Final Results for the year to 31 March 2021
LONDON STOCK EXCHANGE ANNOUNCEMENT
JPMORGAN JAPAN SMALL CAP GROWTH & INCOME PLC
FINAL RESULTS FOR THE YEAR ENDED 31st MARCH 2021
Legal Entity Identifier: 549300KP3CRHPQ4RF811
Information disclosed in accordance with DTR 4.2.2
CHAIRMAN'S STATEMENT
Investment Performance
The Company's financial year to 31st March 2021 was dominated by the COVID-19 pandemic indiscriminately impacting people, economies, governments, and businesses across the globe, as countries struggled under various, intermittent lockdowns. Late in the year, the arrival of effective vaccines signalled a path to economic recovery. Political uncertainties eased early in 2021 with the inauguration of new US President Joe Biden, who acted quickly to implement unprecedented levels of fiscal stimulus. These developments, combined with associated concerns about resurgent inflation pressures, marked a decisive turning point in global equity markets. The technology and other growth stocks so popular over most of 2020 fell out of favour with investors, who turned their attention instead to economically sensitive cyclical and value stocks expected to benefit from the improved economic outlook. These stocks outperformed growth strategies in late 2020 and the first quarter of 2021.
Against this backdrop, shareholders enjoyed very strong absolute returns in the financial year to 31st March 2021, and significant outperformance against the benchmark was combined with a tightening of the discount to net asset value. The return to shareholders was +47.9%, while the Company's total return on net asset value (NAV) was +42.4%. The Company's benchmark, the S&P Japan SmallCap Net Return Index (in sterling terms), returned +21.7%. This represents outperformance of 20.7 percentage points. The return to shareholders of +47.9%, reflected the narrowing of the share price discount to net asset value from 11.9% to 8.7% over the year.
However, these very satisfying results obscure the fact that the year was characterised by two distinct periods for performance. Most of the Company's annual returns were realised in the first half of the financial year, when the quality and growth stocks favoured by the Investment Managers outperformed the Company's benchmark. During the second half, as cyclical and value stocks outpaced growth and quality stocks, both the share price and NAV per share fell marginally. However, after adding back the two interim dividends paid in that period, the total return on NAV for the full year was slightly higher than it had been over the first six months. The total return to shareholders was marginally lower as the share price discount widened from 6.4% at the end of September 2020 to 8.7% at the end of March 2021.
The Investment Managers' Report that follows explains the market backdrop in depth and details the stock and sector stories that most impacted the Company's performance over the past year. The Managers also discuss their optimism about the outlook for the Japanese economy and outline the trends and themes they believe will drive the growth in Japanese smaller companies over the short and longer term.
Dividend Policy and Discount Management
The Company's revised dividend policy has now been in place for three years. As a reminder, the dividend policy aims to pay, in the absence of unforeseen circumstances, a regular quarterly dividend equal to 1% of the Company's NAV on the last business day of the preceding financial quarter, being the end of March, June, September and December. Over the year, this would approximate to 4% of the average NAV. This dividend is paid from a combination of revenue, capital and other reserves.
In respect of the year to 31st March 2021, quarterly dividends totalling 21.9p (2020: 17.7p) per share were declared.
One of the objectives of the revised dividend policy is to enhance the Company's appeal to a broader range of investors. Since its introduction, it has therefore been pleasing to note some narrowing of the Company's discount, driven by new demand and positive press commentary.
The Board will keep the dividend policy under constant review and monitor its impact on demand for the Company's shares and the discount. The Board may use share buy-backs, when appropriate, to narrow the discount at which your Company's shares trade.
A Resolution to approve the Company's dividend policy will be put to shareholders at the forthcoming Annual General Meeting.
Company Name and Ticker
Reflecting the now established dividend policy, the Company has changed its name to JPMorgan Japan Small Cap Growth & Income plc. This change took effect from 16th December 2020. Following the change of name, the Company also changed its London Stock Exchange stock ticker symbol (TIDM) from JPS to JSGI, with effect from 17th December 2020. The Company's ISIN, SEDOL and LEI remain unchanged and its website URL was renamed www.jpmjapansmallcapgrowthandincome.co.uk .
Benchmark Index
F ollowing a review of the composition of relevant indices, the Board decided to change the Company's benchmark from the S&P Japan SmallCap Net Return Index (in sterling terms) to the MSCI Japan Small Cap Index (in sterling terms). This decision was reported in the half year results and took effect from 1st April 2021. The new benchmark index has long term performance very similar to that of the former benchmark, but the Board believes that the new benchmark has the benefit of being more widely recognised by investors.
Gearing
The Company seeks to enhance investment returns for shareholders by borrowing money to buy more assets ('gearing'). The Company's gearing is discussed regularly by the Board and the Investment Managers, and the gearing level is reviewed by the Directors at each Board meeting.
The Company has a revolving credit facility of Yen 4.0 billion (with an option to increase available credit to Yen 6.0 billion) with Scotiabank. This facility has a maturity date of October 2022. The loan facility is on favourable and flexible terms, allowing the Company to repay the loan if required, without any penalties.
This credit facility provides the Managers with the ability to gear tactically within the set guidelines. The Company's investment policy permits gearing within a range of 10% net cash to 25% geared. However, the Board requires the Investment Managers to operate in the narrower range of 5% net cash to 15% geared, in normal market conditions. During the year, the Company's gearing level ranged between 6.1% and 10.4%, finishing the financial year at 8.1% (2020: 7.5%).
The Board and Corporate Governance
There has been no change to the composition of the Board during the reporting period. Following the Board's annual evaluation by the Nomination Committee, the Committee felt that the Board's current composition and size is appropriate, and no changes are anticipated over the next twelve months. The Board has a plan to refresh its membership in an orderly manner over time. As part of its long-term succession planning, and to ensure continuity, the Board will seek to recruit new non-executive Directors when current members come up for retirement.
The Board supports annual re-election for all Directors, as recommended by the AIC Code of Corporate Governance, and all Directors will therefore stand for re-election at the forthcoming Annual General Meeting. Shareholders who wish to contact the Chairman or other members of the Board may do so through the Company Secretary or the Company's website, details of which appear below.
As reported in the Investment Managers' report, environmental, social and governance ('ESG') considerations are integral to the Managers' investment process. The Board shares the Managers' view of the importance of ESG when making investments that are sustainable over the long term, and the necessity of continual engagement with investee companies throughout the duration of the investment. The Managers use their regular company meetings with potential and existing portfolio companies to discuss and challenge management on their adherence to best practice. The Board believes that effective stewardship can help to create sustainable value for shareholders. Further information on the Manager's ESG process and engagement is set out in the ESG Report on pages 14 to 17 of the Annual Report.
Outlook
It is likely to be some time before vaccination programmes vanquish the virus around the world, but the Board shares the Managers' view that the situation will continue to improve. The global economic recovery is gathering momentum, underpinned by ongoing support from governments and central banks. Amidst all its devastating effects on people and businesses, there is reason to hope that the pandemic will also leave some positive changes in its wake, especially in Japan. The impetus the pandemic has given to Japan's digitalisation efforts is likely to be particularly beneficial for productivity over the medium term. Furthermore, Japan's membership of the new regional trading bloc, the Regional Comprehensive Economic Partnership (RCEP) should increase its access to the region's rapidly expanding economies. Japan's smaller companies, which tend to be the economy's most entrepreneurial innovators, should thrive in such an environment, generating many exciting investment opportunities. See the Investment Managers' Report for further discussion.
While the Managers' focus on quality and growth means the portfolio may lag in 'value' rallies such as the one we experienced in the latter part of the review period, the Board shares the Managers' belief that their preference for resilient businesses with leading market positions, robust balance sheets and healthy cash flows, remains the best approach to deliver positive and sustained returns and outperformance over the long term, as it has done in the past.
Annual General Meeting
We are holding the Company's Annual General Meeting at 60 Victoria Embankment, London EC4Y 0JP on 28th July 2021 at 12.00 noon.
The format of the Company's 2021 AGM has unfortunately had to be adapted again. Given the uncertainty about the course of COVID-19, and due to ongoing public health concerns, the Board intends to limit physical attendance at the AGM to the minimum quorum required to allow the formal business to proceed.
Despite these restrictions, the Board is keen to ensure shareholders have the opportunity to hear from the Manager and, accordingly, at the time of the AGM, a webinar will be organised, to include a presentation from the Investment Managers, which may be viewed at the time by registered participants. This will be followed by a live question and answer session. Shareholders are invited to register as webinar participants and pose any questions they have either by submitting them during the webinar or in advance of the AGM via the 'Ask a Question' link on the Company's website, or via email to invtrusts.cosec@jpmorgan.com. Details on how to register as a participant for this event will be available on the Company's website, or they can be requested via the email address above.
The Board strongly encourages all shareholders to submit their votes in advance of the meeting, so that these are registered and recorded at the AGM. Proxy votes can be lodged in advance of the AGM either by post or electronically: detailed instructions are included in the Notes to the Notice of Annual General Meeting on pages 84 and 85 of the Annual Report.
If there are any changes to the above AGM arrangements, the Company will update shareholders through an announcement to the London Stock Exchange and on the Company's website.
The Board would like to thank shareholders for their understanding, co-operation and support at this difficult time. We very much hope that you and your families are safe and well and we look forward to meeting with you when, as we all hope, normality has returned.
Alexa Henderson
Chairman 22nd June 2021
INVESTMENT MANAGERS' REPORT
Performance and market review
Over the twelve months to March 2021, the Company's benchmark, the S&P's Japan SmallCap NR (in sterling terms), produced a total return of +21.7%. The Company's net assets outperformed the index by 20.7 percentage points over the period, delivering a return of +42.4%. The Company's performance is ahead of the benchmark by an average 6.6 percentage points per annum over three years and by 4.6 percentage points per annum over five years. The broader TOPIX index advanced 39.3% in Japanese yen terms over the twelve months to end March 2021.
The market spent last summer recovering much of the ground lost in February and March 2020, when the COVID-19 pandemic spread rapidly around the world and sent equity markets into steep decline. This recovery received fresh impetus in November with the arrival of several vaccines, which fuelled hopes of a global economic recovery in 2021. The Japanese market rose sharply over the remainder of 2020 and the first quarter of 2021, reaching a 30-year high by end-March.
However, the positive vaccine news prompted some notable shifts in equity market drivers. High-value technology and other growth and quality stocks led the market during the first six months of the review period, while more economically sensitive businesses that were hardest hit by lockdowns, lagged. Once investors became more confident that these cyclical and value stocks would survive the pandemic, they began to outperform and continued to outpace growth and quality stocks over the remainder of the review period. In addition, the improvement in the economic outlook, combined with further aggressive US fiscal stimulus implemented by the new Biden administration, sparked concerns about inflation and rising interest rates. The valuations of some stocks, especially high-value growth names, were reassessed accordingly, contributing to their underperformance of cyclical and value names over the latter six months of the review period.
The Japanese yen weakened against the US dollar and sterling over the review period.
PERFORMANCE ATTRIBUTION
YEAR ENDED 31ST MARCH 2021
|
|
% |
% |
|
Contributions to total returns |
|
|
|
Benchmark return |
|
21.7 |
|
Sector allocation |
6.9 |
|
|
Stock selection |
11.3 |
|
|
Gearing/cash |
3.6 |
|
|
Return relative to benchmark |
|
21.8 |
|
Portfolio return |
|
43.5 |
|
Management fee/other expenses |
|
-1.1 |
|
Return on net assetsA |
|
42.4 |
|
Return to shareholdersA |
|
47.9 |
Source: Factset, JPMAM, Morningstar.
All figures are on a total return basis.
Performance attribution analyses how the Company achieved its recorded performance relative to its benchmark.
A Alternative Performance Measure ('APM').
A glossary of terms and APMs is provided on pages 87 and 88 of the Annual Report
S potlight on stocks and sectors
During the twelve months under review, both stock selection and sector allocation had positive impacts on performance. Given our bias towards quality and growth stocks, most of the year's gains were made in the first half of the period, when these stocks performed more strongly than poorer quality, cyclical names.
Stocks that contributed most significantly to returns included BASE, Bengo4.com and Taiyo Yuden. The pandemic has accelerated trends toward technological innovation and the digitalisation of many commercial, personal and government services. These names are all particularly well-placed to take advantage of these trends and their prospects for strong earnings growth have improved accordingly.
• BASE provides an e-commerce platform for smaller companies and individuals. It helps users set up online stores very quickly and easily, without incurring fees. E-commerce market penetration is still low in Japan, compared to many other developed countries and China. However, growth in this sector has accelerated as lockdown restrictions have driven many retail businesses online. Base is ideally positioned to meet the rising demand for online retail platforms.
• Bengo4.com is an online portal for lawyers. The company has a dominant market position, and it is at the forefront of the digitalisation of legal work in Japan, including the provision of a cloud-based digital contracts service called Cloudsign, that replaces Japan's traditional personal signature stamps. Cloudsign has the largest number of registered users in Japan and should continue to benefit as the adoption of such digital services becomes more widespread.
• Taiyo Yuden manufactures electronic components, including multi-layer ceramic capacitors (MLCCs), which are in increasing demand in the automotive industry. The pace of technological innovation in the auto sector is very rapid, driven by the race to develop electric and autonomous driving vehicles. Demand for these vehicles will translate into huge potential markets for several Japanese manufacturers, including those, like Taiyo Yuden, that provide high quality MLCCs.
Negative contributors to relative performance over the review period included Star Mica Holdings, a real estate services company, Yappli, a smartphone app development platform, and Medley, which provides recruitment services to the healthcare sector. However, despite their short-term share price weakness, in our view, each of these companies possesses competitive advantages that will drive growth over the long term, so we have maintained our exposure.
With respect to sector allocation, top contributors to relative performance included our overweight positions in semiconductors & semiconductor equipment and software & related services. Portfolio gearing also had a positive impact. The main detractors from performance at the sectoral level included overweights to insurance and household & personal products.
Positioning the portfolio for future success
The Company maintained its focus on stocks that we believe will be able to deliver earnings growth over the long term, supported by strong management teams and healthy cashflows. We avoid stocks that operate in industries plagued by excess supply and those that offer nothing to differentiate them from competitors. Many stocks in the financial services and real estate sectors fall into these latter categories.
Three new acquisitions made during the past financial year were RENOVA, Nippon Gas, and Fancl.
• RENOVA is a renewable energy supplier operating solar, biomass, onshore and offshore wind power plants. Japan aims to be carbon neutral by 2050 and renewable energy generation will have to expand significantly if the country is to achieve this goal. RENOVA has an established track record in the development and operation of renewable energy plants and is therefore very well-positioned to lead the expansion of Japan's renewable energy industry.
• Nippon Gas provides liquefied petroleum gas (LPG) to households and enterprises. Japan's LPG industry is very traditional and currently makes little use of technology. For example, gas providers still send employees to read the gas meters of each of their customers. However, Nippon Gas is challenging the status quo by offering software services to the many micro enterprises in the sector, including an online gas smart meter service that will replace manual meter readings.
• Fancl is a leading additive-free cosmetic and dietary supplements company. Both the cosmetics and supplements markets are relatively mature in Japan, but by leveraging their strong brand, we expect Fancl to be able to achieve strong growth by expanding into China and other burgeoning markets in the region.
Three of our largest divestments during the review period were Pan Pacific International,Disco, and MonotaRO. The Company's investment guidelines prohibit investment in Japan's top 100 securities. These stocks are all approaching this threshold, so we closed our positions, realising some sizeable profits.
Over the period, annualised portfolio turnover was around 28%, compared to 10% over the previous year, as we sought to take advantage of the opportunities presented by the pandemic-induced sell-off. The overall shape of the portfolio has little changed, and we maintain a bias towards quality and growth: the portfolio has a higher return on equity (ROE) and higher growth in earnings per share (EPS) than the overall market. The Company's gearing level remained within the expected 8-10% range.
About our investment philosophy and themes
The Company has a commitment to provide investors with access to the innovative and fast-growing smaller companies at the core of the new Japanese economy. Our portfolio favours quality and growth and we aim to invest in companies (other than Japan's largest 200) that we believe can compound earnings growth over the long term, supported by sustainable competitive advantages and good management teams. In our view, their strong and durable market positioning will allow these businesses to substantially increase their intrinsic value over time. We are also attracted to companies willing to reinvest to enhance their growth potential. Our focus on high quality names with growth potential means that the portfolio tends to enjoy a high active share and differs significantly from the benchmark. This provides a further source for additional return, enhancing the Company's scope to outperform.
The Company is managed by a team of three with an average of 15 years' experience with the firm and 20 years' experience in the industry. We are supported by JPMorgan Asset Management's extensive resources around the world. Our stock selection is based on fundamental analysis, which is informed by the in-depth, 'on-the-ground' knowledge and expertise of 29, Tokyo-based, investment professionals. The entire Japanese equity market is very under-researched and inefficiently valued by investors and hence our well-resourced local research team enjoys a significant advantage in identifying and exploiting these information and valuation anomalies. Our local knowledge provides us with a significant advantage in our efforts to identify investment opportunities.
The Japanese smaller companies market comprises diverse sectors with strong growth potential. Many of the constituent businesses service international customers, as well as the domestic market. Moreover, an increasing number of smaller firms have recently increased their focus on improving their return on equity and enhancing dividend yields. When investing in smaller companies, we believe it is important to take a long-term perspective, as excess returns take time to accumulate.
In our view, a consistent investment approach is also key. So, while the portfolio tends to struggle during 'value' rallies, we do not view this as a reason to alter our investment process or style. We remain focused on quality names with structural growth opportunities. The Company is not, however, a 'growth at any price' strategy and we continue our efforts to ensure that we pay a fair price for each investee company, based on our estimate of its five-year expected return.
To minimise exposure to unintended risks, we have constructed a well-balanced and diversified portfolio, that is invested in smaller companies in a wide range of sectors, including not only technology stocks providing software and hardware products, but also materials, chemicals, construction, machinery, retail and restaurant outlets and other consumer goods and services. We also use gearing to enhance the portfolio's returns, but deploy it conservatively to avoid excessive exposure to downside market risk.
Environmental, social and governance ('ESG') considerations are integral to our investment process and a key driver of our quest to generate financial returns, both through portfolio construction and effective ongoing engagement with companies held in the portfolio. The acquisition of RENOVA during the review period is one manifestation of our focus on ESG considerations, as this company is at the forefront of Japan's efforts to expand its renewable energy sources and reduce carbon emissions. Further information on the Company's ESG process and engagement is set out in the ESG Report on pages 14 to 17 of the Annual Report.
Trends and themes
While our decisions are based on company-specific factors, there are also structural, long-term trends and themes that underlie much of our stock selection. These include:
• Changing demographics: Japan's population is declining, and the elderly make up an increasingly large percentage of the country's total population. This is a significant economic challenge for the Japanese government, for many reasons, including the associated contraction in Japan's labour supply. However, the government is committed to addressing these issues through digitalisation and regulatory reforms. At the same time, this demographic shift is creating opportunities for innovative smaller firms working to improve the quality of life for older people, for example, by increasing their access to online banking and reducing the need for face-to-face medical appointments.
• Government efforts to digitalise the economy and raise labour productivity: Despite being an advanced industrial economy, in certain areas such as financial services and payments, Japan has been slow to digitalise and adopt new technologies. The persistent use of labour intensive, manual gas meter readings mentioned earlier is just one example of this reluctance to change. However, Japan's new Prime Minister, Yoshihide Suga, is driving regulatory reforms and other measures to step up the pace of innovation and raise labour productivity. Measures include the establishment of a digital agency to accelerate the digitalisation of national and local government, education, and healthcare services. Companies operating in all these sectors, either as suppliers or users of productivity-enhancing digital services, will benefit.
• Technological innovation: While many sectors of the Japanese economy lag other nations in terms of their technological sophistication, Japan's manufacturers are world class and the country is a leading global supplier of factory automation equipment, robots, electronics parts and materials. Demand for these products presents a myriad of investment opportunities for businesses specialising in niche markets for related products and services.
• De-carbonisation: Reducing carbon emissions is an essential part of the global fight to slow climate change. Japanese smaller companies have developed unique technologies related to electric vehicles, solar and wind power plants, and other sources of renewable and clean energy and we maintain our efforts to identify other businesses well-positioned to profit from the global push towards carbon neutrality.
• Enhanced corporate governance standards: Japanese companies are making concerted efforts to strengthen their governance standards, encouraged by a raft of government reforms. The number of independent external directors serving on company boards has increased, and corporate practices have improved - internal controls and disclosures have been enhanced and returns to shareholders have risen. However, there is still room for further improvement, and the market is likely to keep rewarding businesses that raise their governance standards. We maintain constructive dialogue with all the companies in our portfolio, to encourage them to maintain their efforts in this direction.
• Growing overseas demand: Many of Japan's Asian neighbours are experiencing very rapid and dynamic economic growth, driven by the rise of their middle classes. Japanese luxury goods producers and prestige brands are experiencing rising demand from new customers in China, India and other vibrant and increasingly prosperous Asian countries.
Outlook and strategy
COVID-19 and its aftermath have cast a shadow over Japan's economic outlook. Vaccination programmes are gathering momentum in Japan and around the world, and the global economy is beginning to recover from the devastating effects of the pandemic. However, successive waves of the virus and new variants are generating ongoing uncertainties and delaying the resumption of international travel to many regions. At present, the Japanese government has maintained that the Tokyo Olympics will proceed, but spectators from abroad will not be allowed to minimize the risk of infection. We believe that these decisions should have no impact on our portfolio which focuses on the longer-term growth opportunities. We also believe that the pandemic is likely to leave significant and lasting positive changes in its wake, including industry consolidations, supply chain diversification and productivity gains from flexible working practices and the more intensive use of information technologies.
Looking further ahead, Japan remains set on its long-term goals - to achieve sustainable, broadly-based growth, driven by digitalisation, the government's reforms to corporate governance and by free trade. Japan's efforts to boost trade with its regional neighbours in coming decades were greatly enhanced when it became a signatory to the Regional Comprehensive Economic Partnership (RECP), in November 2020. This is a free trade agreement between 15 Asia-Pacific member states, including China, Korea, Indonesia, Singapore and Australia. Member countries represent 30% of the world's population and 30% of global GDP, making it the world's largest trade bloc. The agreement will reduce trade tariffs by 90% over the next 20 years, lower costs and foster deeper co-operation on all aspects of trade across the region. Moreover, average valuations of Japanese companies remain reasonable, both lower than historical averages and below those of most other major markets. In sharp contrast to other developed economies, Japan's smaller and more entrepreneurial companies are at the forefront of innovation, ideally positioned to prosper over the long term.
Regardless of the economic backdrop, at any point in time, we believe it is always important to focus on good quality businesses with leading market positions, strong cashflow generation, robust balance sheets and the potential for structural growth. Our search for such companies is aided by the fact that Japanese businesses typically have significantly large cash positions, and stronger balance sheets than their peers in other developed countries. This strategy puts the Company in a favourable position to uncover exciting investment opportunities amongst smaller companies, and to capitalise on the long-term structural changes playing out in Japan, while weathering any short-term shifts in sentiment driven by the pandemic, trade policies or other economic roadblocks, that may lie ahead. We are therefore confident our investment approach will continue to deliver positive and sustained returns to our shareholders over the medium and long term.
Eiji Saito
Naohiro Ozawa
Michiko Sakai
Investment Managers 22nd June 2021
PRINCIPAL AND EMERGING RISKS
The Directors confirm that they have carried out a robust assessment of the principal and emerging risks facing the Company, including those that would threaten its business model, future performance, reputation, solvency or liquidity. The principal and emerging risks and how they are being managed or mitigated are summarised as follows:
• Operational and Cyber Crime
Disruption to, or failure of, the Manager's accounting, dealing or payments systems or the depositary's or custodian's records could prevent accurate reporting and monitoring of the Company's financial position. Details of how the Board monitors the services provided by the Manager and its associates and the key elements designed to provide effective internal control are included within the Risk Management and Internal Control section of the Corporate Governance report on pages 37 and 38 of the Annual Report.
The risk of fraud or other control failures or weaknesses within the Manager or other service providers could result in losses to the Company. The Audit Committee receives independently audited reports on the Manager's and other service providers' internal controls, as well as a report from the Manager's Compliance function. The Company's management agreement obliges the Manager to report on the detection of fraud relating to the Company's investments and the Company is afforded protection through its various contracts with suppliers, of which one of the key protections is the Depositary's indemnification for loss or misappropriation of the Company's assets held in custody.
The threat of cyber attack, in all its guises, is regarded as at least as important as more traditional physical threats to business continuity and security. The Company benefits directly or indirectly from all elements of JPMorgan's Cyber Security programme. The information technology controls around the physical security of JPMorgan's data centres, security of its networks and security of its trading applications are tested by independent reporting accountants and reported on every six months against the AAF Standard.
• Investment Underperformance and Strategy
An inappropriate investment strategy, for example asset allocation or the level of gearing, may lead to underperformance against the Company's benchmark index and peer companies, resulting in the Company's shares trading on a wider discount. The Board manages these risks by diversification of investments through its investment restrictions and guidelines which are monitored and regularly reported on by the Manager. The Manager provides the Directors with timely and accurate management information, including performance data and attribution analyses, revenue estimates, liquidity reports and shareholder analyses.
The Board monitors the implementation and results of the investment process with the Investment Managers, who attend all Board meetings, and reviews data which show statistical measures of the Company's risk profile. The Investment Managers employ the Company's gearing within a strategic range set by the Board. The Board holds a separate meeting devoted to strategy each year.
• Loss of Investment Team or Investment Manager
Loss of key staff by the Manager, such as the Investment Managers, could affect the performance of the Company. The Manager takes steps to reduce the likelihood of such an event by ensuring appropriate succession planning and the adoption of a team based approach.
• Share Price Relative to Net Asset Value ('NAV') per Share
If the share price of an investment trust is lower than the NAV per share, the shares are said to be trading at a discount. Throughout most of the year ended 31st March 2021, the Company's shares traded at a discount apart from the first week of 2021 when the shares traded at a premium. The Board monitors the Company's discount level and, although the rating largely depends upon the relative attractiveness of the portfolio, the Board may seek to address imbalances in the supply and demand of the Company's shares through a programme of share issuance and buybacks.
• Political and Regulatory
Changes in financial or tax legislation, including in Japan and the UK may adversely affect the Company either directly or because of restrictions or enforced changes on the operations of the Manager. JPMF makes recommendations to the Board on accounting, dividend and tax policies and the Board seeks external advice where appropriate.
In addition, the Company is subject to political risks, such as the imposition of restrictions on the free movement of capital. The Company is therefore at risk from changes to the regulatory, legislative and taxation framework within which it operates, whether such changes were designed to affect it or not. The Board will continue to keep under review the impact of the UK's decision to leave the European Union. The negotiations between the UK and European Union may introduce further currency volatility which may impact portfolio returns.
• Financial
The financial risks faced by the Company include market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk, credit risk and the failure of any counterparty. Further details are disclosed in note 22 on pages 72 to 77 of the Annual Report.
• Pandemic Risk
COVID-19 has developed rapidly to become a pandemic which has delivered a major shock to the global economy and become a principal risk. The Company is exposed to the risk of market volatility and falling equity markets brought about by the pandemic. The resilience of the operational services provided to the Company could be reduced as a result of the effects of the pandemic, representing a risk to the Company. The Board regularly reviews the mitigation measures which JPMorgan Asset Management and other key service providers have in place to maintain operational resilience and is satisfied that these are appropriate even in the current conditions. Relevant business continuity plans have been invoked at those service providers and the Board has been given updates. Working from home arrangements have been implemented where appropriate and government guidance is being followed. The Board to date has not experienced nor does it anticipate a fall in the level of service or any disruption to the Company's operations.
The pandemic triggered sharp falls in global stock markets and created uncertainty around future returns. Whilst the Board notes the initial fall in the Company's NAV per share and share price at the start of the financial year, it also notes that the Manager's investment process is unaffected by the COVID-19 pandemic and that it continues to focus on long-term company fundamentals and detailed analysis of current and future investments. At the time of writing the pandemic continues to have severe impacts around the world and therefore the Board continues to closely monitor these impacts and their risks to the company.
TRANSACTIONS WITH THE MANAGER AND RELATED PARTIES
Details of the management contract are set out in the Directors' Report on page 32 of the Annual Report. The management fee payable to the Manager for the year was £2,478,000 (2020: £2,257,000) of which £nil (2020: £nil) was outstanding at the year end.
During the year £nil (2020: £6,000) was paid to the Manager for the marketing and administration of savings scheme products, of which £nil (2020: £nil) was outstanding at the year end.
Included in administration expenses in note 6 on page 65 of the Annual Report are safe custody fees payable to JPMorgan Chase group subsidiaries amounting to £35,000 (2020: £31,000) of which £13,000 (2020: £8,000) was outstanding at the year end.
The Manager may carry out some of its dealing transactions through group subsidiaries. These transactions are carried out at arm's length. The commission payable to JPMorgan Securities Limited for the year was £nil (2020: £1,000) of which £nil (2020: nil) was outstanding at the year end.
Handling charges on dealing transactions amounting to £4,000 (2020: £4,000) were payable to JPMorgan Chase Bank N.A. during the year of which £nil (2020: £nil) was outstanding at the year end.
At the year end, total cash of £627,000 (2020: £12,743,000) was held with JPMorgan Chase. A net amount of interest of £nil (2019: £nil) was receivable by the Company during the year from JPMorgan Chase of which £nil (2020: £nil) was outstanding at the year end.
Full details of Directors' remuneration and shareholdings can be found on pages 43 and 44 of the Annual Report and in note 6 on page 65 of the Annual Report.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
T he Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulation.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' and applicable law). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing the financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• state whether applicable United Kingdom Accounting Standards, comprising FRS 102, have been followed, subject to any material departures disclosed and explained in the financial statements;
• make judgements and accounting estimates that are reasonable and prudent; 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.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006.
The Directors are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Under applicable law and regulations the Directors are also responsible for preparing a Strategic Report, a Directors' Report and a Directors' Remuneration Report that comply with the law and those regulations.
Each of the Directors, whose names and functions are listed in Directors' Report confirm that, to the best of their knowledge:
• the Company's financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland', and applicable law), give a true and fair view of the assets, liabilities, financial position and profit of the Company; and
• the Directors' Strategic Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.
The Directors consider that the Annual Report and Financial Statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.
For and on behalf of the Board
Alexa Henderson
Chairman
22nd June 2021
STATEMENT OF COMPREHENSIVE INCOME & STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31ST MARCH 2021
|
|
2021 |
2020 |
||||
|
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
Gains/(losses) on investments held at |
|
|
|
|
|
|
|
fair value through profit or loss |
- |
88,639 |
88,639 |
- |
(4,853) |
(4,853) |
|
Net foreign currency gains/(losses) |
- |
3,334 |
3,334 |
- |
(1,865) |
(1,865) |
|
Income from investments |
3,526 |
- |
3,526 |
3,836 |
- |
3,836 |
|
Gross return/(loss) |
3,526 |
91,973 |
95,499 |
3,836 |
(6,718) |
(2,882) |
|
Management fee |
(2,478) |
- |
(2,478) |
(2,257) |
- |
(2,257) |
|
Other administrative expenses |
(465) |
- |
(465) |
(525) |
- |
(525) |
|
Net return/(loss) before finance costs |
|
|
|
|
|
|
|
and taxation |
583 |
91,973 |
92,556 |
1,054 |
(6,718) |
(5,664) |
|
Finance costs |
(264) |
- |
(264) |
(246) |
- |
(246) |
|
Net return/(loss) before taxation |
319 |
91,973 |
92,292 |
808 |
(6,718) |
(5,910) |
|
Taxation |
(350) |
- |
(350) |
(393) |
- |
(393) |
|
Net (loss)/return after taxation |
(31) |
91,973 |
91,942 |
415 |
(6,718) |
(6,303) |
|
(Loss)/return per share (basic and diluted) |
(0.06)p |
168.73p |
168.67p |
0.76p |
(12.32)p |
(11.56)p |
STATEMENT OF CHANGES IN EQUITY
|
|
Called up |
|
Capital |
|
|
|
|
|
|
share |
Share |
redemption |
Other |
Capital |
Revenue |
|
|
|
capital |
premium |
reserve |
reserve |
Reserves1,2 |
reserve2 |
Total |
|
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
At 31st March 2019 |
5,595 |
33,978 |
1,836 |
303,766 |
(98,486) |
(11,579) |
235,110 |
|
Net (loss)/return |
- |
- |
- |
- |
(6,718) |
415 |
(6,303) |
|
Dividends paid in the year (note 3) |
- |
- |
- |
(9,811) |
- |
- |
(9,811) |
|
At 31st March 2019 |
5,595 |
33,978 |
1,836 |
303,766 |
(98,486) |
(11,579) |
235,110 |
|
At 31st March 2020 |
5,595 |
33,978 |
1,836 |
293,955 |
(105,204) |
(11,164) |
218,996 |
|
Net return/(loss) |
- |
- |
- |
- |
91,973 |
(31) |
91,942 |
|
Dividends paid in the year (note 3) |
- |
- |
- |
(11,120) |
- |
- |
(11,120) |
|
At 31st March 2021 |
5,595 |
33,978 |
1,836 |
282,835 |
(13,231) |
(11,195) |
299,818 |
1 The share premium was cancelled in the period ended 31st March 2001 and redesignated as 'other reserve'.
2 These reserves form the distributable reserves of the Company and may be used to fund distributions to investors via dividend payments.
STATEMENT OF FINANCIAL POSITION
AT 31ST MARCH 2021
|
|
2021 |
2020 |
|
|
£'000 |
£'000 |
|
Fixed assets |
|
|
|
Investments held at fair value through profit or loss |
324,002 |
235,388 |
|
Current assets |
|
|
|
Debtors |
1,568 |
2,028 |
|
Cash and cash equivalents |
627 |
12,743 |
|
|
2,195 |
14,771 |
|
Creditors: amounts falling due within one year |
(142) |
(1,281) |
|
Net current assets/(liabilities) |
2,053 |
13,490 |
|
Total assets less current liabilities |
326,055 |
248,878 |
|
Creditors: amounts falling due after more than one year |
(26,237) |
(29,882) |
|
Net assets |
299,818 |
218,996 |
|
Capital and reserves |
|
|
|
Called up share capital |
5,595 |
5,595 |
|
Share premium |
33,978 |
33,978 |
|
Capital redemption reserve |
1,836 |
1,836 |
|
Other reserve |
282,835 |
293,955 |
|
Capital reserves |
(13,231) |
(105,204) |
|
Revenue reserve |
(11,195) |
(11,164) |
|
Total shareholders' funds |
299,818 |
218,996 |
|
Net asset value per share |
550.0p |
401.8p |
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31ST MARCH 2021
|
|
2021 |
2020 |
|
|
£'000 |
£'000 |
|
Net cash outflow from operations before dividends and interest |
(3,262) |
(2,769) |
|
Dividends received |
3,429 |
3,402 |
|
Interest paid |
(260) |
(241) |
|
Net cash (outflow)/inflow from operating activities |
(93) |
392 |
|
Purchases of investments |
(76,939) |
(33,202) |
|
Sales of investments |
76,012 |
44,742 |
|
Settlement of foreign currency contracts |
32 |
(54) |
|
Net cash (outflow)/inflow from investing activities |
(895) |
11,486 |
|
Dividends paid |
(11,120) |
(9,811) |
|
Net cash outflow from financing activities |
(11,120) |
(9,811) |
|
(Decrease)/increase in cash and cash equivalents |
(12,108) |
2,067 |
|
Cash and cash equivalents at start of year |
12,743 |
10,343 |
|
Exchange movements |
(8) |
333 |
|
Cash and cash equivalents at end of year |
627 |
12,743 |
|
(Decrease)/increase in cash and cash equivalents |
(12,108) |
2,067 |
|
Cash and cash equivalents consist of: |
|
|
|
Cash and short term deposits |
627 |
12,743 |
|
Total |
627 |
12,743 |
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31ST MARCH 2021
1. Accounting policies
Basis of accounting
The financial statements are prepared in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice ('UK GAAP'), including FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' (the 'SORP') issued by the Association of Investment Companies in October 2019.
All of the Company's operations are of a continuing nature.
The financial statements have been prepared on a going concern basis. The disclosures on going concern on page 40 of the Annual Report form part of these financial statements.
The policies applied in these financial statements are consistent with those applied in the preceding year.
2. Return/(loss) per share
|
|
2021 |
2020 |
|
|
£'000 |
£'000 |
|
Return per share is based on the following: |
|
|
|
Revenue (loss)/return |
(31) |
415 |
|
Capital return/(loss) |
91,973 |
(6,718) |
|
Total return/(loss) |
91,942 |
(6,303) |
|
Weighted average number of shares in issue during the year (excluding Treasury shares) |
54,510,339 |
54,510,339 |
|
Revenue (loss)/return per share (basic and diluted) |
(0.06)p |
0.76p |
|
Capital return/(loss) per share (basic and diluted) |
168.73p |
(12.32)p |
|
Total return/(loss) per share (basic and diluted) |
168.67p |
(11.56)p |
3. Dividends
Dividends paid and declared
|
|
2021 |
2020 |
|
|
£'000 |
£'000 |
|
Dividends paid |
|
|
|
2020 fourth quarterly dividend of 4.0p (2019: 4.3p) paid to shareholders in May |
2,180 |
2,344 |
|
2021 first quarterly dividend of 5.0p (2020: 4.4p) paid to shareholders in August |
2,726 |
2,398 |
|
2021 second quarterly dividend of 5.5p (2020: 4.6p) paid to shareholders in November |
2,998 |
2,507 |
|
2021 third quarterly dividend of 5.9p (2020: 4.7p) paid to shareholders in February |
3,216 |
2,562 |
|
Total dividends paid in the year |
11,120 |
9,811 |
|
|
2021 |
2020 |
|
|
£'000 |
£'000 |
|
Dividend declared |
|
|
|
2021 fourth quarterly dividend of 5.5p (2020: 4.0p) paid to shareholders in May |
2,998 |
2,180 |
All dividends paid and declared in the year have been funded from the other reserve.
The fourth quarterly dividend has been declared in respect of the year ended 31st March 2021. In accordance with the accounting policy of the Company, this dividend will be reflected in the financial statements for the year ending 31st March 2022.
4. Net asset value per share
|
|
2021 |
2020 |
|
Net assets (£'000) |
299,818 |
218,996 |
|
Number of shares in issue, excluding shares held in Treasury |
54,510,339 |
54,510,339 |
|
Net asset value per share |
550.0p |
401.8p |
5. Status of results announcement
2021 Financial Information
The figures and financial information for 2021 are extracted from the published Annual Report and Accounts for the year ended 31st March 2021 and do not constitute the statutory accounts for that year. The Annual Report and Accounts has been delivered to the Registrar of Companies and included the Report of the Independent Auditors which was unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006.
2020 Financial Information
The figures and financial information for 2020 are extracted from the Annual Report and Accounts for the year ended 31st March 2020 and do not constitute the statutory accounts for the year. The Annual Report and Accounts include the Report of the Independent Auditors which is unqualified and does not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. The Annual Report and Accounts will be delivered to the Register of Companies in due course.
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
22nd June 2021
For further information, please contact:
Divya Amin
For and on behalf of
JPMorgan Funds Limited
020 7742 4000
ENDS
A copy of the Annual 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 annual report will shortly be available on the Company's website at www.jpmjapansmallcapgrowthandincome.co.uk where up-to-date information on the Company, including daily NAV and share prices, factsheets and portfolio information can also be found.
JPMORGAN FUNDS LIMITED
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