REG - JPMorganUS Small Cos - Half-year Report
22/08/2022 09:30
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RNS Number : 7670W JPMorgan US Smaller Co. IT 22 August 2022
LONDON STOCK EXCHANGE ANNOUNCEMENT
JPMorgan US Smaller Companies Investment Trust plc
Half Year Report & FINANCIAL STATEMENTS
for the six months ended 30th June 2022
Legal Entity Identifier: 549300MDD7SOXDMBN667
Information disclosed in accordance with the DTR 4.2.2
The Directors of JPMorgan US Smaller Companies Investment Trust plc announce
the Company's results for the six months ended 30 June 2022.
CHAIRMAN'S STATEMENT
Performance
US stockmarkets, not unlike the vast majority of world markets, saw declines
in the first six months of the year. Your company's benchmark, the Russell
2000 index, fell by 23.5% (in US dollar terms). However, as a result of the
dollar's appreciation against sterling, this decline represented a fall of
14.7% in sterling terms. This compares with a fall of 14.2% in the Net Asset
Value of your Company. The share price fell by 25.4%, resulting in a widening
of the discount.
A fuller explanation of the performance is set out in the Investment Managers'
report in the Half Year Report.
Premium and Discount to Net Asset Value
Having begun the half-year trading at a premium to Net Asset Value (NAV) of
1.1%, the Company's shares traded at a discount for much of the period,
averaging a discount of 6.2% over the six months.
The relationship between our share price and the NAV is monitored on a daily
basis by the Board and our professional advisers, and 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.
Share Issuance and Repurchases
The Company's move from premium to discount is reflected in its share issuance
and buyback behaviour over the six months period. In January 2022 the Company
resold 125,000 shares from Treasury and issued 75,000 new ordinary shares when
the Company was trading at a premium. In subsequent months, with the widening
of the discount, the Company repurchased a total of 480,526 shares into
Treasury. The Company has purchased an additional 55,000 shares into Treasury
since the period end.
The Company's policy remains one of issuing shares at a premium to NAV, if
demand is present, as such issuance enhances the NAV to shareholders as a
whole, improves secondary market liquidity and prevents the emergence of an
excessive short term spike in premium levels. At the same time, the Company
remains willing to acquire shares when it is felt to be in the long term
interests of shareholders.
Board Succession Planning
Mandy Donald was appointed on 2nd January 2022 and became Chairman of the
Audit Committee following the retirement of Julia Le Blan at the Annual
General Meeting in April. The Board now consists of five non-executive
directors with a range of tenures from 7 months to 7 years. We believe the
Board has good diversity and the correct balance of skills. The Board has set
in place a well-structured succession plan.
Gearing
Having renewed the Company's $30 million gearing facility (with an accordion
facility of $10 million) in October 2021 for two years, the Company continued
to utilise its revolving credit facility to maintain a meaningful but modest
level of gearing. $30 million is currently drawn down on the facility. The
Company closed the six month period with a gearing level of 7.1% having
averaged approximately 7.0% throughout the reporting period.
Outlook
Over the first six months of the year large cap stocks outperformed small cap,
with value continuing to outperform growth. This was reflected in the
Company's NAV and share price performance during the period. Difficult
conditions for small cap stocks are likely to be ongoing, with rising
recession fears on the back of increasing interest rates. However, valuations
relative to large cap stocks are attractive and the Investment Managers'
conviction in the longer terms prospects of US small caps remains.
Therefore, notwithstanding the current headwinds, we continue to remain
optimistic about the outlook for the Company and the Investment Managers'
ability to find a wide range of innovative, fast growing and resilient
companies at attractive valuations.
David Ross
Chairman
22nd August 2022
INVESTMENT MANAGERS' REPORT
Market Review
The US equity market saw its worst first half of the year since 1962, as sharp
declines pushed the indices into bear market territory. In the first six
months of 2022, the S&P 500 Index declined by 20% (in US dollar terms) as
supply chain and COVID-19 worries eventually gave way to greater fears that as
the Federal Reserve ('Fed') fights inflation, the economy will tip into
recession.
A confluence of high inflation, fast-paced monetary tightening, elevated input
costs and other supply chain constraints pressured the markets through several
ups and downs throughout the period. Equity markets lost ground at the start
of the year due to the war in Ukraine and high headline inflation. While
heightened anticipation of a hawkish Fed action added to the market
volatility, robust labor markets, promising consumer spending and healthy
business activity even in a tough business environment provided a brief
respite to the investors in March.
The markets resumed the sell-off in April as the first quarter GDP reading
showed that the economy had contracted as a result of unceasing supply chain
constraints and rising input prices and wage costs. Continued headwinds to
corporate manufacturing and retail sales powered a volatile market in May,
ultimately resulting in slow growth and the fall in manufacturing production
by the end of June. While increased spending in pandemic affected areas is
promising, the ability of the Fed to lead the economy into a soft landing
combined with continued supply chain constraints and the highest inflation in
over forty years has brought uncertainty to equity markets.
Large cap stocks, as represented by the S&P 500 Index, returned -20.0% (in
US dollar terms), outperforming the small cap Russell 2000 Index, which
returned -23.5%. Overall, value continued to outperform growth, as the Russell
3000 Value Index declined by 13.1%, while the Russell 3000 Growth Index
declined by 28.2%.
Performance
The Portfolio's net asset value decreased by -14.2% in the first half of 2022.
The Trust outperformed its benchmark, the Russell 2000 Index (Net), which fell
by -14.7% in sterling terms in the face of a steep market decline. Stock
selection was the primary driver of performance.
With regard to relative performance, the consumer discretionary and health
care sectors contributed the most. Within health care, our overweight position
in HealthEquity was one of the largest contributors to performance.
HealthEquity provides technology that helps consumers and employers manage
Health Savings Accounts (HSAs) and other consumer-directed benefits. The
shares rallied as the company reported a better finish to FY22 with record HSA
member growth. The company also provided FY23 guidance, which was in-line with
expectations, and viewed by management as conservative. More recently, with
the Fed commencing rate hikes for the first time in years, HealthEquity is
poised to see a benefit as the company places custodial assets at higher
yields. We took some profits on strength, but continue to like the stock.
Within consumer discretionary, our exposure to Driven Brands proved
beneficial. Driven Brands is one of the largest operators of auto services in
the US. The company reported a solid first quarter and beat consensus
estimates, followed by a full year guidance increase on their second quarter
call. Driven Brands benefitted from double-digit comps, and management noted
that higher gas prices have not had an impact on consumer demand and pricing
power. We continue to like the company due to its attractive valuations
relative to other auto part retailers and the strength of the business.
Our exposure to WEX within industrials proved beneficial. WEX, a payment
processing and technology solutions provider, posted solid earnings results
for 4Q21 and has been benefiting from re-opening trends, as fleet and travel
volumes rebounded. Moreover, WEX's fleet segment benefits from rising fuel
prices, has been a positive in this macro environment. We view WEX as
reasonably inexpensive with cyclical upside, so it remains a larger exposure
for us despite recent outperformance.
On the other hand, our stock selection in utilities as well as sector
allocation to energy detracted from performance. Energy was the best
performing and only positive sector in the benchmark, up 17% (in US dollar
terms) for the first half of the year. High oil prices exacerbated by
geopolitical concerns and the continued lack of new supply caused a rally in
the sector. We currently don't hold any energy names in our portfolio and this
lack of exposure hindered our performance relative to the index. We struggle
to find companies that meet our investment criteria as many small cap energy
names lack financial discipline and are typically lower quality.
At the security level, our overweight in Q2 Holdings and exposure to Allegro
Microsystems within the technology sector hurt performance. Q2 Holdings is a
provider of digital banking software and other technology to
regional/community financial institutions and fin-techs. The company performed
in-line with other high-growth and low margin software stocks, which were
pressured by rising rates. In mid-May, the stock surged on news that the
company was evaluating alternatives after receiving takeover interest but gave
back the gains in early June as offer prices were deemed too low. Allegro
manufactures and markets integrated circuits for motion control and
energy-efficient systems. Shares of the company fell as investors questioned
the health of the global automotive market, which accounts for the majority of
the company's revenue.
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 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.
This year, we have been trimming overvalued defensive names, despite the
stability they have provided in a volatile market. We are also beginning to
add to some cyclical names in the industrials, financials and consumer
sectors, where valuations once again look attractive. We are also adding
a bit to growthier names in technology and health care, as the selloff in
these sectors have resulted in more reasonable valuations. Our largest
absolute and relative weight remains in industrials.
On the other hand, our largest underweight remains in the energy sector. The
underweight is a result of our lack of exposure to energy stocks as they do
not meet our criteria for durable businesses with sustainable competitive
advantages. Health care and real estate sectors are our next largest
underweight sectors.
Market Outlook
We expect rising recession fears to continue to pose a challenging backdrop
for US small cap stocks in the near term. However, with US small caps
currently in a bear market, investor sentiment near all-time lows and
valuations relative to large caps at historically attractive levels, we
believe the longer term prospects for US small caps have become more
compelling, and we have begun incrementally positioning for a market recovery.
Inflation and other uncertainties, such as the tightening liquidity, lingering
effects of COVID-19 on the continued supply chain constraints, and economic
impacts of the war in Ukraine will be integral to investor sentiment moving
forward.
While the economy has steadily recovered, we remain balanced and continue to
monitor incremental risks that could represent headwinds for US stocks.
Through the volatility, we maintain exposure to quality, 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
22nd August 2022
INTERIM MANAGEMENT REPORT
The Company is required to make the following disclosures in its Half Year
Report:
Principal and Emerging Risks and Uncertainties
The principal risks and uncertainties faced by the Company fall into the
following broad categories: underperformance; market and economic; discount
control; shareholder demand; lost of investment team or portfolio manager;
outsourcing; cyber crime; statutory and regulatory compliance; and climate
change. In addition, the following were identified as emerging risks:
political and economic; global pandemics; market risk; and ongoing shareholder
demand. The Board continues to closely consider and monitor these risks.
Information on each of these areas is given in the Strategic Report within the
Annual Report and Financial Statements for the year ended 31st December 2021.
Related Parties Transactions
During the first six months of the current financial year, no transactions
with related parties have taken place which have materially affected the
financial position or the performance of the Company.
Going Concern
In accordance with The Financial Reporting Council's guidance on going concern
and liquidity risk, including its COVID-19 guidance, the Directors have
undertaken a rigorous review of the Company's ability to continue as a going
concern. The Board has, in particular, considered the impact of heightened
market volatility since the COVID-19 outbreak and more recently the Russian
invasion of Ukraine, but does not believe the Company's going concern status
is affected. The Company's assets, the vast majority of which are investments
in quoted securities which are readily realisable, exceed its liabilities
significantly under all stress test scenarios reviewed by the Board. Gearing
levels and compliance with borrowing covenants are reviewed by the Board on a
regular basis. Furthermore, the Directors are satisfied that the Company and
its key third party service providers have in place appropriate business
continuity plans. Accordingly, having assessed the principal and emerging
risks and other matters, the Directors believe that there are no material
uncertainties pertaining to the Company that would prevent its ability to
continue in such operational existence for at least 12 months from the date of
the approval of this half yearly financial report.
Directors' Responsibilities
The Board of Directors confirms that, to the best of its knowledge:
(i) the condensed set of financial statements contained within the
half year financial report has been prepared in accordance with FRS 104
'Interim Financial Reporting' and gives a true and fair view of the state of
affairs of the Company, and of the assets, liabilities, financial position and
net return of the Company as at 30th June 2022 as required by the UK Listing
Authority Disclosure and Transparency Rules 4.2.4R; and
(ii) the interim management report includes a fair review of the
information required by 4.2.7R and 4.2.8R of the UK Listing Authority
Disclosure and Transparency Rules.
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 accounting estimates that are reasonable
and prudent;
• state whether applicable UK Accounting Standards have been
followed, subject to any material departures disclosed and explained in the
financial statements; 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.
For and on behalf of the Board
David Ross
Chairman
22nd August 2022
STATEMENT OF COMPREHENSIVE INCOME
For the six months ended 30th June 2022
(Unaudited) (Unaudited) (Audited)
Six months ended Six months ended Year ended
30th June 2022 30th June 2021 31st December 2021
Revenue Capital Total Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
(Losses)/gains on investments
held at fair value through
profit or loss - (40,791) (40,791) - 26,175 26,175 - 44,039 44,039
Net foreign currency
(losses)/gains on cash
and loans - (2,028) (2,028) - 95 95 - (284) (284)
Income from investments 1,542 - 1,542 1,555 - 1,555 3,236 - 3,236
Interest receivable 14 - 14 16 - 16 30 - 30
Gross return/(loss) 1,556 (42,819) (41,263) 1,571 26,270 27,841 3,266 43,755 47,021
Management fee (209) (834) (1,043) (222) (888) (1,110) (468) (1,873) (2,341)
Other administrative expenses (233) - (233) (189) - (189) (422) - (422)
Net return/(loss) before
finance costs and taxation 1,114 (43,653) (42,539) 1,160 25,382 26,542 2,376 41,882 44,258
Finance costs (31) (123) (154) (27) (101) (128) (51) (201) (252)
Net return/(loss) before
taxation 1,083 (43,776) (42,693) 1,133 25,281 26,414 2,325 41,681 44,006
Taxation (193) - (193) (197) - (197) (477) - (477)
Net return/(loss) after
taxation 890 (43,776) (42,886) 936 25,281 26,217 1,848 41,681 43,529
Return/(loss) per share (note 3) 1.37p (67.18)p (65.81)p 1.48p 39.95p 41.43p 2.87p 64.81p 67.68p
STATEMENT OF CHANGES IN EQUITY
Called up Capital
share Share redemption Capital Revenue
capital premium reserve reserves(1) reserve(1) Total
£'000 £'000 £'000 £'000 £'000 £'000
Six months ended 30th June 2022 (Unaudited)
At 31st December 2021 1,636 45,367 1,851 250,536 2,393 301,783
Issues of Ordinary shares 2 329 - - - 331
Repurchase of shares into Treasury - - - (1,880) - (1,880)
Shares reissued from Treasury - 105 - 479 - 584
Block listing fees - - - (48) - (48)
Net (loss)/return for the period - - - (43,776) 890 (42,886)
Dividends paid in the period (note 4) - - - - (1,626) (1,626)
At 30th June 2022 1,638 45,801 1,851 205,311 1,657 256,258
Six months ended 30th June 2021 (Unaudited)
At 31st December 2020 1,499 21,970 1,851 209,377 2,142 236,839
Issue of Ordinary shares 137 23,354 - - - 23,491
Repurchase of shares into Treasury (2) - - - (5) - (5)
Net return for the period - - - 25,281 936 26,217
Dividends paid in the period (note 4) - - - - (1,597) (1,597)
At 30th June 2021 1,636 45,324 1,851 234,653 1,481 284,945
Year ended 31st December 2021 (Audited)
At 31st December 2020 1,499 21,970 1,851 209,377 2,142 236,839
Issue of 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 (note 4) - - - - (1,597) (1,597)
At 31st December 2021 1,636 45,367 1,851 250,536 2,393 301,783
(1) These reserves form the distributable reserve of the Company and may be
used to fund distributions to investors.
(2) This amount represents Stamp Duty Reserve Tax paid in 2021 in respect of
repurchases made in 2020.
STATEMENT OF FINANCIAL POSITION
At 30th June 2022
(Unaudited) (Unaudited) (Audited)
30th June 2022 30th June 2021 31st December 2021
£'000 £'000 £'000
Fixed assets
Investments held at fair value through profit or loss 274,545 304,857 322,123
Current assets
Debtors 985 196 559
Cash and cash equivalents 6,920 2,481 3,057
7,905 2,677 3,616
Current liabilities
Creditors: amounts falling due within one year(1) (1,489) (22,589) (1,807)
Net current assets/( liabilities) 6,416 (19,912) 1,809
Total assets less current liabilities 280,961 284,945 323,932
Creditors: amounts falling due after one year (24,703) - (22,149)
Net assets 256,258 284,945 301,783
Capital and reserves
Called up share capital 1,638 1,636 1,636
Share premium 45,801 45,324 45,367
Capital redemption reserve 1,851 1,851 1,851
Capital reserves 205,311 234,653 250,536
Revenue reserve 1,657 1,481 2,393
Total shareholders' funds 256,258 284,945 301,783
Net asset value per share (note 5) 394.1p 435.5p 462.1p
( 1) At 30th June 2021, the Company had drawn down US$30.0m (GBP
£21.7m equivalent) on its loan facility with Scotiabank which was repayable
on 29th October 2021, this agreement was reviewed and renewed, with a new
maturity date of 27th October 2023.
STATEMENT OF CASH FLOWS
For the six months ended 30th June 2022
(Unaudited) (Unaudited) (Audited)
30th June 2022 30th June 2021 31st December 2021
£'000 £'000 £'000
Net cash outflow from operations before dividends and
interest (1,349) (1,294) (2,710)
Dividends received 1,351 1,300 2,694
Interest received 14 16 30
Overseas tax recovered 40 50 50
Interest paid (148) (112) (240)
Net cash outflow from operating activities (92) (40) (176)
Purchases of investments (41,300) (66,028) (105,707)
Sales of investments 47,369 36,753 77,565
Settlement of foreign currency contracts 15 1 5
Net cash inflow/(outflow) from investing activities 6,084 (29,274) (28,137)
Dividend paid (1,626) (1,597) (1,597)
Issue of Ordinary shares 331 23,891 23,891
Shares reissued from Treasury 584 - 460
Repurchase of shares into Treasury (1) (1,880) (5) (939)
Block listing fees (48) - -
Draw down of bank loans - 3,531 3,531
Net cash (outflow)/inflow from financing activities (2,639) 25,820 25,346
Increase/(decrease) in cash and cash equivalents 3,353 (3,494) (2,967)
Cash and cash equivalents at start of period/year 3,057 5,985 5,985
Exchange movements 510 (10) 39
Cash and cash equivalents at end of period/year 6,920 2,481 3,057
Increase/(decrease) in cash and cash equivalents 3,353 (3,494) (2,967)
Cash and cash equivalents consist of:
Cash and short term deposits 7 3 27
Cash held in JPMorgan US Dollar Liquidity Fund 6,913 2,478 3,030
Total 6,920 2,481 3,057
(1) The 30th June 2021 amount represents Stamp Duty Reserve Tax paid in 2021
in respect of repurchases made in 2020.
NOTES TO THE FINANCIAL STATEMENTS
For the six months ended 30th June 2022
1. Financial statements
The information contained within the financial statements in this half year
report has not been audited or reviewed by the Company's auditors.
The figures and financial information for the year ended 31st December 2021
are extracted from the latest published financial statements of the Company
and do not constitute statutory accounts for that year. Those financial
statements have been delivered to the Registrar of Companies, including the
report of the auditors which was unqualified and did not contain a statement
under either section 498(2) or 498(3) of the Companies Act 2006.
2. Accounting policies
The financial statements have been prepared in accordance with the Companies
Act 2006, FRS 102 'The Financial Reporting Standard applicable in the UK and
Republic of Ireland' of the United Kingdom Generally Accepted Accounting
Practice ('UK GAAP') and with the Statement of Recommended Practice
'Financial Statements of Investment Trust Companies and Venture Capital
Trusts' (the revised 'SORP') issued by the Association of Investment Companies
in April 2021.
FRS 104, 'Interim Financial Reporting', issued by the Financial Reporting
Council ('FRC') in March 2015 has been applied in preparing this condensed set
of financial statements for the six months ended 30th June 2022.
All of the Company's operations are of a continuing nature.
The accounting policies applied to this condensed set of financial statements
are consistent with those applied in the financial statements for the year
ended 31st December 2021.
3. (Loss)/return per share
(Unaudited) (Unaudited) (Audited)
Six months ended Six months ended Year ended
30th June 2022 30th June 2021 31st December 2021
£'000 £'000 £'000
(Loss)/return per share is based on the following:
Revenue return 890 936 1,848
Capital (loss)/return (43,776) 25,281 41,681
Total (loss)/return (42,886) 26,217 43,529
Weighted average number of shares in issue 65,166,032 63,281,564 64,314,208
Revenue return per share 1.37p 1.48p 2.87p
Capital (loss)/return per share (67.18)p 39.95p 64.81p
Total (loss)/return per share (65.81)p 41.43p 67.68p
4. Dividends paid
(Unaudited) (Unaudited) (Audited)
Six months ended Six months ended Year ended
30th June 2022 30th June 2021 31st December 2021
£'000 £'000 £'000
Final dividend in respect of the year ended 31st December 2021
of 2.5p (2020: 2.5p) 1,626 1,597 1,597
Total dividends paid in the period/year 1,626 1,597 1,597
The dividend paid in the period/year has been funded from the revenue
earnings.
5. Net asset value per share
(Unaudited) (Unaudited) (Audited)
Six months ended Six months ended Year ended
30th June 2022 30th June 2021 31st December 2021
£'000 £'000 £'000
Net assets (£'000) 256,258 284,945 301,783
Number of shares in issue at period/year end 65,025,739 65,431,265 65,306,265
Net asset value per share 394.1p 435.5p 462.1p
JPMORGAN FUNDS LIMITED
22nd August 2022
For further information, please contact:
Lucy Dina
For and on behalf of
JPMorgan Funds Limited
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.
ENDS
A copy of the 2022 Half Year Report will shortly be submitted to the FCA's
National Storage Mechanism and will be available for inspection at
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
The 2022 Half Year 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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