LONDON STOCK EXCHANGE ANNOUNCEMENT
JPMORGAN US SMALLER COMPANIES INVESTMENT TRUST PLC
FINAL RESULTS FOR THE YEAR ENDED
31ST DECEMBER 2022
Legal Entity Identifier: 549300MDD7SOXDMBN667
Information disclosed in accordance with the DTR 4.1.3
CHAIRMAN'S STATEMENT
Performance
I am delighted to present the Annual Report of JPMorgan US Smaller Companies Investment Trust plc ('the Company') for the year ended 31st December 2022.
Having navigated the challenges of the COVID-19 pandemic, the Company was faced with further market global headwinds from heightened tensions between the US and China and the Russian invasion of Ukraine. During the year, the US equity market grappled with numerous interest rate hikes, high inflation levels, continued supply chain constraints, fast-paced tightening liquidity and recessionary risks. However, the Investment Managers continued with their disciplined approach to investing and it is pleasing to report that the Company's NAV outperformed the benchmark for the 12 months to 31st December 2022.
Despite the extreme volatility in the market, the Company's total return on net assets over the year was -8.2% which compares favourably with the -10.6% return for our benchmark, the Russell 2000 index in sterling terms. Return to shareholders was -15.7% for the year. An explanation as to why the return to shareholders is worse than the total return on net assets is given below.
Full details of investment performance, changes to the portfolio and the outlook can be found in the Investment Managers' report in the Annual Report and Financial Statements.
Discount and Premium
As has been said in the past, the Board aims to align the Company's share price movements to changes in its net asset value and monitors the discount or premium at which the shares trade on a daily basis with the assistance of its broker and Manager. However, a number of factors make it difficult to align share price and net asset value movements including the often volatile prices of US smaller companies investments and the additional volatility introduced by owning assets denominated in dollars whilst having a share price and net asset value reported in sterling.
Over the course of the year, the discount averaged 8.5%. Having begun the year trading at a premium of 1.1% to NAV, the Company's shares quickly moved to a discount in January 2022 and ended the year at a discount of 7.3% to NAV. The movement of the shares from a premium to discount is what led the total return to shareholders to fall behind the total return on net assets.
Share Issuance and Buybacks
To help with the management of the discount, we have in place the authority to repurchase up to 14.99% of the Company's issued share capital and we will be seeking renewal of this authority at the AGM. The Company's move from premium to discount is reflected in its share issuance and buyback behaviour over the year.
In January 2022 the Company issued 125,000 shares from Treasury and 75,000 new ordinary shares. In the subsequent months, the Company bought back 760,643 shares into Treasury in periods when discount levels were particularly elevated, reflected in the weighted average discount of 8.2% at which these shares were acquired. Since the year end, the Company has repurchased 109,821 shares into Treasury.
The Company's share buyback policy continues to have three major objectives; to buy back shares with the aim of enhancing the NAV for ongoing shareholders, to minimise discount volatility and ultimately to ensure that the shares do not trade at an excessive discount for a prolonged period of time. Of course, our ability to achieve these outcomes will depend on prevailing market conditions and the behaviour and risk appetites of investors.
The Company will also look to issue shares to enhance shareholders' NAV and to avoid the formation of an excessive premium which may not be in the best interests of incoming and continuing shareholders alike.
Revenue and Dividend
The impact of the global concerns on the dividends received from the Company's portfolio has remained relatively muted and the Board is therefore delighted to recommend a dividend of 2.5p in respect of the financial year ended 31st December 2022 (2021: 2.5p). Subject to shareholders' approval at the Annual General Meeting (AGM), this dividend will be paid on 19th May 2023 to shareholders on the register at the close of business on 21st April 2023.
Shareholders should note the Company's objective is unchanged and remains one of capital growth and our dividend policy will therefore reflect the naturally occurring income on the underlying portfolio.
Gearing
During the year, the Company continued to utilise its revolving credit facility to maintain a meaningful but modest level of gearing. The Board renewed its USD30 million loan facility, with an option to draw a further USD10 million, in October 2021 for a 2-year term. The current facility matures on 27th October 2023 at which point the Board will review its borrowing requirements.
As at 31st December 2022, the Company had drawn down USD30 million (GBP 24.9 million). It closed the year with a gearing level of 6.8% having averaged approximately 6.9% throughout the year. The Board believes that the use of gearing is a key advantage of the investment trust structure and looks to maintain a consistent level of gearing within its permitted 10% cash to 15% geared range.
Our policy sees gearing levels adjusted to reflect changes in the Manager's perception of longer-term opportunities and market risks rather than being used as a short-term market-timing tool.
Environment, Social and Governance (ESG) considerations
We provide a full description of how ESG is integrated into the investment management process later in this report. The Board shares the Investment Managers' view of the importance of ESG factors when making investments for the long term and of the necessity of continued engagement with investee companies throughout the duration of the investment. The Investment Managers' report describes the developments in the ESG process that have taken place during the year together with examples of how these are implemented in practice. Further information on the Manager's ESG process and engagement is set out in the ESG Report section within the Annual Report.
Board Succession
In January 2023 the Board, through its Nomination Committee, carried out a comprehensive evaluation of the Board, its committees, the individual Directors and the Chairman. Topics discussed included the size and composition of the Board, Board information and processes, shareholder engagement, and training and accountability. The report confirmed the efficacy of the Board.
During the year, as part of its succession planning the Board appointed Mandy Donald as a Director in January 2022 to succeed Julia Le Blan as Chairman of the Audit Committee following Julia's retirement in April 2022. The Board continues to monitor succession planning.
In accordance with the UK Corporate Governance Code, Mandy Donald, Christopher Metcalfe, Dominic Neary, Shefaly Yogendra and myself will retire at the forthcoming AGM and, being eligible, will offer ourselves for reappointment by shareholders.
Annual General Meeting
We are inviting shareholders to join us in person for the Company's sixty-sixth AGM to be held on Monday, 24th April 2023 at 2.30 p.m. at 60 Victoria Embankment, London EC4Y 0JP. The Board hopes to welcome as many shareholders as possible.
As with previous years, you will have the opportunity to hear from the Investment Managers. Their presentation will be followed by a question and answer session. There will also be refreshments afterwards, when shareholders will be able to meet members of the Board. Shareholders wishing to follow the AGM proceedings but choosing not to attend will be able to view them live and ask questions through conferencing software. Details on how to register together with access details can be found on the Company's website: www.jpmussmallercompanies.co.uk, or by contacting the Company Secretary at invtrusts.cosec@jpmorgan.com.
In accordance with normal practice, all voting on the resolutions will be conducted on a poll. Due to technological reasons, shareholders viewing the meeting via conferencing software will not be able to vote on the poll and we therefore encourage all shareholders, and particularly those who cannot attend physically, to submit their proxy votes in advance of the meeting, so that they 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 in the Annual Report. In addition, shareholders are encouraged to send any questions ahead of the AGM to the Board via the Company Secretary at the email address above. We will endeavour to answer relevant questions at the meeting or via the website depending on arrangements in place at the time.
If there are any changes to the above AGM arrangements, the Company will update shareholders through its website and, as appropriate, through an announcement on the London Stock Exchange.
Outlook
2022 was a difficult year with a number of headwinds and, while some still remain, there are reasons to be optimistic as 2023 unfolds. As the Investment Managers note in their report, we see small cap valuations at historic lows despite an improving earnings picture. Inflation, although remaining high, is now in retreat and we may be nearing the end of material interest rate increases. However, there are likely to be setbacks, as evidenced by recent issues in the banking sector. In addition, the potential for recession has not gone away and the Board and the Manager continue to communicate regularly and monitor the associated risks.
Whatever challenges 2023 throws our way, we remain confident that the Investment Managers' disciplined approach to investment will continue to identify high quality businesses that will deliver good long term returns.
David Ross
Chairman 20th March 2023
INVESTMENT MANAGERS' REPORT
Market Review
2022 was a difficult year for market participants, to say the least. Equities marched steadily higher throughout 2021, driving valuations to elevated levels exiting the year. As the calendar turned, optimism gave way to pessimism as macro conditions deteriorated on the back of persistent inflation, a hawkish Fed and geopolitical concerns, all of which increased the risk of recession.
After three years of strength, equity markets were whiplashed with a volatile year, beginning with a Fed that no longer considered inflation to be transitory and vowed to tame it with increasingly aggressive rate hikes. Compounding inflationary concerns was the war in Ukraine, which drove oil and gas prices higher and placed further pressure on the Fed to act. As risk of recession increased, and investors re-priced assets on the back of higher interest rates, developed equity markets saw the worst first half performance in over two decades. Over the course of the year, the Fed hiked rates by a cumulative 425 basis points after entering the year with a view that 75 basis points would be sufficient. As a result of unsnarling supply chains and aggressive Fed actions, US CPI peaked in June 2022 at 9.1% and trended down to 7.1% by November, providing some hope for a 'soft' economic landing in the US. Throughout 2022, Corporate America battled high interest rates, contraction in manufacturing and dampened consumer sentiment. As a result, earnings forecasts for 2023 witnessed sharp cuts towards the end of the year.
Large cap stocks as represented by the S&P 500 Index outperformed the small cap Russell 2000 Index, as they returned -18.1% (in US dollar terms) vs. -20.4%, respectively. Value outperformed Growth by a massive margin, as the Russell 3000 Value Index returned -8.0% and the Russell 3000 Growth Index returned -29.0%.
Performance
The Portfolio's net asset value decreased by 8.2% in 2022. The Company outperformed its benchmark, the Russell 2000 Index (Net), which fell by 10.6% in sterling terms in the face of a challenging year and steep market decline. Stock selection was the primary driver of outperformance.
With regard to relative performance, our stock selection in the consumer discretionary and industrials sectors contributed the most.
Within industrials, our position in WillScot Mobile Mini, and our exposure to WEX, were among the top contributors. WillScot Mobile Mini, one of the largest providers of modular office space and portable storage, reported strong quarterly earnings results and provided a favourable outlook for FY23 as it continues to execute on robust demand. Strong pricing and volumes aided the company's performance. We continue to like the business and think that the company is well positioned to weather any potential macroeconomic slowdown. WEX, a payment processing and technology solutions provider also reported strong quarterly results that demonstrated solid revenue upside and benefitted from re-opening trends as fleet and travel volumes rebounded. Moreover, WEX's fleet segment benefitted from rising fuel prices, acting as an inflation hedge, which has been a positive in this macro environment. We remain comfortable with our position in the company.
Among individual names, our exposure to Encompass Health, one of the largest Inpatient Rehab Facilities (IRF) within the health care sector, aided performance. Shares soared despite inflationary and higher cost pressures which led to a lower guidance for profitability. The optimism around non-cyclical revenue growth, coupled with growth in beds/facilities and solid pricing boosted the stock's performance. We think that investors have been willing to look past near term transitory margin headwinds mostly related to new facility opening and labor costs, as topline momentum should continue into 2023 and margins start to move off the bottom. We continue to like the name and view its valuation as attractive.
The contributions to relative performance of your portfolio's sector positioning were all positive, with the exception of the continuing underweight in energy. The energy sector rose due to a rally in oil prices during the year and continued to rise despite oil prices remaining range-bound. Rumours of an end to the Covid-Zero policy in China boosted hopes for an oil demand recovery in Asia. Energy remains an underweight for us, but we continue to assess the long-term sustainability of capital allocation discipline in the space and search for new ideas that will both benefit from secular trends and fit our quality-oriented investment philosophy.
Among individual names, our exposure to Syneos Health, a biopharmaceutical solutions organisation, was the largest detractor for the year. Low reimbursable expenses and foreign exchange headwinds impacted the company's earnings results. Moreover, weak performance of its clinical business segment was one of the main drivers of underperformance. We continue to hold a position in the company due to its attractive valuation and long-term potential.
Our exposure to Hayward, a manufacturer of pool equipment and associated automation systems, within the industrials sector proved lackluster. Along with many other COVID beneficiaries, the stock underperformed as demand trends normalised and excess channel inventory needed to be addressed. We maintain our conviction in the company as its valuation looks attractive on a longer-term basis.
Performance Attribution
Year ended 31st December 2022
|
|
| % | % |
| Contributions to total returns |
|
|
|
| Benchmark return |
|
| -10.6% |
| Asset Allocation | | -1.3% | |
| Stock Selection* | | 6.2% | |
| Investment Manager Contribution |
|
| 4.9% |
| Portfolio total return |
|
| -5.7% |
| Impact of cash/gearing* | | -1.6% | |
| Management fee/other expenses | | -1.0% | |
| Share issuance | | 0.1% | |
| Other effects |
|
| -2.5% |
| Cum Income Net Asset Value Total Return |
|
| -8.2% |
| Share Price Total Return |
|
| -15.7% |
* Includes impact of FX movement on USD loan
Source: Wilshire, JPMAM and Morningstar. All figures are on a total return basis.
Performance attribution analyses how the Company achieved its recorded performance relative to its benchmark index.
Portfolio Positioning
With regard to our portfolio positioning, we continue to focus on finding companies with durable franchises, good management teams and stable earnings that trade at a discount to their intrinsic value. We continue to believe that smaller companies are worth investing in for long term investors as they include innovative companies that serve market niches and thereby can be a way to get in early on innovation.
We have been trimming cyclical outperformers and expensive defensives and COVID winners as the strength in the market during the last quarter of 2022, and our outperformance, provided an opportunity to take some profits. We continue to add to high quality growth names in a measured fashion and added to most beaten down cyclicals, given the strength of the franchises and depressed valuations. We also modestly added to software names within the technology sector. Our largest absolute and relative weight remains in industrials, followed by financials.
On the other hand, our largest underweights remain in the energy and health care sectors. While we have struggled to find high quality assets within the traditional energy sector, we believe there are more interesting opportunities within the alternative energy space.
Market Outlook
We remain optimistic about small caps as we begin 2023 given the constructive backdrop and valuation. The last decade has been challenging for small caps when compared to large caps, and 2022 was no exception. However, small cap valuations are at historic lows akin to those witnessed during the Technology-media-telecoms bubble of the late 1990s/early 2000s or the Great Financial Crisis in 2008-2009. Forward looking performance coming out of those periods was very favourable for small caps for several years. The promising backdrop for small caps also includes an improving earnings picture in the face of high, but declining inflation coupled with higher rates.
While the economy teeters on the edge of recession, we remain balanced and continue to monitor incremental risks that could represent headwinds for U.S. equities. Through the volatility, we continue to focus on high conviction stocks and take advantage of market dislocations for compelling stock selection opportunities.
Don San Jose
Jon Brachle
Dan Percella
Investment Managers 20th March 2023
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, solvency or liquidity. With the assistance of JPMF, the Audit Committee has drawn up a risk matrix, which identifies the key risks to the Company. These are reviewed and noted by the Board and the Board undertakes further work and engages with the Manager where necessary. The risks identified and the broad categories in which they fall, and the ways in which they are managed or mitigated are summarised below. The AIC Code of Corporate Governance requires the Audit Committee to put in place procedures to identify emerging risks. The key emerging risks identified are also summarised below.
| Principal risk | Description | Mitigating activities |
| Investment Management and Performance | ||
| Underperformance | Poor implementation of the investment strategy may lead to underperformance against the Company's benchmark index and peer companies. | A broadly diversified portfolio of equities is managed in line with Board-approved investment restrictions and guidelines. Investments are monitored and reported on by the Manager who provides the Board with regular 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 participate at 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. In addition to regular Board reviews of investment strategy, the Board holds a separate meeting devoted to strategy each year.
|
| Market and Economic Risk | Market risk arises from uncertainty about the future prices of the company's investments, which might result from economic, fiscal and regulatory change, including the continuing impact of COVID-19 and possibly further variants and will weigh on recovery as economies try to emerge from the pandemic. At present market risk is heightened due to various risks mentioned in the Chairman and Managers' reports, for example, fear of sustained inflation, interest rate rises and continuing supply chain issues. The mid-term elections may also cause some increased volatility. Geopolitical risks will also affect the market and are currently heightened due to the war in Ukraine and tensions with China. The war in Ukraine has caused volatility in the market and increased energy costs and is likely to continue to disrupt global markets for some time. | This risk is managed to some extent by diversification of investments and by regular communication with the Manager on matters of investment strategy and portfolio construction which will directly or indirectly include an assessment of these risks. The Board considers asset allocation, stock selection and levels of gearing on a regular basis and has set investment restrictions and guidelines, which are monitored and reported on by the Manager. The Board monitors the implementation and results of the investment process with the Manager. |
| Discount Control Risk | Investment trusts shares often trade at discounts to their underlying NAV; they can also trade at a premium. Discounts and premiums can fluctuate considerably leading to volatile returns for shareholders. | The Board monitors the share price against the absolute and sector relative premium/discount levels. The Board reviews sales and marketing activity and sector relative performance, which it believes are the primary drivers of the relative premium/discount level. The Company has authority to buy back its existing shares or issue new shares to enhance the NAV per share for remaining shareholders when deemed appropriate. |
| Shareholder Demand | Certain buyers within the sector will only consider investing into an investment trust where its AUM is over a certain level; the Company's AUM currently stands below these levels. | The Board reviews sales and marketing activity and it also receives regular feedback via the Manager's sales team from both existing and prospective shareholders. |
| Loss of Investment Team or Portfolio Manager | A sudden departure of the Investment Managers, or several members of the investment management team could result in a short term deterioration in investment performance. | The Board seeks assurance that 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, as well as special efforts to retain key personnel. The Board engages with the senior management of the Manager in order to mitigate this risk. |
| Operational Risks | ||
| Outsourcing | Disruption to, or failure of, the Manager's accounting, dealing or payments systems or the Registrar, Depositary or Custodian's records may prevent accurate reporting and monitoring of the Company's financial position or a misappropriation of assets. | Details of how the Board monitors the services provided by JPM and its associates and the key elements designed to provide effective risk management and internal control are included within the Risk Management and Internal Controls section of the Corporate Governance Statement in the Annual Report. The Manager has a comprehensive business continuity plan which facilitates continued operation of the business in the event of a service disruption (including disruption resulting from a pandemic). Directors have received evidence that the Manager and its key third party service providers have business continuity plans in place and that these are regularly tested. The response to the restrictions imposed during the COVID-19 pandemic gives assurance that the controls are in place and that the Manager and the service providers are working as expected. |
| Cyber Crime | The threat of cyber attack, in all guises, is regarded as at least as important as more traditional physical threats to business continuity and security. | The Company benefits directly and/or indirectly from all elements of JPMorgan's Cyber Security programme. The information technology controls around physical security of JPMorgan's data centres, security of its networks and security of its trading applications, are tested by independent auditors and reported every six months against the AAF Standard. The Company and the Manager have evidence from the major service providers that they have procedures in place to maintain the best practices in the fight against cybercrime and to ensure business resiliency. |
| Corporate Governance | ||
| Statutory and Regulatory Compliance | Failure to comply with relevant statute law or regulation may have an impact on the Company both in terms of fines and in terms of its ability to continue to operate. Also, the Company's business model could become non-viable as a result of new or revised rules or regulations arising from, for example, policy change or political impact. | The Board relies on the services of its Company Secretary, the Manager and its professional advisers to ensure compliance with the Companies Act 2006, the UKLA Listing Rules, DTRs, MAR and AIFMD. Details of the Company's compliance with Corporate Governance best practice, are set out in the Corporate Governance Statement in the Annual Report. The Board receives regular reports from its broker, depositary, registrar and Manager as well as its legal advisers and the Association of Investment Companies on changes to regulations which could impact the Company and its industry. The Company monitors events and relies on the Manager and its key third party providers to manage this risk by preparing for any changes. |
| Environmental | ||
| Climate Change | Climate change has become one of the most critical issues confronting companies and their investors. Climate change can have a significant impact on the business models, sustainability and even viability of individual companies, whole sectors and even asset classes. | The Board receives ESG reports from the Manager on the portfolio and the way ESG considerations are integrated into the investment decision-making, so as to mitigate risk at the level of stock selection and portfolio construction. As extreme weather events become more common, the resiliency, business continuity planning and the location strategies of the Company's services providers will come under greater scrutiny. |
| Emerging risk | Description | Mitigating activities |
| Political and Economic | Political issues and changes in financial or tax legislation in the UK or the US may lead to changes to the operating model of the Company and/or reduce the appeal of the Company to shareholders. | The Manager monitors events and makes recommendations to the Board on accounting, dividend and tax policies and the Board seeks external advice where appropriate. |
| Global Pandemics | The outbreak and spread of COVID-19 has highlighted the speed and extent of economic damage that can arise from a pandemic. Should a new form of the virus or another pandemic emerge that spreads more aggressively or is more virulent, it may present risks to the operations of the Company, its Manager and other major service providers. | Time after time, markets have recovered, albeit over varying and sometimes extended time periods, and so the Board does have an expectation that the portfolio's holdings will not suffer a material long-term impact and should recover. The Board receives reports on the business continuity plans of the Manager and other key service providers. The effectiveness of these measures have been assessed throughout the course of the COVID-19 pandemic and the Board will continue to monitor developments as they occur and seek to learn lessons which may be of use in the event of future pandemics. Should the virus become more virulent than is currently the case, it may present risks to the operations of the Company, its Manager and other major service providers. Should efforts to control a pandemic prove ineffectual or meet with substantial levels of public opposition, there is the risk of social disorder arising at a local, national or international level. Even limited or localised societal breakdown may threaten both the ability of the Company to operate, the ability of investors to transact in the Company's securities and ultimately the ability of the Company to pursue its investment objective and purpose. |
| Market Risk | Inappropriate Government/Central banks fiscal or monetary responses to the debt burden arising from the COVID-19 stimulus packages combined with inflation, the potential of stagflation, economies threatened by recession and the unknown consequences of the war in Ukraine could lead to material adverse movements in asset prices. These factors, in the long term, could also render the Company'-s objectives and policies unachievable. | The Manager's market strategists are available for the Board and can discuss market trends. External consultants and experts can be accessed by the Board. The Board can, with shareholder approval look to amend the investment policy and objectives of the Company, if required, to enable investment in companies or assets which offer more appealing risk/return characteristics in prevailing economic conditions. |
| Ongoing shareholder demand | Competing investment vehicles (e.g. ETFs) or new investment technologies may render the Company's shares unappealing to shareholders. | The Manager has a dedicated investment trust sales team that works closely with the Company's broker as well as current and prospective shareholders. Regular meetings are held with shareholders to try to ensure continued demand/interest. Both the Manager and the broker submit a sales activity report to each Board meeting and are available to discuss any issues throughout the year. In addition, the Manager's marketing team has focused on marketing more effectively to retail shareholders which represent a vast majority of the Company's shareholder base. |
LONG TERM VIABILITY
The Company is an investment trust with an objective of achieving capital growth from investing in US smaller companies. The Company enjoys the benefit of the closed ended structure and is therefore better able to withstand market movements since it is not subject to forced liquidation of investments due to sudden or large redemptions by shareholders.
The Board notes by way of context that the Company has invested through many difficult economic and market cycles since its incorporation in 1955. The Board is cognisant of the unusually high levels of political, economic and market uncertainty being experienced at the current time and its potential impact on the prospects of many of the Company's portfolio holdings. This includes the continuing war in Ukraine and the political tensions between the US and China. Notwithstanding this crisis, given the factors stated below, the Board expects the Company to continue for the foreseeable future and has conducted its assessment for a period of five years.
In conducting its assessment of the long term viability of the Company, the Board has taken account of the Company's current financial position, its debt level and debt covenants, the liquidity of its holdings as well as the principal and emerging risks that it faces, the investment capabilities of the Manager, the Manager's historic longer term investment performance and the current outlook for the US economy and its equity markets.
The Board has further considered the mitigation measures which key service providers, including the Manager, have in place to maintain operational resilience.
In addition to the above, the Company has carried out stress testing of a number of scenarios where the Company might be put under significant stress due to market volatility. This included modelling the impact of substantial market falls and testing portfolio liquidity under stress. The results demonstrated the impact on the Company's NAV, its expenses, its debt levels and the covenants attached to that debt as well as the Company's ability to meet its liabilities. In even the most stressed scenario, the Company was shown to have sufficient cash, or to be able to liquidate a sufficient portion of its listed holdings, in order to meet its liabilities as they fall due. See notes 13 and 14 in the Annual Report and Financial Statements.
In determining the appropriate period of assessment the Directors had regard to their view that, given the Company's objective of achieving capital growth, shareholders should consider the Company as a long term investment proposition. This is consistent with advice provided by independent financial advisers and wealth managers, that investors should consider investing in equities for a minimum of five years. The Directors also take account of the inherent uncertainties of equity markets and the existence of a continuation vote every five years. As a result of all these deliberations, the Directors consider five years to be an appropriate time horizon to assess the Company's viability.
The Directors confirm that they have a reasonable expectation that the Company will be able to continue in operation, subject to shareholders voting in favour of continuation at the AGM in 2025, and meet its liabilities as they fall due over the next five years until 31st December 2027. This reasonable expectation is subject to there being no significant adverse change to the regulatory or taxation environment for investment trusts; and subject to there being no sustained adverse investment performance by the current or any successive Investment Managers, that may result in the Company not being able to maintain a supportive shareholder base.
TRANSACTIONS WITH THE MANAGER
Details of the management contract are set out in the Directors' Report in the Annual Report. The management fee payable to the Manager for the year was £2,080,000 (2021: £2,341,000) of which £nil (2021: £nil) was outstanding at the year end.
Included in administration expenses in note 6 in the Annual Report and Financial Statements are safe custody fees amounting to £2,000 (2021: £3,000) payable to JPMorgan Chase Bank, N.A. of which £1,000 (2021: £1,000) was outstanding at the year end.
The Company also holds cash in the JPMorgan US Dollar Liquidity Fund, which is managed by JPMorgan. At the year end this was valued at £6.6 million (2021: £3.0 million). Income amounting to £118,000 (2021: £5,000) was receivable during the year of which £nil (2021: £nil) was outstanding at the year end. The JPMorgan US Dollar Liquidity Fund does not charge a fee and the Company does not invest in any other investment fund managed or advised by JPMorgan.
Handling charges on dealing transactions amounting to £6,000 (2021: £6,000) were payable to JPMorgan Chase Bank, N.A. during the year of which £1,000 (2021: £1,000) was outstanding at the year end.
At the year end, total cash of £3,000 (2021: £27,000) was held with JPMorgan Chase Bank, N.A. A net amount of interest of £nil (2021: £25,000) was receivable by the Company during the year from JPMorgan Chase Bank, N.A of which £nil (2020: £nil) was outstanding at the year end.
TRANSACTIONS WITH RELATED PARTIES
Full details of Directors' remuneration and shareholdings can be found in the Directors' Remuneration Report and in note 6 of the Annual Report and Financial Statements.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and the Financial Statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare the Annual Report and Financial Statements for each financial year. Under that law, the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising Financial Reporting Standard 102, the Financial Reporting Standard applicable in the UK and Republic of Ireland (FRS 102) and applicable law). Under Company law the Directors must not approve the Financial Statements unless they are satisfied that taken as a whole, the Annual Report and Financial Statements are fair, balanced and understandable, provide the information necessary for shareholders to assess the Company's position and performance, business model and strategy and that they give a true and fair view of the state of affairs of the Company and of the net return or loss of the Company for that period. In order to provide these confirmations, and in preparing these financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and estimates that are reasonable and prudent;
• state whether applicable UK Accounting Standards, comprising FRS 102, have been followed, subject to any material departures disclosed and explained in the financial statements;
• prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Company will continue in business; and
• notify the Company's shareholders in writing about the use, if any, of disclosure exemptions in FRS 102 in the preparation of the financial statements
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 to enable them to ensure that the financial statements comply with the Companies Act 2006. They 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.
Under applicable law and regulations the Directors are also responsible for preparing a Directors' Report and Directors' Remuneration Report that comply with that law and those regulations.
Each of the Directors, whose names and functions are listed in the Board of Directors section in the Annual Report, confirm that, to the best of their knowledge:
• the financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), give a true and fair view of the assets, liabilities, financial position and return or loss of the Company; and
• the 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 and emerging risks and uncertainties that it faces.
The Board confirms that it is satisfied that the Annual Report and Financial Statements taken as a whole are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's position and performance, business model and strategy.
The Board also confirms that it is satisfied that the Strategic Report and Directors' Report include a fair review of the development and performance of the business, and the Company, together with a description of the principal risks and uncertainties that it faces.
The Financial Statements are published on the www.jpmussmallercompanies.co.uk website, which is maintained by the Manager. The maintenance and integrity of the website maintained by the Manager is, so far as it relates to the Company, the responsibility of the Manager. The work carried out by the Auditors does not involve consideration of the maintenance and integrity of this website and, accordingly, the Auditor accepts no responsibility for any changes that have occurred to the accounts since they were initially presented to the website. The accounts are prepared in accordance with UK legislation, which may differ from legislation in other jurisdictions.
For and on behalf of the Board
David Ross
Chairman
20th March 2023
STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31st December 2022
| | 2022 | 2021 |
| ||||
| | Revenue | Capital | Total | Revenue | Capital | Total | |
| | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
| (Losses)/gains on investments held at fair value | | | | | | | |
| through profit or loss | - | (22,082) | (22,082) | - | 44,039 | 44,039 | |
| Net foreign currency losses on cash and loans | - | (2,513) | (2,513) | - | (284) | (284) | |
| Income from investments | 3,218 | - | 3,218 | 3,236 | - | 3,236 | |
| Interest receivable | 118 | - | 118 | 30 | - | 30 | |
| Gross return/(loss) | 3,336 | (24,595) | (21,259) | 3,266 | 43,755 | 47,021 | |
| Management fee | (416) | (1,664) | (2,080) | (468) | (1,873) | (2,341) | |
| Other administrative expenses | (547) | - | (547) | (422) | - | (422) | |
| Net return/(loss) before finance costs and taxation | 2,373 | (26,259) | (23,886) | 2,376 | 41,882 | 44,258 | |
| Finance costs | (135) | (539) | (674) | (51) | (201) | (252) | |
| Net return/(loss) before taxation | 2,238 | (26,798) | (24,560) | 2,325 | 41,681 | 44,006 | |
| Taxation | (466) | - | (466) | (477) | - | (477) | |
| Net return/(loss) after taxation | 1,772 | (26,798) | (25,026) | 1,848 | 41,681 | 43,529 | |
| Return/(loss) per share (note 2) | 2.72p | (41.21)p | (38.49)p | 2.87p | 64.81p | 67.68p | |
Dividend declared in respect of the financial year ended 31st December 2022 total 2.5p (2021: 2.5p) per share amounting to £1,616,000 (2021: £1,626,000). Further information on dividends is given in note 3.
All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the year.
The 'Total' column of this statement is the profit and loss account of the Company and the 'Revenue' and 'Capital' columns represent supplementary information prepared under guidance issued by the Association of Investment Companies.
Net return/(loss) after taxation represents the profit/(loss) for the year and also Total Comprehensive Income.
STATEMENT OF CHANGES IN EQUITY
For the year ended 31st December 2022
| | Called up |
| Capital |
|
|
|
| | share | Share | redemption | Capital | Revenue |
|
| | capital | premium | reserve | reserves1 | reserve1 | Total |
| | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 |
| At 31st December 2020 | 1,499 | 21,970 | 1,851 | 209,377 | 2,142 | 236,839 |
| Issue of new Ordinary shares | 137 | 23,354 | - | - | - | 23,491 |
| Shares reissued from Treasury | - | 43 | - | 417 | - | 460 |
| Repurchase of shares into Treasury | - | - | - | (939) | - | (939) |
| Net return for the year | - | - | - | 41,681 | 1,848 | 43,529 |
| Dividends paid in the year | - | - | - | - | (1,597) | (1,597) |
| At 31st December 2021 | 1,636 | 45,367 | 1,851 | 250,536 | 2,393 | 301,783 |
| Issue of new Ordinary shares | 2 | 329 | - | - | - | 331 |
| Shares reissued from Treasury | - | 62 | - | 522 | - | 584 |
| Repurchase of shares into Treasury | - | - | - | (2,941) | - | (2,941) |
| Block listing fees | - | - | - | (48) | - | (48) |
| Net (loss)/return for the year | - | - | - | (26,798) | 1,772 | (25,026) |
| Dividends paid in the year | - | - | - | - | (1,626) | (1,626) |
| At 31st December 2022 | 1,638 | 45,758 | 1,851 | 221,271 | 2,539 | 273,057 |
1 These reserves form the distributable reserves of the Company and may be used to fund distributions to shareholders.
STATEMENT OF FINANCIAL POSITION
As at 31st December 2022
| | 2022 | 2021 |
| | £'000 | £'000 |
| Fixed assets |
|
|
| Investments held at fair value through profit or loss | 291,723 | 322,123 |
| Current assets |
|
|
| Debtors | 405 | 559 |
| Cash and cash equivalents | 6,652 | 3,057 |
| | 7,057 | 3,616 |
| Creditors: amounts falling due within one year | (25,723) | (1,807) |
| Net current (liabilities)/assets | (18,666) | 1,809 |
| Total assets less current liabilities | 273,057 | 323,932 |
| Creditors: amounts falling due after more than one year | - | (22,149) |
| Net assets | 273,057 | 301,783 |
| Capital and reserves |
|
|
| Called up share capital | 1,638 | 1,636 |
| Share premium | 45,758 | 45,367 |
| Capital redemption reserve | 1,851 | 1,851 |
| Capital reserves | 221,271 | 250,536 |
| Revenue reserve | 2,539 | 2,393 |
| Total shareholders' funds | 273,057 | 301,783 |
| Net asset value per share (note 4) | 421.7p | 462.1p |
STATEMENT OF CASH FLOWS
For the year ended 31st December 2022
| | 2022 | 2021 |
| | £'000 | £'000 |
| Net cash outflow from operations before dividends and interest | (2,629) | (2,710) |
| Dividends received | 2,726 | 2,694 |
| Interest received | 93 | 30 |
| Overseas tax recovered | 42 | 50 |
| Interest paid | (530) | (240) |
| Net cash (outflow) from operating activities | (298) | (176) |
| Purchases of investments | (76,428) | (105,707) |
| Sales of investments | 83,743 | 77,565 |
| Settlement of foreign currency contracts | - | 5 |
| Net cash inflow/(outflow) from investing activities | 7,315 | (28,137) |
| Dividends paid | (1,626) | (1,597) |
| Issue of Ordinary shares | 331 | 23,891 |
| Shares reissued from Treasury | 584 | 460 |
| Repurchase of shares into Treasury | (2,941) | (939) |
| Drawdown of bank loan | - | 3,531 |
| Block listing fees | (48) | - |
| Net cash (outflow)/inflow from financing activities | (3,700) | 25,346 |
| Increase/(decrease) in cash and cash equivalents | 3,317 | (2,967) |
| Cash and cash equivalents at start of year | 3,057 | 5,985 |
| Exchange movements | 278 | 39 |
| Cash and cash equivalents at end of year | 6,652 | 3,057 |
| Cash and cash equivalents consist of: |
|
|
| Cash and short term deposits | 3 | 27 |
| Cash held in JPMorgan US Dollar Liquidity Fund | 6,649 | 3,030 |
| Total | 6,652 | 3,057 |
RECONCILIATION OF NET DEBT
| | As at |
| Other non-cash | As at |
| | 31st December 2021 | Cash flows | charges | 31st December 2022 |
| | £'000 | £'000 | £'000 | £'000 |
| Cash and cash equivalents |
|
|
|
|
| Cash | 27 | (429) | 405 | 3 |
| Cash equivalents | 3,030 | 3,746 | (127) | 6,649 |
| | 3,057 | 3,317 | 278 | 6,652 |
| Borrowings |
|
|
|
|
| Debt due within one year | - | - | (24,940) | (24,940) |
| Debt due after more than one year | (22,149) | - | 22,149 | - |
| | (22,149) | - | (2,791) | (24,940) |
| Total | (19,092) | 3,317 | (2,513) | (18,288) |
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31st December 2022
1. Accounting policies
Basis of accounting
The financial statements are prepared under the historical cost convention, modified to include fixed asset investments at fair value, and in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice (UK GAAP), including 'the Financial Reporting Standard applicable in the UK and Republic of Ireland' (FRS 102) 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 July 2022.
All of the Company's operations are of a continuing nature.
The Directors believe that having considered the Company's investment objective, risk management policies, capital management policies and procedures, the nature of the portfolio and expenditure projections, the Company has adequate resources, an appropriate financial structure and suitable management arrangements in place to continue in operational existence for a period of at least 12 months from the date of approval of these financial statements. In particular, the Board has considered the ongoing impact of the war in Ukraine and the tensions between the USA and China and believes that this will have a limited financial impact on the Company's operational resources and existence. For these reasons, the Directors consider it appropriate to adopt the going concern basis of accounting in preparing the Company's financial statements. They have not identified any material uncertainties to the Company's ability to continue as a going concern.
The policies applied in these financial statements are consistent with those applied in the preceding year.
2. Return/(loss) per share
| | 2022 | 2021 |
| | £'000 | £'000 |
| Revenue return | 1,772 | 1,848 |
| Capital (loss)/return | (26,798) | 41,681 |
| Total (loss)/return | (25,026) | 43,529 |
| Weighted average number of shares, excluding Treasury shares, in issue during | | |
| the year | 65,029,256 | 64,314,208 |
| Revenue return per share | 2.72p | 2.87p |
| Capital (loss)/return per share | (41.21)p | 64.81p |
| Total (loss)/return per share | (38.49)p | 67.68p |
3. Dividends
(a) Dividends paid and declared
| | 2022 | 2021 |
| | £'000 | £'000 |
| Dividends paid |
|
|
| 2021 final dividend of 2.5p (2020: 2.5p) paid to shareholders in May 2022 | 1,626 | 1,597 |
| Dividend declared |
|
|
| 2022 Final dividend proposed of 2.5p (2021: 2.5p) declared | 1,616 | 1,633 |
All dividends paid and declared in the year have been funded from the underlying earnings in the financial year. The dividend declared in respect of the year ended 31st December 2021 amounted to £1,633,000. However, the amount paid amounted to £1,626,000 due to shares issued after the balance sheet but prior to the share register record date.
The final dividend has been declared in respect of the year ended 31st December 2022. In accordance with the accounting policy of the Company, this dividend will be reflected in the accounts for the year ending 31st December 2023.
(b) Dividends for the purposes of Section 1158 of the Corporation Tax Act 2010 ('Section 1158')
The requirements of Section 1158 are considered on the basis of dividends declared in respect of the financial year as shown below. The revenue available for distribution by way of dividend for the year is £1,772,000 (2021: £1,848,000).
|
| 2022 | 2021 |
|
| £'000 | £'000 |
| 2022 final dividend of 2.5p (2021: 2.5p) declared | 1,616 | 1,633 |
4. Net asset value per share
|
| 2022 | 2021 |
| Net assets (£'000) | 273,057 | 301,783 |
| Number of shares in issue | 64,745,622 | 65,306,265 |
| Net asset value per share | 421.7p | 462.1p |
5. Status of results announcement
2021 Financial Information
The figures and financial information for 2021 are extracted from the published Annual Report and Financial Statements for the year ended 31st December 2021 and do not constitute the statutory accounts for the year. The Annual Report and Financial Statements have 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.
2022 Financial Information
The figures and financial information for 2022 are extracted from the Annual Report and Financial Statements for the year ended 31st December 2022 and do not constitute the statutory accounts for that year. The Annual Report and Financial Statements 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 Financial Statements 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.
For further information, please contact:
Lucy Dina
For and on behalf of JPMorgan Funds Limited,
Company Secretary
020 7742 4000
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
A copy of the annual report will be submitted to the FCA's National Storage Mechanism and will shortly 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.jpmussmallercompanies.co.uk where up-to-date information on the Company, including daily NAV and share prices, factsheets and portfolio information can also be found.
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