12 Jun 2020 12:28
LONDON STOCK EXCHANGE ANNOUNCEMENT
JPMORGAN EUROPEAN SMALLER COMPANIES TRUST PLC
FINAL RESULTS FOR THE YEAR ENDED31st MARCH 2020
Legal Entity Identifier: 54930049CEWDI46Y3U28
Information disclosed in accordance with DTR 4.1.3
CHAIRMAN'S STATEMENT
Dear Shareholder,
I am pleased to present the Company's results for the year ended 31st March 2020, albeit in a challenging period.
Investment Performance
It would not be right for me to begin a review of the performance of your Company for the year to 31st March 2020 without first acknowledging the impact of the Covid-19 virus on Europe and European companies, with the complete cessation of activity in many sectors of the economies. In the first quarter of 2020 there has been a sharp reversal of the economic growth experienced in the latter part of 2019 and the pandemic has the potential to impact significantly global economies in the future. The actions taken globally in response to Covid-19 have also caused exceptional volatility in equity markets which is likely to continue.
Over the year to 31st March 2020 the total return on net assets was -17.6%, an underperformance of 4.8% compared to the Company's benchmark during the period, the Euromoney Smaller European Companies (ex UK) net total return index. The majority of this decline occurred in the last three months to 31st March 2020. In the nine months to 31st December 2019 the total return on net assets was +10.6%, whereas total return on net assets for the three months to 31st March 2020 was -25.1%. This is a disappointing result in extraordinary times and the reasons for this are explained in detail in the Investment Managers' Report.
On a more positive note, since 31st March 2020 stock markets have experienced a rebound and over the two month period to the end of May net asset total return was +24.5% compared to the Company's new benchmark index return of +20.7%, an outperformance of 3.8%.
Nonetheless, the Trust's longer term performance remains strong, with the 5 year and 10 year total return on net assets rising 28.8% and 103.3%, respectively, whilst the benchmark total return rose 27.9% and 78.9% respectively. From 1st April 2020 the benchmark changed to the MSCI Europe (ex UK) small cap net total return index. This index better reflects the underlying portfolio constituents.
The investment managers explain their investment approach and process below. Their investment process essentially is to focus on identifying market leading companies with a catalyst for outperformance. The catalyst can be any one or a combination of Value, Quality and Momentum. Following discussions with the investment managers additional flexibility has been provided to invest in up to 25% in companies outside the benchmark.
Investment Management Fees
Following discussions with the Manager, a reduction in management fees was agreed in March this year and has been effective from 1st April 2020. The investment management fee is now charged at an annual rate of 0.85% of net assets. Previously, the management fee was charged at 1.0% on net assets up to £400 million and 0.85% on net assets over £400 million. This reduction ensures that the Company's fee arrangements remain competitive, provides a saving for our existing shareholders and should make the Company more attractive for new investors.
Gearing
Gearing can be a differentiator for an investment trust and the Board believes that it can be beneficial to performance. The Board sets the overall strategic gearing policy and guidelines and reviews these at each Board meeting. Borrowings during the year consisted of a €140 million revolving credit facility, of which €125 million was drawn down at the year end. During the year gearing varied between 12.2% geared and 4.9% cash. As outlined by the investment managers the spread of Covid-19 was an unprecedented event and at the start of the Covid-19-related market downturn the portfolio was over 10% geared, thus impacting performance.
Revenue and Dividends
The Board's dividend policy is to pay out the majority of the net revenue available each year. This is set against the Company's objective of maximising capital growth and the investment managers are therefore not constrained to deliver income in any one financial year.
Net revenue return for the year reduced to £10.9 million (2019: £11.6 million), a marginal decline compared to 2019. An interim dividend of 1.2 pence per share was paid on 17th January 2020. Subject to shareholder approval at the forthcoming Annual General Meeting, a final dividend of 5.5 pence per share will be paid on 31st July 2020 to shareholders on the register as at the close of business on 25th June 2020 (ex-dividend date 26th June 2020).
Discounts and Share Repurchases
Discounts in the European investment trust sector have widened in recent months. The discount of the Company's share price to net asset value widened over the year from 12.8% to 22.6% at the year end, reflecting general market sentiment, with an average discount over the 12 months of 13.9%. As at 5th June 2020 the discount had subsequently widened to 16.1%. The Board continues to monitor the level of the discount carefully and seeks to use its ability to repurchase shares to minimise the short term volatility and the absolute level of the discount when appropriate. No shares were repurchased during the year.
Manager Evaluation
During the year, the Management Engagement Committee undertook a formal review of the Manager, covering the investment management, company secretarial, administrative and marketing services provided to the Company. The review took into account the Manager's investment performance record, management processes, investment style, resources and risk control mechanisms. During the recent period of market volatility arising as a result of Covid-19 the Board has met more frequently to ensure support has been available to the investment managers. As Chair I have been in regular contact with Francesco Conte and Edward Greaves. The Board agreed with the Committee's recommendation that the continued appointment of the Manager is in the interests of shareholders as a whole.
Environmental, Social and Governance ('ESG')
The investment managers have always considered environmental, social and governance ('ESG') issues in their investment process. ESG issues are considered at every stage of the investment decision and this is outlined in the Annual Report. The investment managers use their regular company meetings with potential and existing portfolio companies to discuss and challenge management on their adherence to best practice.
Board of Directors
As reported in my statement in the Half Year Report we welcome Tanya Cordrey as a new member of the Board. Tanya has a strong background in the digital environment.
Amendment to Articles of Association
The Board is proposing an amendment to the Company's Articles of Association to enable the Company to hold shareholder meetings whereby shareholders are not required to attend the meeting in person at a physical location. This will facilitate shareholder attendance in situations where they are prevented, through laws or regulations, from attending at a physical location. Having consulted a number of the Company's larger shareholders the Board understands that these shareholders do not object to the proposed change in the articles. The Directors have no present intention of holding 'virtual-only' meetings and would only utilise them where Directors consider it in the best interests of shareholders to do so, for example where shareholders are not permitted to physically attend. Further details of the amendments are set out in the Directors' Report in the Annual Report.
Annual General Meeting
The Company's Annual General Meeting ('AGM') will be held at 60 Victoria Embankment, London EC4Y 0JP on Monday, 20th July 2020 at 12.30 p.m.
As you would expect, due to the ongoing situation surrounding Covid-19 and the developing advice from the Department of Health & Social Care, the Board has decided to revise the format of this year's AGM. Whilst the formal business of the AGM will be considered, the meeting will be functional only. There will be no presentation from the investment managers Francesco Conte and Edward Greaves. However, a video presentation will be placed on the Company's website. In addition there will be no social event as part of the AGM and therefore no refreshments provided. The Government has, for the time being, prohibited public gatherings of more than two people and therefore shareholders will not be allowed to attend the AGM in person. Anyone seeking to attend the meeting will be refused entry.
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 addition, shareholders are encouraged to raise any questions in advance of the AGM with the Company Secretary via the 'Ask US a Question' link which can be found in the 'Contact Us' section on the Company's website. Any questions received will be replied to by the Company Secretary after the AGM.
Outlook
At the time of writing it is difficult to predict the ultimate impact of the Covid-19 virus spread and the political, economic and societal outcomes and costs are very uncertain. Globally there are also continuing issues to address, not least the Brexit trade negotiations between the United Kingdom and the European Union, but also trade friction between the US and China.
Notwithstanding the uncertainties we have confidence in the investment managers' ability to position the portfolio to weather the storms ahead and reiterate their belief that the pandemic will not change the principal investment themes in the portfolio - environmental improvement, technology and wellness.
Marc van Gelder
Chairman 12th June 2020
INVESTMENT MANAGERS' REPORT
Investment Scope and Process
The objective of the Company is to achieve capital growth from a portfolio of quoted smaller European companies, excluding the United Kingdom. The investment universe is defined at the time of purchase by the countries and market capitalisation range of the constituents of the benchmark index, the Euromoney Smaller European Companies (ex UK) net total return Index (until the end of March). At the end of March 2020 this index consisted of 1,000 companies with a market value of between £91 million and £4.9 billion. This universe of potential investments is screened using a proprietary multi-factor model, to the results of which we apply fundamental analysis. From 1st April 2020 we have changed the benchmark index to the more widely used MSCI Europe (ex UK) small cap net total return index. At the end of March 2020 the new benchmark consisted of 705 companies with a market value of between £43 million and £6.3 billion.
The investment process is driven by bottom-up stock selection with a focus on identifying market leading growth companies with a catalyst for outperformance. The catalyst could be any one, or a combination of Value, Quality and Momentum. Stock position sizing is determined by investment conviction and trading liquidity. Investments are sold when there is a fundamental deterioration in business prospects, they become overvalued, or the market capitalisation has significantly outgrown the benchmark index. The Board has set a liquidity range of between 20% cash and 20% gearing within which we may operate. The policy is not to hedge the currency exposure of the portfolio's assets.
Market Review
The 12 month period to March 2020 saw a great deal of uncertainty and financial market volatility, much of it due to the constantly changing US stance on trade with China specifically, and the rest of the world more generally. In Europe, ambiguity surrounding the UK's future relationship with the European Union added to the feeling of unease. With little visibility on how the global tariff regime might evolve, companies became increasingly unwilling to invest and the economic outlook deteriorated. As has become commonplace since the global financial crisis, Central banks quickly stepped in to prop up economies with ever looser monetary policies. As a result, markets seesawed between pessimism due a poor economic outlook and optimism due to loose monetary policies.
By late summer, the US and China moved closer to signing phase one of a trade deal and the Conservative Party's resounding election win in the UK dispelled any ambiguities about the UK's Brexit position. As a result of abundant liquidity and moderating political risks, equity markets broke out of their volatile sideways trading range to finish 2019 strongly, even as the outlook for company earnings remained weak.
The 2020 calendar year started strongly and initially markets believed that, like SARS-CoV in 2003, Covid-19 was likely to be a short lived phenomenon. Unfortunately by late February, despite extreme lockdown measures by the Chinese government, it quickly became apparent that the outbreak could not be contained and Covid-19 rapidly became a global pandemic. Equity markets plunged at the sharpest rate since the 1929 financial crisis and volatility rose to levels last seen during the 2008 global financial crisis. The market sell off was compounded by increasingly severe lockdown measures announced by nations across the world and uncertainty around how the crisis could be resolved.
Portfolio Performance
Over the financial year, the net asset value total return of the Company fell by 17.6%, underperforming its benchmark by 4.8%. The biggest detractor from performance was gearing as the portfolio was over 10% geared at the start of the sharp Covid-19 related drawdown in late February. As visibility worsened, we reduced gearing sharply by the end of March.
Detractors from performance also included companies with weaker balance sheets which became a significant concern for investors following the Covid-19 outbreak. These included French technical services provider, Spie, Swiss semiconductor manufacturer, AMS, which needed financing following a large acquisition, and Swedish facilities manager, Coor. We sold all of these positions to reduce gearing.
By contrast, top performing investments over the period included; Swiss aseptic packaging solutions provider, SIG Combibloc, as the company continued to benefit from strong end market demand and market share gains, the French payments business, Ingenico, following the announcement of its acquisition by French peer, Worldline, as well as Italian renewable energy company, Falck Renewables, after announcing its ambition to double installed capacity by 2025.
PERFORMANCE ATTRIBUTION
YEAR ENDED 31ST MARCH 2020
% | % | |
Contributions to total returns | ||
Benchmark return | -12.8 | |
Asset allocation | 0.7 | |
Stock selection | -2.4 | |
Gearing/cash effect | -2.5 | |
Currency effect | 0.4 | |
Investment Managers' added contribution | -3.8 | |
Portfolio return | -16.6 | |
Management fee/other expenses | -1.0 | |
Other effects | -1.0 | |
Return on net assetsA | -17.6 | |
Return to shareholdersA | -26.7 |
Source: Datastream/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')
Portfolio Positioning
Over the period, we further increased the portfolio's exposure to companies benefitting from Environmental, Social and Governance ('ESG') structural tailwinds. Electricity became the largest sector overweight position, although it is important to note that our exposure here is exclusively to renewable energy companies. We increased our holding in Falck Renewables in Italy and added new companies; Encavis in Germany, Solaria in Spain, and Scatec Solar in Norway. We believe that renewable energy is an attractive investment opportunity due to the increasing demand for clean energy and rapidly falling generation costs. Not only will renewable energy production be encouraged by the European Green Deal, but we are also witnessing a growing corporate appetite for long-term 'green energy' contracts, both for sustainability and risk management reasons. Lastly, renewable companies such as Scatec Solar are taking advantage of the rapid development of new markets for renewable energy, such as South Africa, Bangladesh, Vietnam or Indonesia.
Software & Computer Services remained the second largest overweight sector position while General Industrials became the third largest overweight sector position. However, our exposure to this latter sector is composed of packaging companies that serve the food and pharma industries which have defensive growth characteristics and also offer environmentally friendly solutions. For example, we increased our exposure to Swiss listed SIG Combibloc and added another Swiss company, Aluflexpack, to the portfolio. Aluflexpack is a manufacturer of premium flexible packaging solutions based on aluminium, a more easily recyclable material. Aluflexpack's focus on growing product ranges such as coffee capsules and pet food packaging, as well as their willingness to consolidate a very fragmented market, offers sustainable long-term growth prospects.
We financed these purchases by reducing our exposure to companies with declining operational momentum. We sold our position in the Danish IT services provider, NNIT, as they unexpectedly lost two large contracts and suffered from price pressure on their legacy outsourcing business with Novo Nordisk. We also sold our positions in two Dutch companies: animal feed distributor, ForFarmers, following the implementation of new emissions-related regulation which put pressure on cattle herd sizes in the Netherlands, and speciality distributor, B&S, as trade tensions and protests in Hong Kong significantly disturbed their Asian operations. We also reduced our exposure to companies most exposed to the weak global economic environment including the automotive suppliers Hella in Germany and Plastic Omnium in France. Additionally, during the period we sold two French companies whose prices benefited from takeover approaches: Altran, the world leader in R&D outsourcing, and Ingenico, a leading French payments company.
During the period, Switzerland grew to be the Company's largest country overweight position as we built positions in attractive stocks likely to prove resilient to the Covid-19 pandemic. For example, the consumer electronics equipment manufacturer, Logitech, should benefit from more video conferencing and online gaming, and the online pharmacy, Zur Rose, should benefit from new regulations allowing consumers to order their prescriptions online.
The Netherlands moved to our second largest country overweight position following the disposal of companies such as ForFarmers and NNIT. The proceeds of these divestments were partially reinvested into new opportunities such as the world leader in Atomic Layer Desposition, ASM International, who have pioneered a methodology to produce ever smaller logic based semiconductors.
Austria, Sweden and Germany were our largest country underweights positions as they tend to be large exporting countries whose companies are likely to suffer in a global industrial slowdown.
By the end of the financial year we were 3.8% geared.
Outlook
The world has rarely looked less certain. It is 100 years since we last faced a pandemic and so there are no easy formulas to be followed. Thankfully, as we write the number of new deaths has rapidly declined as a result of the severe lockdown measures, but the economic costs are considerable. Despite record falls in GDP and record rises in unemployment, European markets have recouped about 40% of the fall that took place from mid-February to mid-March as a result of unprecedented government and central bank support. This is a trend we expect to continue albeit with considerable volatility.
We believe that the pandemic will not change the principal investment themes in the portfolio - environmental improvement, technology and wellness - but instead will lead to their acceleration. To that end we have taken advantage of sharp share price falls to purchase new positions in high quality businesses that benefit from these megatrends. We have bought a leading Swedish supplier of heating and ventilation solutions that improve building efficiency, two online pharmacy companies, one Swiss and the other German, that help us in our efforts to socially distance and technology companies that enable working from home.
The shape of the path to recovery is uncertain but the Trust's investments include many world leaders in markets that should grow regardless of the pace of recovery.
Francesco Conte
Edward Greaves
Investment Managers 12th 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, solvency or liquidity.
With the assistance of the Manager, the Board has drawn up a risk matrix, which identifies the key risks to the Company, as well as emerging risks. In assessing the risks and how they can be mitigated, the Board has given particular attention to those risks that might threaten the viability of the Company. These key risks fall broadly under the following categories:
• Investment Underperformance and Strategy: Investment performance could be adversely affected by the loss of one or more of the investment management team. To reduce the likelihood of such an event, the Manager ensures appropriate succession planning and adopts a team-based approach as well as special efforts to retain key personnel.
An inappropriate investment strategy, for example excessive concentration of investments, asset allocation, the level of gearing or the degree of portfolio risk, may lead to underperformance against the Company's benchmark index and peer companies.
The Board manages these risks by diversification of investments through its investment restrictions and guidelines which are monitored and reported on by the Manager. JPMF 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 Board sets strategic guidelines for gearing as well as investments. Once those are agreed, decisions on levels of gearing are delegated to the investment managers, whose decisions are subject to challenge by the Board. The Board holds a separate meeting devoted to strategy each year.
A disproportionate widening of the discount relative to the Company's peers could result in loss of value for shareholders. The Board regularly discusses discount management policy and has set parameters for the Manager and the Company's broker to follow.
• Market and Currency: Market risk arises from uncertainty about the future prices of the Company's investments. It represents the potential loss that the Company might suffer through holding investments in the face of negative market movements. Investing in smaller companies is inherently more risky and volatile, partly due to the potential lack of liquidity in some shares. The Board discusses these risk factors at each Board meeting and has placed investment restrictions and guidelines to limit 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 JPMF. The Board monitors the implementation and results of the investment process with the investment manager. The majority of the Company's assets, liabilities and income are denominated in Euros rather than in the Company's functional currency of sterling (in which it reports). As a result, movements in the Euro:sterling exchange rate may affect the sterling value of those items. Therefore, there is an inherent risk from these exchange rate movements. The fair value or future cash flows of a financial instrument held by the Company may fluctuate because of changes in market prices. This market risk comprises three elements - currency risk, interest rate risk and other price risk. Information to enable an evaluation of the nature and extent of these three elements of market risk is given in note 21(a) of the Annual Report, together with details of how the Board manages these risks.
The Board has considered, and continues to keep under review the political, economic and investment risks to the Company, associated with the UK's decision to leave the European Union and the ongoing trade negotiations. The outcome of these negotiations with the European Union remain uncertain at the time of writing. Continued lack of clarity as to the outcome might lead to a reduced or increased demand for the Company's shares as a result of investor sentiment, which may be reflected in a widening or narrowing of the discount.
• Accounting, Legal and Regulatory: In order to qualify as an investment trust, the Company must comply with Section 1158 of the Corporation Tax Act 2010 ('Section 1158'). Details of the Company's approval are given under 'Business of the Company' in the Annual Report. Were the Company to breach Section 1158, it may lose investment trust status and, as a consequence, gains within the Company's portfolio would be subject to capital gains tax. The Section 1158 qualification criteria are continually monitored by JPMF and the results reported to the Board each month. The Company must also comply with the provisions of the Companies Act 2006 and, since its shares are listed on the London Stock Exchange, the FCA Listing Rules, the Market Abuse Regulations ('MAR'), Disclosure Guidance and Transparency Rules ('DTRs') and, as an investment trust, the Alternative Investment Fund Managers Directive ('AIFMD'). A breach of the Companies Act could result in the Company and/or the Directors being fined or the subject of criminal proceedings. Breach of the FCA Listing Rules or DTRs could result in the Company's shares being suspended from listing which in turn would breach Section 1158. Failure of the Manager to comply with the AIFMD could lead to the Manager losing its status as an Alternative Investment Fund Manager ('AIFM') and the Company would then need to change its AIFM. The Board relies on the services of its Company Secretary, the Manager and its professional advisers to ensure compliance with the Companies Act, the FCA Listing Rules, MAR, DTRs and AIFMD.
• Operational: Disruption to, or failure of, the Manager's accounting, dealing or payments systems or the Depositary or Custodian's records may prevent accurate reporting and monitoring of the Company's financial position. Under the terms of its agreement, the Depositary has strict liability for the loss or misappropriation of assets held in custody. See note 21 for further details on the responsibilities of the Depositary. Details of how the Board monitors the services provided by JPMF and its associates and the key elements designed to provide effective risk management and internal control are included within the Risk Management and Internal Control section of the Corporate Governance Statement in the Annual Report.
The risk of fraud or other control failures or weaknesses within the Manager or other service providers could result in losses to the Company. The Audit Committee receives independently audited reports on the Managers and other service providers' internal controls, as well as a report from the Manager's Compliance function. The Company's management agreement obliges the Manager to report on the detection of fraud relating to the Company's investments and the Company is afforded protection through its various contracts with suppliers, of which one of the key protections is the Depositary's indemnification for loss or misappropriation of the Company's assets held in custody.
• Cyber Crime: 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 Board has received the cyber security policies for its key third party service providers and JPMF has provided assurance to the Directors that 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 and reported on every six months against the AAF Standard.
• Financial: The financial risks arising from the Company's financial instruments include market price risk, interest rate risk, liquidity risk and credit risk. Further details are disclosed in note 21 of the Annual Report.
Poor control of expenses can lead to an escalation of costs and high ongoing charges. The Board monitors the expenses of the Trust and is provided with detailed financial information.
• Corporate Governance and Shareholder Relations: Details of the Company's compliance with corporate governance best practice, including information on relations with shareholders, are set out in the Corporate Governance Statement of the Annual Report.
• Pandemic Risk: Covid-19 has developed rapidly to become a pandemic which has delivered a major shock to the global economy and become a principal risk. The Company is exposed to the risk of market volatility and falling equity markets brought about by the pandemic. The resilience of the operational services 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 dividend income. Whilst the Board notes the fall in the Company's NAV per share and share price it also notes that 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.
Further information on Covid-19 is set out in the Chairman's statement above, the Investment Managers' report above and note 23 of the Annual Report.
• Emerging Risks: The Board assesses and keeps under review emerging risks, including but not limited to the impact of climate change, natural disasters and social inequality and pandemics. Increasingly these risks have the potential to combine and in doing so heighten geopolitical risk.
TRANSACTIONS WITH THE MANAGER AND RELATED PARTIES
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 £6,284,000 (2019: £6,458,000) of which £nil (2019: £nil) was outstanding at the year end.
During the year £36,000 (2019: £51,000), including VAT, was payable to JPMAM 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 to the financial statements are safe custody fees payable to JPMorgan Chase amounting to £90,000 (2019: £90,000) excluding VAT of which £25,000 (2019: £14,000) was outstanding at the year end.
The Manager may carry out some of its dealing transactions through group subsidiaries. These transactions are carried out at arm's length. The commission payable to JPMorgan Securities Limited for the year was £nil (2019: £nil) of which £nil (2019: £nil) was outstanding at the year end.
The Company also holds cash in JPMorgan Euro Liquidity Fund, which is managed by JPMF. At the year end, this was valued at £46.0 million (2019: £28.3 million). Interest amounting to £nil were payable (2019: £160,000) during the year of which £nil (2019: £nil) was outstanding at the year end. This is included in other administrative expenses in note 6. Due to change in EU Money Market Fund Regulations, effective from 18th March 2019, negative interest is no longer charged explicity. Instead, it causes the NAV per share to fall. Therefore for the 12 months ended 30th March 2020, negative interest was included under (losses)/gains on liquidity fund. In the comparative period/year, this was included in other administrative expenses.
Stock lending income amounting to £253,000 (2019: £120,000) were received by the Company during the year. JPMAM commissions in respect of such transactions amounted to £28,000 (2019: £21,000).
Handling charges on dealing transactions amounting to £76,000 (2019: £97,000) were payable to JPMorgan Chase during the year of which £12,000 (2019: £10,000) was outstanding at the year end.
At the year end, a bank balance of £60,227,000 (2019: £266,000) was held with JPMorgan Chase Bank N.A. A net amount of interest of £1,000 (2019: £nil) was receivable by the Company during the year from JPMorgan Chase of which £nil (2019: £nil) was outstanding at the year end.
Full details of Directors' remuneration and shareholdings can be found on in the Annual Report.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and Accounts in accordance with applicable law and regulations.
Company law requires the Directors to prepare 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 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 Accounts 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 total 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 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 a 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 proper 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.
The financial statements are published on the www.jpmeuropeansmallercompanies.co.uk website, which is maintained by the Company's 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 Auditors accept no responsibility for any changes that have occurred to the financial statements since they were initially presented on the website. The financial statements are prepared in accordance with UK legislation, which may differ from legislation in other jurisdictions.
Under applicable law and regulations the Directors are also responsible for preparing a Directors' Report, Strategic Report, Statement of Corporate Governance and Directors' Remuneration Report that comply with that law and those regulations.
Each of the Directors, whose names and functions are listed 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 risks and uncertainties that it faces.
The Board confirms that it is satisfied that the Annual Report and Accounts taken as a whole are fair, balanced and understandable and provide the information necessary for shareholders to assess the strategy and business model of the Company.
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 position of the Company, together with a description of the principal risks and uncertainties that the Company faces.
For and on behalf of the Board
Marc Van Gelder
Chairman
12th June 2020
STATEMENT OF COMPREHENSIVE INCOME
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 | - | (113,854) | (113,854) | - | (57,332) | (57,332) |
Foreign exchange gains/(losses) on liquidity fund1 | - | 505 | 505 | - | (946) | (946) |
Net foreign currency losses | - | (2,611) | (2,611) | - | (248) | (248) |
Income from investments | 14,823 | - | 14,823 | 15,717 | - | 15,717 |
Interest receivable and similar income | 254 | - | 254 | 120 | - | 120 |
Gross return/(loss) | 15,077 | (115,960) | (100,883) | 15,837 | (58,526) | (42,689) |
Management fee | (1,885) | (4,399) | (6,284) | (1,938) | (4,520) | (6,458) |
Other administrative expenses | (723) | - | (723) | (863) | - | (863) |
Net return/(loss) before finance costs | ||||||
and taxation | 12,469 | (120,359) | (107,890) | 13,036 | (63,046) | (50,010) |
Finance costs | (171) | (398) | (569) | (183) | (428) | (611) |
Net return/(loss) before taxation | 12,298 | (120,757) | (108,459) | 12,853 | (63,474) | (50,621) |
Taxation | (1,412) | - | (1,412) | (1,173) | - | (1,173) |
Net return/(loss) after taxation | 10,886 | (120,757) | (109,871) | 11,680 | (63,474) | (51,794) |
Return/(loss) per share | 6.83p | (75.73)p | (68.90)p | 7.31p | (39.71)p | (32.40)p |
STATEMENT OF CHANGES IN EQUITY
Called up | Capital | |||||
share | Share | redemption | Capital | Revenue | ||
capital | premium | reserve | reserves | reserve1 | Total | |
£'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
At 31st March 2018 | 8,000 | 1,312 | 7,636 | 673,600 | 11,627 | 702,175 |
Repurchase and cancellation of the | ||||||
Company's own shares | (26) | - | 26 | (1,857) | - | (1,857) |
Net (loss)/return | - | - | - | (63,474) | 11,680 | (51,794) |
Dividends paid in the year (note 3) | - | - | - | - | (10,716) | (10,716) |
At 31st March 2019 | 7,974 | 1,312 | 7,662 | 608,269 | 12,591 | 637,808 |
Net (loss)/return | - | - | - | (120,757) | 10,886 | (109,871) |
Dividends paid in the year (note 3) | - | - | - | - | (10,684) | (10,684) |
At 31st March 2020 | 7,974 | 1,312 | 7,662 | 487,512 | 12,793 | 517,253 |
STATEMENT OF FINANCIAL POSITION
AT 31ST MARCH 2020
2020 | 2019 | |
£'000 | £'000 | |
Fixed assets | ||
Investments held at fair value through profit or loss | 537,036 | 604,429 |
Current assets | ||
Derivative financial instruments | 16 | - |
Debtors | 11,226 | 7,871 |
Cash and cash equivalents | 106,257 | 28,596 |
117,499 | 36,467 | |
Current liabilities | ||
Creditors: amounts falling due within one year | (26,668) | (3,084) |
Derivative financial liabilities | - | (4) |
Net current assets | 90,831 | 33,379 |
Total assets less current liabilities | 627,867 | 637,808 |
Creditors: amounts falling due after more than one year | (110,614) | - |
Net assets | 517,253 | 637,808 |
Capital and reserves | ||
Called up share capital | 7,974 | 7,974 |
Share premium | 1,312 | 1,312 |
Capital redemption reserve | 7,662 | 7,662 |
Capital reserves | 487,512 | 608,269 |
Revenue reserve | 12,793 | 12,591 |
Total shareholders' funds | 517,253 | 637,808 |
Net asset value per share | 324.4p | 400.0p |
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31ST MARCH 2020
2020 | 2019 | |
£'000 | £'000 | |
Net cash outflow from operations before dividends and interest | (6,152) | (6,830) |
Dividends received | 12,935 | 12,613 |
Interest received | 1 | - |
Overseas tax recovered | 568 | 168 |
Interest paid | (429) | (659) |
Net cash inflow from operating activities | 6,923 | 5,292 |
Purchases of investments and derivatives | (980,965) | (1,035,910) |
Sales of investments and derivatives | 954,435 | 1,143,506 |
Settlement of forward currency contracts | 102 | (133) |
Net cash (outflow)/inflow from investing activities | (26,428) | 107,463 |
Dividends paid | (10,684) | (10,716) |
Repurchase and cancellation of the Company's own shares | - | (1,857) |
Drawdown of bank loans | 108,262 | 66,704 |
Repayment of bank loans | - | (160,313) |
Net cash inflow/(outflow) from financing activities | 97,578 | (106,182) |
Increase in cash and cash equivalents | 78,073 | 6,573 |
Cash and cash equivalents at start of year | 28,596 | 21,998 |
Exchange movements | (412) | 25 |
Cash and cash equivalents at end of year | 106,257 | 28,596 |
Increase in cash and cash equivalents | 78,073 | 6,573 |
Cash and cash equivalents consist of: | ||
Cash and short term deposits | 60,227 | 266 |
Cash held in JPMorgan Euro Liquidity Fund | 46,030 | 28,330 |
Total | 106,257 | 28,596 |
NOTES TO THE FINANCIAL STATEMENTS
1. Accounting policies
Basis of accounting
All of the Company's operations are of a continuing nature.
The financial statements have been prepared on a going concern basis. The Directors have considered any potential impact of the Covid-19 pandemic on the going concern and viability of the Company. They have considered the potential impact of Covid-19 and the mitigation measures which key service providers, including the Manager, have in place to maintain operational resilience particularly in light of Covid-19. The Directors have reviewed income and expense projections and the liquidity of the investment portfolio in making their assessment. Further details of Directors' considerations regarding this are given in the Chairman's Statement, Investment Managers' Report, Going Concern Statement, Viability Statement and Principal Risks section of this Annual Report.
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 | |
Revenue return | 10,886 | 11,680 |
Capital loss | (120,757) | (63,474) |
Total loss | (109,871) | (51,794) |
Weighted average number of shares in issue during the year | 159,462,885 | 159,839,186 |
Revenue return per share | 6.83p | 7.31p |
Capital loss per share | (75.73)p | (39.71)p |
Total loss per share | (68.90)p | (32.40)p |
3. Dividends
(a) Dividends paid and proposed
2020 | 2019 | |
£'000 | £'000 | |
Dividends paid | ||
2019 final dividend of 5.5p (2018: 5.5p) per share | 8,770 | 8,799 |
2020 Interim dividend of 1.2p (2019: 1.2p) per share | 1,914 | 1,917 |
Total dividends paid in the year | 10,684 | 10,716 |
Dividend proposed | ||
2020 final dividend of 5.5p (2019: 5.5p) per share | 8,770 | 8,770 |
All dividends paid and declared in the period have been funded from the revenue reserve.
The final dividend has been proposed in respect of the year ended 31st March 2020 and is subject to approval at the forthcoming Annual General Meeting. 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.
(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, shown below. The revenue available for distribution by way of dividend for the year is £10,886,000 (2019: £11,680,000). The revenue reserve after payment of the final dividend will amount to £4,023,000 (2019: £3,821,000).
2020 | 2019 | |
£'000 | £'000 | |
Interim dividend of 1.2p (2019: 1.2p) per share | 1,914 | 1,917 |
Final dividend of 5.5p (2019: 5.5p) per share | 8,770 | 8,770 |
10,684 | 10,687 |
4. Net asset value per share
2020 | 2019 | |
Net assets (£'000) | 517,253 | 637,808 |
Number of shares in issue | 159,462,885 | 159,462,885 |
Net asset value per share | 324.4p | 400.0p |
JPMORGAN FUNDS LIMITED
12th June 2020
For further information:
Faith Pengelly,
JPMorgan Funds Limited
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 shortly be submitted to the FCA's National Storage Mechanism and will be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism