Interim Results
STOCK EXCHANGE ANNOUNCEMENT
JPMORGAN US DISCOVERY INVESTMENT TRUST PLC
HALF YEAR RESULTS FOR THE SIX MONTHS ENDED 30TH JUNE 2008
Chairman's Statement
Performance
This has not been an easy review for me to write as my first communication to shareholders since becoming Chairman. World stock markets are experiencing some of the biggest challenges seen in recent times as inflationary pressures surge globally at the same time as economic activity is falling. Central banks would normally respond by adjusting interest rates to tackle this problem but they are severely hampered by a financial system that is still suffering the consequences of the crisis in credit markets. With this gloomy and uncertain background, investors in the US have been reducing perceived risk in their portfolios which particularly hurt the micro cap sector. In the six months to 30th June 2008, the Company's net asset value ('NAV') fell by 19.5%, lagging the Company's benchmark, the Russell 2000 Index, which fell 9.5% in Sterling terms. Over the same period the newer Russell Microcap Index declined by 15.5%. The £/$ exchange rate had minimal impact on returns as both currencies were weak over the period.
Over the six months the Company's share price fell by 16.2%. At the end of June the discount of the share price to net assets was 8.2% (assuming reissue of Treasury shares) compared with 11.7% at 31st December 2007. This was in line with the Board's aim of employing various measures, including share buy-backs, to maintain a stable discount of around 9%. These measures had the effect of reducing the impact of falling share prices over a period which saw, according to AIC data, the average North American small cap investment trust discount widen to over 16%.
Change of Chairman
Following the AGM in April 2008, the Company's Chairman, Robin Lewis, announced his retirement. The Board would like to wish Robin well and thank him for his contribution. The Board subsequently invited me to take over as Chairman. A review has been undertaken of the balance of the Board and it has been agreed that no new directors will be added in the immediate future.
Share Buybacks
At the Annual General Meeting held in April 2008, the authority to repurchase up to 14.99% of the Company's issued share capital was renewed. Over the six months to 30th June 2008, 1,358,027 shares were repurchased and cancelled at an average discount of 10%. Since the period end, an additional 141,086 shares have been repurchased for cancellation.
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 issued, but a further 146,000 shares were repurchased to hold in Treasury at an average discount of 9.5%. Where necessary, such 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, 442,000 shares were cancelled from Treasury during the period.
The Board will continue to monitor the discount and its volatility closely.
Gearing
As reported in the annual statement, the Company's single borrowing facility was renewed at US$28m in January 2008 to allow the investment managers to manage gearing to enhance returns to shareholders. The Company had drawn down US$417,000 as at the date of this announcement.
Management Engagement Committee
Following the recent guidance by the AIC, the Board has established a Management Engagement Committee which will meet annually to review and evaluate the Manager. The conclusions of the Committee's deliberations will be set out in the annual report and accounts.
Outlook
It has been a difficult period for the asset class in which we invest and it has also been a difficult year for the investment managers in picking the best stocks in that universe, as explained in detail in their Investment Managers' Report overleaf. We still believe however that US micro cap companies remain a very exciting and potentially fruitful area in which to invest. There is always a large number of entrepreneurs with good new ideas which can do well, even when the overall US economy is having problems.
Davina Walter
Chairman
27th August 2008
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 the following broad categories: investment and strategy; market; accounting, legal and regulatory; corporate governance and shareholder relations; operational; foreign currency; 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 2007.
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:
Davina Walter
Chairman
27th August 2008
Investment Managers' Report
Investment Performance
The first half of 2008 proved to be extremely challenging for investors in US equities, in particular for small and micro cap stocks. The acceleration of the credit and housing crisis, combined with rapidly rising energy and food costs, put severe pressure on markets and investor sentiment. As a result, in the six months to 30th June 2008 the Company's NAV declined 19.5%. This compared unfavourably to the Russell 2000 Index's decline of 9.5% and the Russell Microcap Index's 15.5%, both in Sterling terms.
Not surprisingly, given the scale of investor risk aversion, smaller stocks underperformed larger stocks in a relationship broadly inversely correlated with size. 70% of the Company's portfolio is invested in companies below $500 million in market capitalisation, and 42% of the portfolio is below $250 million. During the first half of the year, the Russell 2000 stocks with market capitalisations below $250 million declined 22%, while those between $250 million and $500 million declined 16%.
Performance was also negatively impacted by sector performance. The Energy and Basic Materials sectors dominated market returns, areas where quality is very suspect in the small and microcap universe. The sectors where we have historically found the best longer term investments, including Healthcare, Technology and Consumer Discretionary, were three of the four sectors which posted the greatest declines during the reporting period. The portfolio did, however, benefit from its significant underweight in the Financial Services sector, although not enough to offset these other factors.
Portfolio Highlights
The top three contributors to performance were Wet Seal, Illumina and Approach Resources.
Specialty retailer Wet Seal's shares more than doubled during the period as new management's turnaround started to gain traction and the stock's valuation increased from 0.3x sales to 0.8x sales. Shares of Illumina appreciated almost 50% as the company reached a favorable settlement in a key lawsuit and as the company continued to show strong sales growth in its genetic analysis franchise. Approach Resources, one of the Company's few energy positions, increased 98% during the first half of 2008. The combination of higher natural gas prices and increased resource potential in its properties drove the stock.
The top three detractors from performance were BluePhoenix Solutions, AmericanWest Bancorporation and Magma Design Automation.
BluePhoenix Solutions, a hybrid software-IT services vendor declined 75% on lower revenue expectations from reduced IT spending and higher expenses due to currency headwinds. We continue to hold the stock as the company's revenue backlog provides a floor to revenue and earnings reductions and shares trade at only 5x forward earnings. AmericanWest Bancorporation declined 50% and was sold out of the portfolio after reporting significantly higher loan loss provisions than expected due to the weakening Utah residential real estate market. Shares of Magma Design Automation, a chip-design software company, declined 50% after the company cut their growth target in half due to the push-out of a few large deals in the quarter. Despite the economic headwinds, we continue to hold the stock as the company continues to be an industry leader, continues to grow double-digits, and trades at 10x earnings.
Market Outlook
The cause of the current malaise in equity markets, specifically in the US, has been highly visible to all investors. The credit and housing crisis, global commodity price inflation and the continued weakness of the dollar have driven consumer confidence to 25 year lows, while creating a nerve racking balancing act for the Federal Reserve and US Treasury Department.
While there is little immediate likelihood of these issues meaningfully improving, there are some rays of light that are worth noting. First, statistically at some point the writedowns in the credit markets must hit a bottom. Second, again, at some point the market will work through the excess inventory of homes and pricing will stabilise. Housing starts peaked close to 2 years ago and are now at 25 year lows. Third, the weakness of the Dollar is doing wonders for US global competitiveness, a fact that has been obscured in the trade figures by the rapid escalation in the cost of imported oil.
That is not to say that considerable risks and problems do not exist in the market. They obviously do, and should be taken very seriously, but in the event that the market is able to see through these major economic challenges US equities will be an excellent place to be invested.
With fear and uncertainty come investment opportunities and particularly so in the less well followed and illiquid parts of the stockmarket. While we have taken a lot of pain in the recent past in the performance of the Company's investments, many stocks in the portfolio are now trading at extremely attractive valuations both in nominal and relative terms. In certain sectors of the market, particularly primarily tied to the US consumer, we are seeing valuations at levels we have not seen for 20 years. While it is hard to point to any immediate catalyst for this changing, as long as the core competitive strength of the franchises we have invested in remains intact, when markets normalise these valuations will return to their historical averages.
Christopher Jones
Gary Schnierow
27th August 2008
For further information, please contact:
Lucy Dina
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
JPMorgan US Discovery Investment Trust plc
Income Statement
For the six months ended 30th June 2008
(Unaudited) (Unaudited) (Audited)
Six months ended Six months ended Year ended
30th June 2008 30th June 2007 31st December 2007
Revenue Capital Total Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
(Losses)/gains from
investments held at fair
value through profit or loss - (13,652) (13,652) - 3,238 3,238 - (5,703) (5,703)
Net foreign currency
(losses)/gains - (12) (12) - 254 254 - 442 442
Income from investments 80 - 80 171 - 171 264 - 264
Other interest receivable and
similar income 6 - 6 5 - 5 21 - 21
Gross return/(loss) 86 (13,664) (13,578) 176 3,492 3,668 285 (5,261) (4,976)
Management fee (27) (244) (271) (46) (419) (465) (86) (773) (859)
Performance fee writeback - 431 431 - 115 115 - 472 472
Other administrative
expenses (151) - (151) (137) - (137) (271) - (271)
Net (loss)/return on ordinary
activities before finance
costs and taxation (92) (13,477) (13,569) (7) 3,188 3,181 (72) (5,562) (5,634)
Finance costs (3) (26) (29) (33) (295) (328) (47) (425) (472)
Net (loss)/return on ordinary
activities before taxation (95) (13,503) (13,598) (40) 2,893 2,853 (119) (5,987) (6,106)
Taxation (12) - (12) (25) - (25) (39) - (39)
Net (loss)/return on ordinary
activities after taxation (107) (13,503) (13,610) (65) 2,893 2,828 (158) (5,987) (6,145)
(Loss)/return per share
(note 3) (1.52)p (192.30)p (193.82)p(0.67)p 29.96p 29.29p (1.72)p (65.12)p(66.84)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.
JPMorgan US Discovery Investment Trust plc
Reconciliation of Movements in Shareholders' Funds
For the six months ended 30th June 2008
(Unaudited)
Called up Capital
share redemption Capital Revenue
capital reserve reserve reserve Total
Six months ended 30th June 2008 £'000 £'000 £'000 £'000 £'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 from ordinary activities - - (13,503) (107) (13,610)
At 30th June 2008 1,648 1,494 45,972 (4,968) 44,146
(Unaudited)
Called up Capital
share redemption Capital Revenue
capital reserve reserve reserve Total
Six months ended 30th June 2007 £'000 £'000 £'000 £'000 £'000
At 31st December 2006 2,540 602 94,753 (4,703) 93,192
Repurchase and cancellation of shares (272) 272 (9,412) - (9,412)
Purchase of shares into Treasury - - (3,315) - (3,315)
Net return/(loss) from ordinary activities - - 2,893 (65) 2,828
At 30th June 2007 2,268 874 84,919 (4,768) 83,293
(Audited)
Called up Capital
share redemption Capital Revenue
capital reserve reserve reserve Total
Year ended 31st December 2007 £'000 £'000 £'000 £'000 £'000
At 31st December 2006 2,540 602 94,753 (4,703) 93,192
Repurchase and cancellation of shares (442) 442 (14,492) - (14,492)
Purchase of shares into Treasury - - (4,644) - (4,644)
Net loss from ordinary activities - - (5,987) (158) (6,145)
At 31st December 2007 2,098 1,044 69,630 (4,861) 67,911
JPMorgan US Discovery Investment Trust plc
Balance Sheet
As at 30th June 2008 (Unaudited) (Unaudited) (Audited)
30th June 2008 30th June 2007 31st December 2007
£'000 £'000 £'000
Fixed assets
Investments at fair value through
profit or loss 43,915 96,674 70,093
Current assets
Debtors 547 6,652 806
Cash at bank and in hand 139 245 982
Derivative financial instrument:
forward currency contract
at fair value through profit or loss - 13 -
686 6,910 1,788
Creditors: amounts falling due within
one year (455) (20,185) (3,518)
Derivative financial instrument:
forward currency contract
at fair value through profit or loss - - (21)
Net current assets/(liabilities) 231 (13,275) (1,751)
Total assets less current liabilities 44,146 83,399 68,342
Provisions for liabilities and charges - (106) (431)
Total net assets 44,146 83,293 67,911
Capital and reserves
Called up share capital 1,648 2,268 2,098
Capital redemption reserve 1,494 874 1,044
Capital reserve 45,972 84,919 69,630
Revenue reserve (4,968) (4,768) (4,861)
Shareholders' funds 44,146 83,293 67,911
Net asset value per share (note 4) 695.6p 958.3p 865.1p
JPMorgan US Discovery Investment Trust plc
Cash Flow Statement
For the six months ended 30th June 2008 (Unaudited) (Unaudited) (Audited)
Six months ended Six months ended Year ended
30th June 2008 30th June 2007 31st December 2007
£'000 £'000 £'000
Net cash outflow from operating activities (note 5) (194) (1,195) (1,538)
Net cash outflow from returns on investments
and servicing of finance (29) (329) (473)
Net cash inflow from capital expenditure
and financial investment 12,356 4,916 29,231
Net cash outflow from financing (12,856) (3,521) (26,833)
(Decrease)/increase in cash for the period (723) (129) 387
Reconciliation of net cash flow to movement
in net (debt)/funds
Net cash movement (723) (129) 387
Loans (drawn down)/repaid in the period (440) (2,367) 10,838
Exchange movements (33) 242 463
Movement in net (debt)/funds in the period (1,196) (2,254) 11,688
Net funds/(debt) at the beginning of the period 982 (10,706) (10,706)
Net (debt)/funds at the end of the period (214) (12,960) 982
Represented by:
Cash at bank and in hand 139 245 982
Debt falling due within one year (353) (13,205) -
Net (debt)/funds at the end of the period (214) (12,960) 982
JPMorgan US Discovery Investment Trust plc
Notes to the Accounts
For the six months ended 30th June 2008
-
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 2007 are extracted from the latest published accounts of the Company and do not constitute accounts (as defined in section 434(3) of the Companies Act 2006) 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 237(2) or 237(3) of the Companies Act 1985 (as amended).
Accounting Policies
The accounts have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies' dated 31st December 2005.
All of the Company's operations are of a continuing nature.
The accounting policies applied to these interim accounts are consistent with those applied in the accounts for the year ended 31st December 2007.
(Loss)/return per share (Unaudited) (Unaudited) (Audited)
Six months ended Six months ended Year ended
30th June 2008 30th June 2007 31st December 2007
£'000 £'000 £'000
(Loss)/return per share is based on the following:
Revenue loss (107) (65) (158)
Capital (loss)/return (13,503) 2,893 (5,987)
Total (loss)/return (13,610) 2,828 (6,145)
Weighted average number of
shares in issue 7,021,963 9,657,538 9,194,230
Revenue loss per share (1.52)p (0.67)p (1.72)p
Capital (loss)/return per share (192.30)p 29.96p (65.12)p
Total (loss)/return per share (193.82)p 29.29p (66.84)p
Net asset value per share
Net asset value per share is based on the net assets attributable to the ordinary shareholders of £44,146,000 (30th June 2007: £83,293,000 and 31st December 2007: £67,911,000) and on the 6,346,453 (30th June 2007: 8,691,480 and 31st December 2007: 7,850,480) shares in issue at the period end, excluding shares held in Treasury.
JPMorgan US Discovery Investment Trust plc
Notes to the Accounts
For the six months ended 30th June 2008
Reconciliation of total (loss)/return on ordinary activities before finance costs and taxation to net cash outflow
from operating activities
(Unaudited) (Unaudited) (Audited)
Six months ended Six months ended Year ended
30th June 2008 30th June 2007 31st December 2007
£'000 £'000 £'000
Total (loss)/return on ordinary activities before
finance costs and taxation (13,569) 3,181 (5,634)
Add back/(deduct) capital loss/(return) before
finance costs and taxation 13,477 (3,188) 5,562
Decrease/(increase) in net debtors and accrued income 154 (61) 29
Performance fee paid - (683) (683)
Overseas taxation (12) (25) (39)
Expenses charged to capital (244) (419) (773)
Net cash outflow from operating activities (194) (1,195) (1,538)
JPMORGAN ASSET MANAGEMENT (UK) LIMITED
27TH AUGUST 2008
This information is provided by RNS
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