Final Results to 31st Mach 2020
LONDON STOCK EXCHANGE ANNOUNCEMENT
JPMORGAN JAPAN SMALLER COMPANIES TRUST PLC
FINAL RESULTS FOR THE YEAR ENDED 31st MARCH 2020
Legal Entity Identifier: 549300KP3CRHPQ4RF811
Information disclosed in accordance with DTR 4.2.2
CHAIRMAN'S STATEMENT
Dear Shareholders,
I am pleased to be writing my first report to you as Chairman, following the retirement of Robert White after our Annual General Meeting ('AGM') held in July last year.
Investment Performance
The Company's financial year was an uncertain time in which investment markets grappled with political and geopolitical factors and the global economy shifted firmly into reverse. The trade tariff disputes between the United States and China continued to unsettle investors but it was the outbreak of the coronavirus (COVID-19) that has dominated concerns since the news broke in early January of this year. The emergency measures put in place to contain this global health crisis and tackle its unparalleled economic impact have profound consequences for many countries, including Japan. It represents both a very significant public welfare concern and an unprecedented economic risk.
The impact of COVID-19 ripped through global economies and stock markets, with significant re-pricing of assets occurring during some wild trading days in late February and March. Shares in Japanese companies did not escape this turbulence and fell sharply during this volatile period, prompting the Bank of Japan to step in with a range of measures to stabilise markets.
For the year ended 31st March 2020, the Company delivered a negative return for investors: the total return on net assets was -3.1%, but nonetheless outperforming the S&P Japan SmallCap NR (benchmark) return of -6.7%. The total return to ordinary shareholders was -1.6%, reflecting a narrowing of the share price discount to net asset value (NAV) from 12.8% at the beginning of the financial year to 11.9% at 31st March 2020.
Whilst any decline in net assets is disappointing, it is of some consolation that the Company outperformed its benchmark and a broad range of its competitor funds over the period. And over longer time periods, performance continues to be strong, with both the NAV and share price having outperformed the benchmark over three, five and ten years.
This year's performance is explored in depth in the Investment Managers' Report, where the team explain the market backdrop for the year and discuss stock and sector stories that have most impacted the Company's performance. The Managers also consider the potential future impact of COVID-19 as part of their broader market outlook.
Dividend Policy and Discount Management
The Company introduced a new dividend policy in April 2018 and aims to pay dividends approximating 4% of the average NAV of the Company over each preceding financial year. These dividends are paid quarterly, from a combination of the revenue and capital reserves. In respect of the year to 31st March 2020, quarterly dividends totaling 17.7p per share were declared.
One of the objectives of the revised dividend policy was to enhance the Company's appeal to a broader audience of investors. Since its introduction, it has therefore been pleasing to note some narrowing of the Company's discount to NAV, driven by new demand and positive press commentary - although the recent weakness in global stock markets has widened discounts in many investment trusts, at least for now.
The Board will keep the dividend policy, as well as its impact on demand for the Company's shares and the discount level to NAV, under constant review. In monitoring the discount level, the Board may also use share buy-backs, when appropriate, to tighten 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.
Change of Annual Management Fees
Your Board is focused on the costs of running the Company's specialist mandate. Following a review of the investment management fee arrangements with the Manager, JPMorgan, the Board was pleased to announce, in February 2020, a revision in the annual management fee structure. With effect from 1st April 2020, the investment management fee remains at the rate of 1% per annum on the NAV of the Company's portfolio up to £150 million but a reduced rate of 0.75% (previously 0.80%) per annum applies to any amount in excess thereof. In addition, the £200,000 per annum company secretarial fee, which was previously included separately in the management fee, is removed from the same date.
These changes will enhance shareholder returns and should stimulate new demand for the Company's shares, to the benefit of all investors. Based on the Company's average net assets over the course of 2019, the revisions to the fee structure would amount to an estimated reduction of 9.2% in its Ongoing Charges Figure.
Gearing
The Company seeks to enhance investment returns for shareholders by borrowing money to buy more assets ('gearing'). The Company's gearing is regularly discussed by the Board and the Investment Managers and the gearing level is reviewed by the Directors at each Board meeting.
During the year, the Company renewed its revolving credit facility of Yen 4.0 billion (introducing an option of further increasing the facility to Yen 6.0 billion) with Scotiabank, and extending its maturity date to October 2022. The loan renewal was secured on favourable and flexible terms, allowing the Company to repay the loan as and when required without any penalties.
The credit facility provides the Investment 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, under normal market conditions, to operate in the range of 5% net cash to 15% geared. During the year, the Company's gearing level ranged between 6% and 12%, finishing the financial year at 7.5%.
The Board
As part of the Board's succession planning and as reported in the last Annual Report, Martin Shenfield and Tom Walker joined the Board immediately after the AGM in July last year. I assumed the role of Chairman of the Board and of the Nomination Committee upon the retirement of Robert White. Tom has replaced me as the Chairman of the Audit Committee.
Both Martin and Tom bring a diversity of experience and skills to the Board. Martin is a specialist in Asia Pacific macroeconomics with over 35 years' experience in the asset management industry. Tom is a chartered accountant, with extensive fund management experience covering Asia and other regions. The refreshed Board provides a comprehensive balance of experience and relevant skills and no further changes to its composition or size are anticipated in the next twelve months.
Outlook
These are challenging times and our thoughts and sympathies are with all those whose health, welfare and family situations have been impacted by COVID-19. At the time of writing, the main issues are how long the pandemic persists, how widely its impact spreads further globally and what would be its enduring impact. When our thoughts turn specifically to the economic and investment outlook, however, it is clear that short-term material impacts are inevitable. Despite improving trends in COVID-19 data and the encouraging recovery in many regional markets since the low point in late March, the calamity will drastically affect the global economy, corporate profitability and investor sentiment throughout 2020 and into 2021. For further insights, please refer to the detailed report on page 9 of the Annual Report.
Against this unprecedented backdrop, it is important to emphasise that your Manager and the Board share the view that the current problems will ease with time and that the Company's investments should not suffer a material, lasting impact. Whilst there may be short term periods when the Managers' approach does not outperform the benchmark, the Board is reassured by the team's track record and focus on identifying resilient businesses with leading market positions, strong balance sheets and strong cash generation. They do not buy companies where the short-term valuation looks low unless this is also accompanied by a strong long-term growth outlook.
We believe the Managers' approach should provide portfolio stability during this and any future times of uncertainty and put the Company in a position to deliver positive and sustained returns 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 2020 at 12.00 noon. Please note that as a result of the COVID-19 pandemic and the imposition of compulsory Stay at Home measures by the UK Government, the AGM will be functional only and follow the minimum legal requirements for an AGM. There will be no investor presentation in person by the investment team and there will be no refreshments. In line with the Stay at Home measures, Shareholders are strongly discouraged from attending the meeting and indeed entry may be refused if Government guidance so requires. Arrangements will be made by the Company to ensure that the minimum number of Shareholders required to form a quorum will attend the meeting in order that the meeting may proceed and the business concluded.
In light of the changed format, the Board strongly encourages all shareholders to exercise their votes in respect of the meeting in advance, by completing and returning their proxy forms. This will ensure that the votes are registered in the event that attendance at the AGM is not possible.
In addition, shareholders are encouraged to raise any questions in advance of the AGM via the 'Ask the Question' link found under the 'Contact Us' section on the Company's website (www.jpmjapansmallercompanies.co.uk). Any questions received will be replied to via the Company Secretary.
In the event that the situation changes the Company will update shareholders through an announcement to the London Stock Exchange and on the Company's website.
Alexa Henderson
Chairman 26th June 2020
INVESTMENT MANAGERS' REPORT
Setting the scene: market review
The year to 31st March 2020 was a testing period for Japanese equities, and smaller companies were no exception. Various macro headwinds challenged markets and depressed investor sentiment, not only in Japan but globally.
When we last updated investors, at the halfway stage of the Company's financial year, we commented that the Japanese stock market had endured a volatile six months, with investors unsettled by the increasingly sluggish global economy (as evidenced by downturns in both manufacturing output and corporate earnings). Concerns were exacerbated by the ongoing, and seemingly endless, trade wrangles between China and the United States.
The second half of the year provided some reasons for cautious optimism, as progress began to be made on the trade dispute front and central bank policy makers cut interest rates, in concerted attempts to stimulate economic growth. However, since the end of January, the spread of the coronavirus (COVID-19) has had a massive impact on all our lives and, consequently, on global economies and markets. This pandemic is not only a global public health crisis but has also ripped through the global economy, precipitating a collapse in business and consumer confidence.
Both Japanese and global equity markets fell sharply towards the end of the financial year, as lockdowns were imposed in Greater Tokyo and around the world, in response to the acceleration of COVID-19 cases. Simultaneously, the Japanese yen strengthened against the US dollar and the pound sterling. The crisis compelled the Bank of Japan to introduce a raft of emergency monetary stimulus measures, designed to ease business financing and support cash-strapped companies through the economic fall-out. The period ended with the manufacturing sector contracting significantly, as orders disappeared.
Performance
Against this extreme backdrop, shares in Japanese smaller companies fell by 15.3% over the last three months of the financial year to 31st March 2020. Since the year-end, they have recovered, rising 14.5% to 31st May 2020.
The Company outperformed its benchmark (the S&P Japan SmallCap NR) by a significant 3.6% margin but ended the period in negative territory. The Company's return on net assets over the period was -3.1% whilst the benchmark return was -6.7%. Since the year-end, the Company's net asset value has recovered, rising 25.0% to 31st May 2020.
The Company's performance is well ahead of its benchmark over 1, 3, 5 and 10 years.
PERFORMANCE ATTRIBUTION
YEAR ENDED 31ST MARCH 2020
|
|
% |
% |
|
Contributions to total returns |
|
|
|
Benchmark return |
|
-6.7 |
|
Sector allocation |
0.9 |
|
|
Stock selection |
5.2 |
|
|
Gearing/cash |
-1.4 |
|
|
Return relative to benchmark |
|
4.7 |
|
Portfolio return |
|
-2.0 |
|
Management fee/other expenses |
|
-1.1 |
|
Return on net assetsA |
|
-3.1 |
|
Return to shareholdersA |
|
-1.6 |
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 77 and 78 of the Annual Report.
Spotlight on stocks and sectors
Over the review period, both stock selection and sector allocation contributed towards the Company's relative performance, whilst the level of gearing had a negative impact. In this section we reflect on how various stock and sectoral decisions affected performance over the year.
Winners
Stocks that contributed most positively to performance included Miura, Taiyo Yuden, and Tri Chemical Laboratories. All three companies performed well on the back of their strong earnings growth, as well as specific factors highlighted below:
• Miura is Japan's leading boiler manufacturer, with environmentally friendly credentials and global expansion plans. Sustainability, and the need to reduce carbon dioxide emissions is a big topic across the global economy and Miura's 'on-demand steam solution' boilers are more environmentally friendly than traditional coal-fired boilers. Miura is one of our largest holdings and we believe it is well positioned to achieve long-term growth by selling its boiler technologies across China (where the boiler market is six times larger than Japan's and dominated by coal-fired products) and other emerging countries.
• Taiyo Yuden is the Company's largest holding and develops, manufactures, and sells multi-layer ceramic capacitors (MLCC) for the automotive industry. This is an industry that is in the midst of significant technological innovation related to electric vehicles, autonomous driving, and connected cars (vehicles that use mobile internet technology); all of which should create huge potential markets for niche Japanese manufacturers like Taiyo Yuden that provide high quality MLCC.
• Tri Chemical Laboratories (TCL) is a global market leader in the supply of high-purity, specialist chemicals for semiconductor manufacturing. It is renowned for its cutting-edge research and development. TCL's specialist analytic, research and design capabilities place it in a unique position to benefit from the fast pace of technological developments in the semiconductor industry.
Losers
Tosho, Benefit One , and Mercari were among stocks that contributed negatively to relative performance over the year, although we still hold all three. Tosho, one of Japan's leading sports gym operators in terms of operating margin and return on assets, declined as it was forced to close its gym network following the COVID-19 state of emergency declaration. Service company Benefit One, which manages fringe benefit programmes on behalf of employers was also negatively impacted, and e-commerce provider Mercari has underperformed for some time due to concerns over increasing losses on its US and payment businesses. We believe that each of these businesses possesses competitive advantages that will bolster its structural growth once the economy recovers from the current coronavirus shock.
Positioning the portfolio for future success
We look to identify good quality businesses with robust governance structures whose qualities may be overlooked/underpriced in the stock market. Over the review period, we maintained our focus on stocks that are supported by strong management teams and healthy cash flow. We avoided stocks that lack clear product differentiation and operate in industries plagued by excess supply. In our view, many stocks in the Financial Services and Real Estate sectors fall into this category.
The portfolio's largest overweight positions over the period were in the Information and Communication sector. We maintained our higher weighting, favouring those companies with high earnings growth potential. Three of our most significant new purchases are summarised below:
• Sansan is a software company that provides a cloud-based, multi-platform contact management tool for corporate customers in Japan and beyond. Its product offering is centred around digitised business cards, which can be simply scanned to build a database designed to enhance staff productivity in sales, marketing and client service activities.
• MEC is a technology-driven, market-leading business that develops, manufactures, and sells chemicals used in the production of printed circuit boards. In turn, these are vital components that drive a wide variety of electronic products, such as laptop and desktop computers, smartphones, cars and televisions. MEC's operations are expanding worldwide: it has established manufacturing bases in China, Taiwan, Thailand and Belgium, as well as distribution bases in the US and South Korea.
• Capcom develops and publishes video game software including bestsellers such as Street Fighter, Monster Hunter, and Resident Evil (Biohazard). We have had a constructive view on the game software industry for some time and, as well as buying Capcom, we added to our existing holding in Square Enix. The key point for us is that the game software business has become more robust, especially for those providers with strong intellectual property protection. This is because of the rising penetration of digital downloads which has increased from 6% of sales in 2012 to around 77% now. Digital downloads have higher per-unit profitability thanks to easier distribution and lower associated costs; those market leaders with many popular video game titles will likely benefit.
Amongst our most significant stock exits, we sold online elderly care provider SMS, IT business OtsukaCorporation, and Chiba Bank. In the cases of SMS and Otsuka Corporation, we considered that their potential future earnings growth prospects had already been priced into valuations. We sold Chiba Bank as we acknowledged that future improvements in corporate governance and shareholder returns would be slower in the prevailing low-interest rate environment.
Over the period, the Company's annualised turnover was 9.5%, with the overall shape of the portfolio changing little, whilst the gearing level was within the expected range of 6-12%.
About our investment philosophy and themes
The Company celebrated its 20th anniversary recently and our commitment to providing access to the innovative and fast-growing smaller companies universe at the core of the Japanese economy is undimmed. Our portfolio has a bias towards quality and growth and we aim to invest in companies (other than Japan's largest 200, measured by market capitalisation) which we believe can compound earnings growth over the long term, supported by sustainable competitive advantages and good management teams. We believe such companies' strong and durable market positioning will allow them to substantially increase their intrinsic value in the future. This also means that the portfolio tends to enjoy a high active share and differs significantly from the benchmark which provides a further source for additional return and hence the Company's outperformance.
Local knowledge
Our stock selection is based on fundamental analysis, local 'on-the-ground' knowledge and extensive company management contact. The Company is managed by a team of three led by Eiji Saito and supported by an overall Tokyo-based group of 29 investment professionals offering expertise and in-depth knowledge of local markets in what is a very under-researched and under-appreciated market. This local knowledge provides us with a significant strength in identifying investment opportunities, with a focus on businesses that reinvest to provide higher growth potential.
Smaller companies in Japan comprise a diverse sector with strong growth potential, serving both local and global market needs. Moreover an increasing number of constituent stocks within the sector have latterly adopted a greater focus on improving return on equity and also enhancing dividend yields.
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 ageing and declining. This trend is providing opportunities for innovative smaller companies that are working to improve quality of life for seniors. Also, businesses which focus on labour productivity improvement in workplace are benefitting from the tight labour market.
• Technological innovation: many companies are embracing the productivity opportunities that technology offers. Despite Japan being an advanced industrial economy, certain areas such as financial services and payments lag other markets in terms of technological sophistication. Japanese manufacturing however is world class and the country is a leading supplier of factory automation equipment, robots, and electronics parts and materials. There are therefore attractive investment opportunities for companies that specialise in niche product/technology segments that drive global technology innovation.
• Improving corporate governance standards across Japanese companies: this has resulted in increasing numbers of independent, external directors serving on company boards, as well as improving governance policies overall, including shareholders returns, internal controls and disclosure. The market is likely to reward companies that improve their governance standards and we maintain a constructive dialogue with companies on this broad theme.
• Overseas growth: businesses operating beyond Japan's shores are in a very strong position to capture the benefits of the dynamic economic growth across Asia which is creating demand from new customers for high quality Japanese goods, services and brands.
• Government policy reforms that improve labour productivity: the record numbers of Japanese women in employment are testament to this. The stable political environment has also led to the adoption of policies to reform labour laws and corporate governance and to encourage inbound tourism.
Investing responsibly
An increasingly broad spectrum of investors now rightly focus not simply on return, risk and investment process issues but also on Environmental, Social and Governance ('ESG') considerations for their portfolios. They want to know that: their investment managers are aware of these concerns; they take them into account in building their portfolios; and they raise matters directly with investee companies. Simplistic negative or positive screening has dwindled in popularity. Investors expect to see an integrated approach to ESG and that this approach is clearly linked to driving financial returns, both through portfolio construction and stewardship.
JPMorgan has long been a leader in using such an Integrated Approach and believes that this has particular relevance in Japan, where widespread shareholder engagement is a more recent phenomenon but where, equally, it is beginning to prove effective.
We believe that ESG factors, particularly those related to governance, can play a critical role in a long-term investment strategy. Companies that address ESG issues and adopt sustainable business practices are better placed to maximise their performance and create enduring value for shareholders.
In our view, corporate governance considerations have the most direct bearing on the risk/reward profile of the Company's portfolio; as such it is the area most integrated into our investment process. However, environmental concerns are an ever-increasing part of the investment landscape in part due to the impact they can have on investment returns and cash flows; where relevant we make an assessment of environmental issues and include them in our decision-making process. Where social issues are relevant, again the focus is on the economic impact of the involvement.
We seek to identify investee companies that run their businesses in a sustainable and efficient way, with high-quality board decision-making, and aim to influence their behaviour and encourage best practice through dialogue. While we are always focused on efficient capital use and structures we have engaged broadly on multiple topics that affect valuation and propriety. The introduction of the Stewardship and Corporate Governance Codes has led to greater willingness on the part of a number of companies to engage.
We use an active bottom-up process, with emphasis placed on direct contact with companies. ESG factors are systematically and explicitly considered during the investment decision-making process, with a risk profile analysis undertaken on the economics, duration (which includes sustainability) and governance of a company, to ensure that there is due focus on potential risks.
Our commitment to sustainable investing extends beyond the initial investment, as we incorporate ESG issues into our ownership policies and practices. The following are examples of topics discussed during recent engagements:
Environmental - climate change
We are engaging with companies to request they enhance public disclosures on their climate change analysis and policies, such as a greenhouse gas reduction target, rather than just providing data on current energy and water usage. In future we expect to see enhanced disclosures such as scenario analysis following the TCFD (Task Force on Climate related Financial Disclosures) recommendations. Without such information, it is difficult to have an informed and constructive exchange on climate change with invested companies. We will continue to encourage investee companies to enhance their public disclosures.
Social - employee working practices
During an exchange with a retailer in the spring, the company acknowledged it was continuously examining how it could improve working practices for its employees. In recent years, extreme weather events had led to a re-examination of its business contingency plans, and now the COVID-19 outbreak meant there were further challenges facing the company. In addition to strengthening health and safety measures in its retail outlets, the company had examined ways in which activities might be conducted from home and noted they were finding more opportunities than initially expected. The company is looking to reflect this not only in measures employed during the coronavirus pandemic, but also in its future working practices for employees.
Governance - board structure
We engaged with a specialist building products company where we have previously cast votes against top management due to a lack of sufficient outsiders on the board, as we believe that having external and independent directors on the board is essential. The company acknowledged that this was an issue they were examining closely, and were considering bringing on new external members. In addition, the company agreed with our observations that it would be beneficial if the board could become more diverse, in terms of gender or nationality, or by introducing members with additional skillsets and experience. (Subsequently, we voted in favour of all directors at the June 2020 annual general meeting, as the company introduced a new female external board member, thus improving its overall board structure).
Proxy voting
In addition to engaging in meaningful interaction with investee companies through dedicated meetings, we vote in a prudent and diligent manner, and in the best financial interests of our clients. We voted at 86 annual general meetings of investee companies during the 12 month period to March 2020. During this period, we voted against 24.9% of management proposals. The highest percentage of our votes against management were cast on income allocation proposals, followed by director and statutory auditor elections (primarily due to independence concerns of the individual candidates or the lack of sufficient outsiders on the board overall) and the payment of retirement bonuses to external directors.
Outlook
COVID-19 and its aftermath have cast a huge shadow over Japan's economic outlook. The situation remains fluid, but its risks dominate our thinking at the present time. The pandemic has already delivered a massive shock to global equity markets, with Japan and most other global economies stunned into recession. No one knows how long it will last but we do know that the investment landscape has altered materially.
Pre-COVID-19 economic forecasts no longer have relevance. Japan's businesses are sensitive to economic cycles so a failure to achieve a positive outcome from here would undoubtedly pose a headwind. Both global and domestically focused companies could face big earnings declines and production and consumption are likely to be hit, with corporate earnings coming under pressure. Indeed, analysts have already been aggressively cutting earnings forecasts.
Whilst we acknowledge that investors will need to maintain a patient attitude during this unprecedented period, we believe that the problems will ease with time. We may see industry consolidation and productivity growth through trends such as diversifying production sources, adopting flexible working practices and better use of information technologies. As always, we believe it is important to focus on quality companies with structural growth potential.
It is important to highlight that valuations of Japanese companies remain reasonable, both lower than historical averages and below those of most other major markets. Japanese companies typically have significant cash on hand, and now have the strongest balance sheets among developed countries. The country remains focused on its long-term goals of achieving sustainable and broadly-based growth, driven by digitalisation, free trade and the Japanese government's major corporate governance and stewardship reforms.
In our view, the fundamental long-term outlook for Japanese smaller companies remains positive and we see no shortage of exciting investment opportunities. Not least as in Japan, in sharp contrast to other developed economies, it is the smaller more entrepreneurial companies which are at the forefront of the trend to digitalisation and broader IT innovation. The Company maintains its focus on investing in businesses with leading market positions, strong cash generation and solid balance sheets, across a diverse range of industries. We believe that by focusing on businesses with these attributes, the Company is well positioned to benefit from secular trends in Japan as well as weathering potential short-term changes in sentiment driven by the coronavirus pandemic, trade policies, or other economic roadblocks that could lie ahead. We remain confident that our approach will deliver positive and sustained returns over the long term.
Eiji Saito
Naohiro Ozawa
Michiko Sakai
Investment Managers 26th June 2020
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 page 32 of the Annual Report.
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 the year ended 31st March 2020, the Company's shares traded at a discount. 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 are likely to 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 64 to 69 of the Annual Report.
• Climate Change
Climate change, which barely registered with investors a decade ago, has today become one of the most critical issues confronting asset managers and their investors. Investors can no longer ignore the impact that the world's changing climate will have on their portfolios, with the impact of climate change on returns now inevitable.
The Board is overseeing the Manager to ensure the formal integration of ESG factors into its investment process over the course of the coming year. Financial returns for long-term diversified investors should not be jeopardised given the investment opportunities created by the world's transition to a low-carbon economy. The Board is also considering the threat posed by the direct impact of climate change on the operations of the Manager and other major service providers.
As extreme weather events become more common, the resiliency, business continuity planning and the location strategies of our services providers will come under greater scrutiny.
• 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 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 had been given updates. Working from home arrangements have been implemented where appropriate and government guidance is being followed. The Board does not anticipate a fall in the level of service.
The pandemic has triggered a sharp fall in global stock markets and created uncertainty around future returns. Whilst the Board notes the fall in the Company's NAV per share and share price it also notes the Investment Managers' investment process is unaffected by the COVID-19 pandemic and they continue to focus on long-term company fundamentals and detailed analysis of current and future investments. At the time of writing it is uncertain as to whether there will be a second wave of the COVID-19 virus outbreak.
TRANSACTIONS WITH THE MANAGER
Details of the management contract are set out in the Directors' Report on page 26 of the Annual Report. The management fee payable to the Manager for the year was £2,257,000 (2019: £2,294,000) of which £nil (2019: £nil) was outstanding at the year end.
During the year £6,000 (2019: £11,000) was paid to the Manager for the marketing and administration of savings scheme products, of which £nil (2019: £nil) was outstanding at the year end.
Included in administration expenses in note 6 on page 57 of the Annual Report are safe custody fees payable to JPMorgan Chase group subsidiaries amounting to £31,000 (2019: £30,000) of which £8,000 (2019: £5,000) 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 £1,000 (2019: £nil) of which £nil (2019: £nil) was outstanding at the year end.
Handling charges on dealing transactions amounting to £4,000 (2019: £6,000) were payable to JPMorgan Chase during the year of which £nil (2019: £nil) was outstanding at the year end.
At the year end, total cash of £12,743,000 (2019: £10,343,000) 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 (2019: £nil) was outstanding at the year end.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The 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 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
Deborah Guthrie
Director
26th June 2020
STATEMENT OF COMPREHENSIVE INCOME & STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31ST MARCH 2020
|
|
2020 |
2019 |
||||
|
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
Losses on investments held at fair |
|
|
|
|
|
|
|
value through profit or loss |
- |
(4,853) |
(4,853) |
- |
(20,917) |
(20,917) |
|
Net foreign currency losses |
- |
(1,865) |
(1,865) |
- |
(530) |
(530) |
|
Income from investments |
3,836 |
- |
3,836 |
4,007 |
- |
4,007 |
|
Gross return/(loss) |
3,836 |
(6,718) |
(2,882) |
4,007 |
(21,447) |
(17,440) |
|
Management fee |
(2,257) |
- |
(2,257) |
(2,294) |
- |
(2,294) |
|
Other administrative expenses |
(525) |
- |
(525) |
(426) |
- |
(426) |
|
Net return/(loss) before finance costs |
|
|
|
|
|
|
|
and taxation |
1,054 |
(6,718) |
(5,664) |
1,287 |
(21,447) |
(20,160) |
|
Finance costs |
(246) |
- |
(246) |
(220) |
- |
(220) |
|
Net return/(loss) before taxation |
808 |
(6,718) |
(5,910) |
1,067 |
(21,447) |
(20,380) |
|
Taxation |
(393) |
- |
(393) |
(389) |
- |
(389) |
|
Net return/(loss) after taxation |
415 |
(6,718) |
(6,303) |
678 |
(21,447) |
(20,769) |
|
Return/(loss) per share |
0.76p |
(12.32)p |
(11.56)p |
1.24p |
(39.35)p |
(38.11)p |
STATEMENT OF CHANGES IN EQUITY
|
|
Called up |
|
Capital |
|
|
|
|
|
|
share |
Share |
redemption |
Other |
Capital |
Revenue |
|
|
|
capital |
premium |
reserve |
Reserve1,2 |
reserves2 |
reserve2 |
Total |
|
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
At 31st March 2018 |
5,595 |
33,978 |
1,836 |
311,237 |
(77,039) |
(12,257) |
263,350 |
|
Share transaction expense3 |
- |
- |
- |
(3) |
- |
- |
(3) |
|
Net (loss)/return |
- |
- |
- |
- |
(21,447) |
678 |
(20,769) |
|
Dividends paid in the year (note 3) |
- |
- |
- |
(7,468) |
- |
- |
(7,468) |
|
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 2020 |
5,595 |
33,978 |
1,836 |
293,955 |
(105,204) |
(11,164) |
218,996 |
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.
3 Stamp duty on shares repurchased into Treasury on 29th March 2018.
STATEMENT OF FINANCIAL POSITION
AT 31ST MARCH 2020
| 2020 | 2019 |
| £'000 | £'000 |
Fixed assets |
|
|
Investments held at fair value through profit or loss | 235,388 | 253,585 |
Current assets |
|
|
Debtors | 2,028 | 1,786 |
Cash and cash equivalents | 12,743 | 10,343 |
| 14,771 | 12,129 |
Creditors: amounts falling due within one year | (1,281) | (30,604) |
Net current assets/(liabilities) | 13,490 | (18,475) |
Total assets less current liabilities | 248,878 | 235,110 |
Creditors: amounts falling due after more than one year | (29,882) | - |
Net assets | 218,996 | 235,110 |
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 | 293,955 | 303,766 |
Capital reserves | (105,204) | (98,486) |
Revenue reserve | (11,164) | (11,579) |
Total shareholders' funds | 218,996 | 235,110 |
Net asset value per share | 401.8p | 431.3p |
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31ST MARCH 2020
| 2020 | 2019 |
| £'000 | £'000 |
Net cash outflow from operations before dividends and interest | (2,769) | (2,694) |
Dividends received | 3,402 | 3,465 |
Interest paid | (241) | (222) |
Net cash inflow from operating activities | 392 | 549 |
Purchases of investments | (33,202) | (61,376) |
Sales of investments | 44,742 | 69,840 |
Settlement of foreign currency contracts | (54) | 30 |
Net cash inflow from investing activities | 11,486 | 8,494 |
Dividends paid | (9,811) | (7,468) |
Repurchase of shares into Treasury | - | (469) |
Net cash outflow from financing activities | (9,811) | (7,937) |
Increase in cash and cash equivalents | 2,067 | 1,106 |
Cash and cash equivalents at start of year | 10,343 | 9,117 |
Exchange movements | 333 | 120 |
Cash and cash equivalents at end of year | 12,743 | 10,343 |
Increase in cash and cash equivalents | 2,067 | 1,106 |
Cash and cash equivalents consist of: |
|
|
Cash and short term deposits | 12,743 | 10,343 |
Total | 12,743 | 10,343 |
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31ST MARCH 2020
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 34 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
| 2020 | 2019 |
| £'000 | £'000 |
Return per share is based on the following: |
|
|
Revenue return | 415 | 678 |
Capital loss | (6,718) | (21,447) |
Total loss | (6,303) | (20,769) |
Weighted average number of shares in issue during the year | 54,510,339 | 54,510,339 |
Revenue return per share | 0.76p | 1.24p |
Capital loss per share | (12.32)p | (39.35)p |
Total loss per share | (11.56)p | (38.11)p |
3. Dividends
Dividends paid and declared
| 2020 | 2019 |
| £'000 | £'000 |
Dividends paid |
|
|
2019 fourth quarterly dividend of 4.3p (2018: 0.0p) paid to shareholders in May | 2,344 | - |
2020 first quarterly dividend of 4.4p (2019: 4.9p) paid to shareholders in August | 2,398 | 2,671 |
2020 second quarterly dividend of 4.6p (2019: 4.9p) paid to shareholders in November | 2,507 | 2,671 |
2020 third quarterly dividend of 4.7p (2019: 3.9p) paid to shareholders in February | 2,562 | 2,126 |
Total dividends paid in the year | 9,811 | 7,468 |
| 2020 | 2019 |
| £'000 | £'000 |
Dividend declared |
|
|
2020 fourth quarterly dividend of 4.0p (2019: 4.3p) payable to shareholders in May | 2,180 | 2,344 |
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 2020. In accordance with the accounting policy of the Company, this dividend will be reflected in the financial statements for the year ending 31st March 2021.
4. Net asset value per share
| 2020 | 2019 |
Net assets (£'000) | 218,996 | 235,110 |
Number of shares in issue, excluding shares held in Treasury | 54,510,339 | 54,510,339 |
Net asset value per share | 401.8p | 431.3p |
5. Status of results announcement
2020 Financial Information
The figures and financial information for 2020 are extracted from the published Annual Report and Accounts for the year ended 31st March 2020 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.
2019 Financial Information
The figures and financial information for 2019 are extracted from the Annual Report and Accounts for the year ended 31st March 2019 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
JPMORGAN FUNDS LIMITED
ENDS
Annual Report and Financial Statements
The Annual Report and Financial Statements will be posted to shareholders and will shortly be available electronically on the Company's website at www.jpmjapansmallercompanies.co.uk where up-to-date information on the Company, including daily NAV and share prices, factsheets and portfolio information can also be found.
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
JPMORGAN FUNDS LIMITED
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