2,061	-	9,134	9,134
Net foreign currency
(losses)/gains on cash
and loans		-		(178)		(178)	-	454	454	-	845	845
Income from investments		1,252		-		1,252	1,242	-	1,242	2,460	-	2,460
Interest receivable		59		-		59	42	-	42	92	-	92
Gross return		1,311		14,790		16,101	1,284	2,515	3,799	2,552	9,979	12,531
Management fee		(90)		(814)		(904)	(86)	(776)	(862)	(174)	(1,566)	(1,740)
Other administrative expenses		(220)		-		(220)	(207)	-	(207)	(385)	-	(385)
Net return before finance
costs and taxation		1,001		13,976		14,977	991	1,739	2,730	1,993	8,413	10,406
Finance costs		(17)		(151)		(168)	(15)	(133)	(148)	(30)	(265)	(295)
Net return before taxation		984		13,825		14,809	976	1,606	2,582	1,963	8,148	10,111
Taxation		(185)		-		(185)	(188)	-	(188)	(396)	-	(396)
Net return after taxation		799		13,825		14,624	788	1,606	2,394	1,567	8,148	9,715
Return per share (note 3)		1.40p		24.29p		25.69p	1.40p	2.86p	4.26p	2.79p	14.48p	17.27p

STATEMENT OF CHANGES IN EQUITY

for the six months ended 30th June 2018

		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 2018 (Unaudited)
At 31st December 2017	1,424		10,421		1,851	151,440	1,551	166,687
Issue of new ordinary shares	8		960		-	-	-	968
Shares reissued from Treasury	-		331		-	634	-	965
Net return for the period	-		-		-	13,825	799	14,624
Dividend paid in the period (note 4)	-		-		-	-	(1,422)	(1,422)
At 30th June 2018	1,432		11,712		1,851	165,899	928	181,822
Six months ended 30th June 2017 (Unaudited)
At 31st December 2016	1,424		8,998		1,851	141,567	(16)	153,824
Shares reissued from Treasury	-		2,349		-	65	-	2,414
Repurchase of shares into Treasury	-		-		-	(420)	-	(420)
Net return for the period	-		-		-	1,606	788	2,394
At 30th June 2017	1,424		11,347		1,851	142,818	772	158,212
Year ended 31st December 2017 (Audited)
At 31st December 2016	1,424		8,998		1,851	141,567	(16)	153,824
Shares reissued from Treasury	-		1,423		-	2,393	-	3,816
Repurchase of shares into Treasury	-		-		-	(668)	-	(668)
Net return for the year	-		-		-	8,148	1,567	9,715
At 31st December 2017	1,424		10,421		1,851	151,440	1,551	166,687

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 2018

		(Unaudited)	(Unaudited)	(Audited)
		30th June 2018	30th June 2017	31st December 2017
		£'000	£'000	£'000
Fixed assets
Investments held at fair value through
profit or loss	194,016		166,673	175,408
Current assets
Derivative financial assets	-		1	-
Debtors	209		1,396	298
Cash and cash equivalents	3,610		6,367	5,891
	3,819		7,764	6,189
Current liabilities
Creditors: amounts falling due within one year1	(16,013)		(16,225)	(14,910)
Net current liabilities	(12,194)		(8,461)	(8,721)
Total assets less current liabilities	181,822		158,212	166,687
Net assets	181,822		158,212	166,687
Capital and reserves
Called up share capital	1,432		1,424	1,424
Share premium	11,712		11,347	10,421
Capital redemption reserve	1,851		1,851	1,851
Capital reserves	165,899		142,818	151,440
Revenue reserve	928		772	1,551
Total shareholders' funds	181,822		158,212	166,687
Net asset value per share (note 5)	317.4p		281.2p	294.2p

¹ At 30th June 2018, 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 2018

	(Unaudited)		(Unaudited)	(Audited)
	Six months ended		Six months ended	Year ended
	30th June 2018		30th June 2017	31st December 2017
	£'000		£'000	£'000
Net cash outflow from operations before dividends
and interest (note 6)		(1,147)	(1,074)	(2,113)
Dividends received		1,147	1,273	2,189
Interest received		56	48	91
Overseas tax recovered		25	13	13
Interest paid		(172)	(136)	(290)
Net cash (outflow)/inflow from operating activities		(91)	124	(110)
Purchases of investments		(23,333)	(25,713)	(57,705)
Sales of investments		20,446	20,890	51,707
Settlement of forward currency contracts		(9)	5	13
Net cash outflow from investing activities		(2,896)	(4,818)	(5,985)
Dividend paid		(1,422)	-	-
Issue of new ordinary shares		968	-	-
Shares reissued from Treasury		965	2,414	3,816
Repurchase of shares into Treasury		-	(420)	(668)
Net cash inflow from financing activities		511	1,994	3,148
Decrease in cash and cash equivalents		(2,476)	(2,700)	(2,947)
Cash and cash equivalents at start of period/year		5,891	9,407	9,407
Foreign exchange gains/(losses)		195	(340)	(569)
Cash and cash equivalents at end of period/year		3,610	6,367	5,891
Decrease in cash and cash equivalents		(2,476)	(2,700)	(2,947)
Cash and cash equivalents consist of:
Cash and short term deposits		-	7	152
Cash held in JPMorgan US Dollar Liquidity Fund		3,610	6,360	5,739
Total		3,610	6,367	5,891

NOTES TO THE FINANCIAL STATEMENTS 

FOR THE SIX MONTHS ENDED 30TH JUNE 2018

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 2017 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 February 2018.

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 2018.

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 2017.

3.  Return per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th June 2018	30th June 2017	31st December 2017
	£'000	£'000	£'000
Return per share is based on the following:
Revenue return	799	788	1,567
Capital return	13,825	1,606	8,148
Total return	14,624	2,394	9,715
Weighted average number of shares in issue	56,923,613	56,210,630	56,256,353
Revenue return per share	1.40p	1.40p	2.79p
Capital return per share	24.29p	2.86p	14.48p
Total return per share	25.69p	4.26p	17.27p

4.     Dividend paid

		(Unaudited)	(Unaudited)	(Audited)
		Six months ended	Six months ended	Year ended
		30th June 2018	30th June 2018	31st December 2017
		£'000	£'000	£'000
	Final dividend in respect of the year ended    31st December 2017 of 2.50p (2016: £nil)	1,422	-	-
	Total dividend paid in the period	1,422	-	-

The dividend paid and declared in the period has been funded from the Revenue Reserve.

5.   Net asset value per share

	(Unaudited)	(Unaudited)	(Audited)
	30th June 2018	30th June 2017	31st December 2017
Net assets (£'000)	181,822	158,212	166,687
Number of shares in issue	57,276,928	56,271,928	56,651,928
Net asset value per share	317.4p	281.2p	294.2p

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 2018

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

 

 

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