Half Yearly Results

RNS Number : 8210X

JPMorgan US Discovery IT PLC

21 August 2009

 



LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN US DISCOVERY INVESTMENT TRUST PLC

UNAUDITED HALF YEAR RESULTS FOR THE SIX MONTHS ENDED 

30TH JUNE 2009

Chairman's Statement

Performance

I am pleased to report that the Company's new investment management team has made a strong start in turning round the Company's performance, especially given the challenging markets and the negative effects of the weak dollar. In the six month period to 30th June 2009 the Company's net asset value (NAV) rose by 7.6% which compares with a fall of 10.5% in the Russell 2000 Index in sterling terms. The share price rose by 12.1% over the period under review which reflected a narrowing of the discount to NAV. In dollar terms the NAV rose by 23.2% which compares with a rise of only 2.6% for the Russell 2000 Index.

2009 has been one of the trickiest periods experienced by the current generation of investors. The financial crisis of 2008 has turned into a full blown global economic crisis with huge consequences for stock markets. Governments have been forced to provide substantial economic stimulus in an attempt to stem the sharp rises in unemployment and the fall in growth. In the Investment Manager's Report below, Glenn Gawronski describes how he and his team have met these challenges over the six month reporting period together with the changes that have been made to the portfolio and how it is now positioned.

Share Buybacks

At the Annual General Meeting held in April 2009, the authority to repurchase up to 14.99% of the Company's issued share capital was renewed. Over the six months to 30th June 2009, 220,557 shares were repurchased into Treasury at an average discount of 14.0%.

Shareholders also gave the Board authority to allot new ordinary shares in the Company and reissue ordinary shares from Treasury. During the reporting period, no shares were allotted or reissued. Where necessary, Treasury shares will be re-issued at a limited discount to net asset value to manage any imbalance between supply and demand and hence improve liquidity in the Company's shares. In accordance with the Company's policy that shares held in Treasury be cancelled after one year, 96,000 shares were cancelled from Treasury during the period.

Over the past six months volatile stock markets, the fluctuating dollar and the strong move in our underlying assets have combined to make it hard to keep the discount in line with our stated policy of under 9% on a daily basis. Despite these factors our discount to NAV has averaged 9.6% over the past twelve months, well below the current average of 19.5% for the AIC North American Smaller Companies sector.

Gearing

At the end of January 2009 our gearing facility expired and the Company has been unable to renew this borrowing. The good news is that the Board and the Investment Manager have not wanted to be geared at this time given the uncertainties that prevail in the market. We will, however, continue to work on getting a borrowing arrangement in place so that when the opportunities arise, the Investment Manager will be able to take advantage of them in order to enhance returns to shareholders.

Outlook

It would be premature to talk about signs of recovery and to cite a positive outlook for the US small cap market given the levels of uncertainty that exist. Uncertainty does, however, create investment opportunities especially in the riskier asset classes such as smaller cap equities. The recent rally in small cap from the March lows has been concentrated in the riskier, low quality end of the market which has produced some interesting valuations in higher quality companies which in turn should produce some good investment opportunities in the coming months.

Davina Walter

Chairman 

21st August 2009

Investment Manager's Report

Market Review

The first half of 2009 was a period of contrast. During the period from January through 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 March 9th.

Subsequently, US equity markets surged. On March 10th the Russell 2000 Index rose 7.1% and the Chicago Board Options Exchange Volatility Index (VIX) fell 11%, as investors' appetite for risk returned. The rally from mid-March through June was largely sparked by positive pre-announcements from large cap financial companies regarding their profitability, which took the possibility of a systematic failure of the financial system off the table. The rally continued through March and into June driven by optimism regarding worldwide government stimuli and a deceleration in the pace of economic deterioration. Investors considered the equity market oversold and began to embrace risk with economically sensitive businesses, highly leveraged companies and lower quality stocks leading the rally.

Investment Performance

For the six months to 30th June 2009, the total return on net assets was +7.6%, a strong performance relative to the benchmark, the Russell 2000 Index, which fell by 10.5%, both in sterling terms. The Company's outperformance was primarily due to superior stock selection in the financial services and consumer discretionary sectors.

Portfolio Positioning

We took responsibility for management of the Company's portfolio in mid November 2008 and have reshaped the portfolio, while remaining true to our bottom-up fundamental analysis. During the period, we have expanded the number of stocks in the portfolio from 65 to 83 (as at 30th June), reducing concentration, while upgrading the quality of the portfolio. We have materially reduced our sector overweight positions in the Consumer Discretionary, Technology and Auto & Transportation sectors, though we continue to remain overweight in those sectors. On the other hand, the portfolio remains underweight in the Producer Durables, Energy and Materials & Processing sectors. Finally, the portfolio's significant underweight position in the Financial Services and Utilities sectors has been significantly reduced and at the end of June we were modestly underweight in those sectors.

Our sector weights are a by-product of our bottom-up investment analysis and disciplined approach to portfolio construction. We maintain a consistent investment strategy that focuses on companies that possess a sustainable competitive advantage and that are overseen by a management team with a track record of success. Finally, we seek to acquire equity stakes in those businesses when they trade at a discount to their intrinsic value.

For the six months ended 30th June 2009, our strategy outperformed the Russell 2000 Index. The majority of out-performance resulted from stock selection, though sector weights contributed positively as well. As we repositioned the portfolio, we shifted away from companies that contained severe enterprise risk due to impaired balance sheets and/or inconsistent cash flows and we moved towards companies that generate sustainable earnings and more consistent cash flows. This is illustrated by the change in the portfolio tilts since November 2008, as the portfolio now has lower earnings variation, lower volatility and a higher earnings yield. We have accomplished this without sacrificing the growth bias of the portfolio; the portfolio remains more growth orientated than the benchmark as high quality growth stocks remain more attractive.

Portfolio Highlights

The top three contributors to performance were Calamos Asset Management, Youbet.com and Switch & Data. Calamos Asset Management contributed positively with a return of 93% during the period and a contribution of +263bps to our relative outperformance. Calamos is an asset manager with $23.8 billion in assets under management and a strong long-term track record in growth investing. Shares of Calamos rallied in conjunction with a significant rebound in the equity market. Youbet.com produced a return of 279% during the period and a contribution of +149bps. Youbet is an internet gambling website and provider of pari-mutuel horse racing content. Youbet's new management team continues to implement a successful operational turnaround, reducing costs and improving the company's profitability and cash flow generation, while at the same time adding new racetrack content. Finally, Switch & Data produced a return of 59% during the period and a contribution of +107bps. Switch & Data provides network neutral interconnection and collocation services to internet dependent business. The company continues to post strong revenue and earnings growth, driven by new bookings from existing customers, its recent capacity expansion which added more billable cabinets and stable pricing trends. Capacity utilisation at its new facilities is progressing ahead of plan, while the near-term order trends and pipeline remain solid.

The top three detractors to performance were Zep, RLI Corp. and GMX Resources. Zep, a specialty chemical manufacturer, detracted from our performance with a return of -37% during the period and a contribution of -58bps. Broad-based weakness in Zep's end-markets has put pressure on volumes, offsetting the benefit of internal initiatives and improved pricing. As a result, the company delivered disappointing results and was forced to lower expectations for this fiscal year. Management has since made progress on sustainable cost improvements and margin improvement, and is well-positioned for a recovery. RLI, an excess and surplus lines property-casualty insurance underwriter, returned -26% during the period and made a contribution of -44bps. Shares of RLI have suffered from poor investment results in their securities portfolio and a weak insurance pricing environment. We believe that RLI's securities portfolio will benefit from the recent rebound in equity markets, which should translate into book value growth, a key driver of share performance in the insurance space. Meanwhile, RLI's management team is taking the right steps to address the soft insurance rate environment, namely not chasing market share and maintaining focus on achieving underwriting profitability. Finally, GMX Resources is an exploration and production company that acquires and develops oil and gas properties. GMX Resources returned -74% during the period, detracting -43bps from our outperformance. We sold out of GMX Resources because of the company's impaired balance sheet and the low commodity price environment's impact on cash flows.

Market Outlook

Financial markets are forward looking. In 2008, markets discounted future economic problems well in advance and punished smaller, less liquid, micro cap stocks. In the last few months, however, equity markets have rebounded sharply as aggressive monetary policy actions and government stimuli have bolstered investor confidence that we will avert financial collapse. As investors adjusted their desire for risk, the smallest, least liquid stocks have rallied.

While certain leading economic indicators, such as the Institute of Supply Management ('ISM') manufacturing index, have begun to show signs of improvement from very low levels, the economy remains in the early stages of the healing process. We remain concerned by weak job markets, unrelenting declines in the US housing market and continued de-leveraging by financial institutions and consumers alike. We expect that the economic recovery will be gradual. That said, we must balance our predilection for caution against the objective fact that even after a strong rally from March through June, the Russell 2000 Index has only increased 2.6% in the first half of this year and remains approximately 26% off its 52-week high. With the yield on the ten year Treasury bonds hovering around 3.5% versus the earnings yield on the Russell 2000 Index of more than 6%, investors may continue to increase their

risk appetite despite the potential for a slow, uneven economic recovery. As a result, we plan to remain disciplined with regards to our investment strategy: identifying companies with a sustainable competitive advantage, durable business models and solid management teams, and buying these companies at a discount to their intrinsic value.

Glenn Gawronski

Investment Manager 

21st August 2009

For further information please contact:

Jonathan Latter

For and on behalf of

JPMorgan Asset Management (UK) Limited, Secretary

020 7742 6000

Interim Management Report 

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

Principal Risks and Uncertainties

The principal risks and uncertainties faced by the Company fall into six broad categories: market; investment and strategy; accounting, legal and regulatory; corporate governance and shareholder relations; operational; and financial. Information on each of these areas is given in the Business Review within the Annual Report and Accounts for the year ended 31st December 2008.

During the market turmoil in the latter part of 2008, JPMAM reacted with heightened management scrutiny of counterparty risk. In addition, reviews were initiated of exposures, policies, procedures and legal arrangements applicable to the major sources of counterparty exposure.

Related Parties Transactions

During the first six months of the current financial year, no transactions with related parties have taken place which have materially affected the financial position or the performance of the Company during the period.

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

Davina Walter

Chairman 

For further information, please contact:

Jonathan Latter

For and on behalf of

JPMorgan Asset Management (UK) Limited, Secretary

020 7742 6000

Please note that up to date information on the Company, including daily NAV and share prices, factsheets and portfolio information can be found at www.jpmusdiscovery.co.uk

  Income Statement

for the six months ended 30th June 2009

	(Unaudited) Six months ended 30th June 2009			(Unaudited) Six months ended 30th June 2008			(Audited) Year ended 31st December 2008
	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
	-	2,818	2,818	-	(13,652)	(13,652)	-	(20,814)	(20,814)
Net foreign currency (losses)/gains	-	(179)	(179)	-	(12)	(12)	-	5	5
Income from investments	112	-	112	80	-	80	130	-	130
Other interest receivable and similar income
	3	-	3	6	-	6	167	-	167
Gross return/(loss)	115	2,639	2,754	86	(13,664)	(13,578)	297	(20,809)	(20,512)
Management fee	(16)	(149)	(165)	(27)	(244)	(271)	(48)	(430)	(478)
Performance fee (charge)/ writeback	-	(91)	(91)	-	431	431	-	431	431
VAT recovered	-	-	-	-	-	-	228	13	241
Other administrative   expenses
	(119)	-	(119)	(151)	-	(151)	(287)	-	(287)
Net (loss)/return on ordinary activities before finance costs and taxation
costs and taxation	(20)	2,399	2,379	(92)	(13,477)	(13,569)	190	(20,795)	(20,605)
Finance costs	(1)	(6)	(7)	(3)	(26)	(29)	(5)	(43)	(48)
Net (loss)/return on ordinary  activities before taxation	(21)	2,393	2,372	(95)	(13,503)	(13,598)	185	(20,838)	(20,653)
Taxation	(17)	-	(17)	(12)	-	(12)	(19)	-	(19)
Net (loss)/return on ordinary activities after taxation
	(38)	2,393	2,355	(107)	(13,503)	(13,610)	166	(20,838)	(20,672)
(Loss)/return per share   (note 3)
	(0.66)p	41.51p	40.85p	(1.52)p	(192.30)p	(193.82)p	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 period.

The 'Total' column of this statement is the profit and loss account of the Company and the 'Revenue' and 'Capital' columns represent supplementary information prepared under guidance issued by the Association of Investment Companies. The Total column represents all the information that is required to be disclosed in a Statement of Total Recognised Gains and Losses ('STRGL'). For this reason a STRGL has not been presented.

Reconciliation of Movements in Shareholders' Funds

Six months ended 30th June 2009 (Unaudited)	Called up share capital £'000	Capital redemption reserve £'000	Capital  reserves  £'000	Revenue reserve £'000	Total £'000
At 31st December 2008	1,508	1,634	36,028	(4,695)	34,475
Repurchase of shares into Treasury	-	-	(1,086)	-	(1,086)
Cancellation of shares in Treasury	(24)	24	-	-	-
Net return/(loss) on ordinary activities	-	-	2,393	(38)	2,355
At 30th June 2009	1,484	1,658	37,335	(4,733)	35,744
Six months ended 30th June 2008 (Unaudited)	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 shares	(450)	450	(9,100)	-	(9,100)
Repurchase of shares into Treasury	-	-	(1,055)	-	(1,055)
Net loss on ordinary activities	-	-	(13,503)	(107)	(13,610)
At 30th June 2008	1,648	1,494	45,972	(4,968)	44,146
Year ended 31st December 2008 (Audited)	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 shares	(442)	442	(11,429)	-	(11,429)
Repurchase of shares into Treasury	-	-	(1,335)	-	(1,335)
Cancellation of shares in Treasury	(148)	148	-	-	-
Net loss on ordinary activities	-	-	(20,838)	(166)	(20,672)
At 31st December 2008	1,508	1,634	36,028	(4,695)	34,475

Balance Sheet

at 30th June 2009

	(Unaudited) 30th June 2009 £'000	(Unaudited) 30th June 2008 £'000	(Audited) 31st December 2008 £'000
Fixed assets
Investments held at fair value through profit
or loss	34,448	43,915	32,121
Investments in liquidity funds held at fair value through profit or loss
	880	-	-
	35,328	43,915	32,121
Current assets
Debtors	-	547	951
Cash and short term deposits	229	139	2,132
Derivative financial instruments	330	-	-
	559	686	3,083
Creditors: amounts falling due within one year	(52)	(455)	(729)
Net current assets	507	231	2,354
Total assets less current liabilities	35,835	44,146	34,475
Provisions for liabilities and charges	(91)	-	-
Total net assets	35,744	44,146	34,475
Capital and reserves
Called up share capital	1,484	1,648	1,508
Capital redemption reserve	1,658	1,494	1,634
Capital reserves	37,335	45,972	36,028
Revenue reserve	(4,733)	(4,698)	(4,695)
Shareholders' funds	35,744	44,146	34,475
Net asset value per share (note 4)	631.4p	695.6p	586.2p

Cash Flow Statement

for the six months ended 30th June 2009

	(Unaudited) Six months ended 30th June 2009 £'000	(Unaudited) Six months ended 30th June 2008 £'000	(Audited) Year ended 31st December 2008 £'000
Net cash (outflow)/inflow from operating activities (note 5)
	(59)	(194)	195
Net cash outflow from returns on investments and servicing of finance
	(6)	(29)	(49)
Net cash (outflow)/inflow from capital expenditure and financial investment
	(573)	12,356	16,924
Net cash outflow from financing	(1,086)	(12,856)	(15,905)
(Decrease)/increase in cash for the period	(1,724)	(723)	1,165
Reconciliation of net cash flow to movement in   net funds/debt
Net cash movement	(1,724)	(723)	1,165
Loans drawn down in the period	-	(440)	-
Exchange movements	(179)	(33)	(15)
Changes in net funds/debt arising from cash flows	(1,903)	(1,196)	1,150
Net funds at the beginning of the period	2,132	982	982
Net funds/(debt) at the end of the period	229	(214)	2,132
Represented by:
Cash and short term deposits	229	139	2,132
Debt falling due within one year	-	(353)	-
	229	(214)	2,132

Notes to the Accounts

for the six months ended 30th June 2009

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 2008 are extracted from the latest published accounts of the Company and do not constitute statutory accounts for that year. Those accounts have been delivered to the Registrar of Companies and included the report of the auditors which was unqualified and did not contain a statement under either section 498 (2) or 498 (3) of the Companies Act 2006.

2. Accounting Policies

The accounts have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice ('UK GAAP') and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies' issued in January 2009.

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

The accounting policies applied to these half year accounts are consistent with those applied in the accounts for the year ended 31st December 2008.

3. (Loss)/return per share

	(Unaudited) Six months ended 30th June 2009 £'000	(Unaudited) Six months ended 30th June 2008 £'000	(Audited) Year ended 31st December 2008 £'000
(Loss)/return per share is based on the following:
Revenue (loss)/return	(38)	(107)	166
Capital return/(loss)	2,393	(13,503)	(20,838)
Total return/(loss)	2,355	(13,610)	(20,672)
Weighted average number of shares in issue	5,765,035	7,021,963	6,555,908
Revenue (loss)/return per share	(0.66)p	(1.52)p	2.53p
Capital return/(loss) per share	41.51p	(192.30)p	(317.85)p
Total return/(loss) per share	40.85p	(193.82)p	(315.32)p

4. Net asset value per share

Net asset value per share is based on the net assets attributable to ordinary shareholders of £35,744,000 (30th June 2008: £44,146,000 and 31st December 2008: £34,475,000) and on the 5,660,810 (30th June 2008: 6,346,453 and 31st December 2008: 5,881,367) shares in issue at the period end, excluding shares held in Treasury.

5. Reconciliation of net return/(loss) on ordinary activities before finance costs and taxation to net cash (outflow)/inflow from operating activities

	(Unaudited) Six months ended 30th June 2009 £'000	(Unaudited) Six months ended 30th June 2008 £'000	(Audited) Year ended 31st December 2008 £'000
Net return/(loss) on ordinary activities before  finance costs and taxation	2,379	(13,569)	(20,605)
Add back capital (return)/loss before finance costs  and taxation	(2,399)	13,477	20,795
Decrease in net debtors and  accrued income	127	154	441
VAT recovered included in capital	-	-	13
Expenses charged to capital	(149)	(244)	(430)
Overseas withholding tax	(17)	(12)	(19)
Net cash (outflow)/inflow from operating activities	(59)	(194)	195

 

END

 

 

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