Last checked at 29 Sep 2021 15:32
LONDON STOCK EXCHANGE ANNOUNCEMENT
JPMORGAN EMERGING MARKETS INVESTMENT TRUST PLC
(the 'Company')
FINAL RESULTS FOR THE YEAR ENDED 30TH JUNE 2021
Legal Entity Identifier: 5493001VPQDYH1SSSR77
Information disclosed in accordance with the DTR 4.1.3
CHAIRMAN'S STATEMENT
The Directors set four key objectives for your Company for the financial year to 30th June 2021. These were to continue the strong record of investment performance; to reduce the discount of our share price to the net asset value; to further broaden the shareholder base; and to ensure that the increasing focus on ESG and sustainable investing and its more formalised integration into the Manager's investment process is more fully communicated to the Company's shareholders.
It is pleasing to report positive progress on all fronts. Investment performance has once again remained above benchmark and we have made further progress in broadening the shareholder base to include more retail investors and wealth managers. The discount of the Company's share price to net asset value was 6.4% at the end of the financial year compared with 8.7% the previous year (although the shares briefly traded at a premium in February and March) and we are now communicating more fully our ESG credentials to both existing and prospective shareholders.
Investment Performance
Investment performance in the year to 30th June 2021 was again positive in both absolute and relative terms. The return to shareholders was +36.2% over the year and the Company's return on net assets was +32.7%. This represents outperformance of our benchmark index (the MSCI Emerging Markets index with net dividends reinvested, in sterling terms) which returned +26.0%.
Most of the outperformance came in the first half when the return on net assets was +24.9% against a benchmark return of +18.5%. However, it was very pleasing that the Company held onto its gains in the second half despite the significant rotation in markets towards cyclical stocks and deep value stocks, as these companies do not generally satisfy the Manager's criteria of investing in sustainable growth companies and are not widely held in the portfolio. Performance over the longer term remains very strong and is also well ahead of benchmark over three, five and ten years as the graph on page 20 of the Annual Report illustrates.
Stock selection was once again the main contributor to outperformance over the year with country allocation marginally detracting. Stock selection has added value every year for the last seven years and demonstrates the integrity and strength of Austin Forey and his team's process of investing in companies with sustainable business models and responsible management. Looking at the outperformance over the last five years, it is interesting that the main contributions have come from markets in EMEA (Europe, the Middle East and Africa) and Latin America, with the Eastern European, software services company, EPAM, being the outstanding performer. In Latin America, the two main contributors to outperformance over the last five years have been Argentina's Mercadolibre, an e-commerce and fintech business, and the IT and software company Globant. This illustrates the benefit of being an active investment manager and having the resources and ability to find the best stockpicking opportunities across a broad global emerging market universe rather than confining investment to one country or area.
This consistent long term outperformance has been recognised by the Company winning a number of accolades; Following an in-depth review by Morningstar's research analysts, the Company was recently upgraded from Silver to a Gold Morningstar Analyst Rating. The Company also holds a Morningstar Sustainability Rating of Five Globes, reflecting its strong ESG credentials and it is the only company, within the emerging markets trust sector, to attain this Five Globe rating. We are also delighted that Austin Forey received the Morningstar award for Outstanding Fund Manager this year.
Meanwhile, for the second year running the Company was awarded Investment Week's Best Emerging Markets Trust and for the third consecutive year, it was the winner of the Citywire Global Emerging Market Equities award.
The Investment Manager's Report provides a review of the financial year to 30th June 2021 and more detail on the investment performance and how it was achieved.
Discount
The discount (to the cum income net asset value) ended the financial year at 6.4%. This compares with a discount of 8.7% at the end of the previous financial year and 3.0% at the half year ended 31st December 2020. Over the last 12 months the discount on the Company's shares ranged between 12.8% and a premium of 2.2%, averaging a discount of 5.0%, which compares with an average discount of 8.3% for the previous financial year. At the time of writing the Company's shares are trading on a discount of 7.2%.
The Board regularly considers the merits of buying back shares in order to manage the level and volatility of the discount and will buy back shares if the discount is out of line with the peer group and markets are orderly. As shares are only bought back at a discount to the prevailing net asset value, share buybacks benefit shareholders as they increase the net asset value per share. Over the financial year 9,261,304 shares were bought back at an average discount of 9.4% and at a cost of £10.6 million. A further 4,898,625 shares have been bought back post the year end. This compares with buybacks of 24,139,960 shares in the previous financial year (adjusted for the 10 for 1 share split) at an average discount of 9.2%. If the shares were to trade at a premium to NAV for a sustained period of time, the Board may decide to use its authority to re-issue shares out of Treasury, but only if the impact of any share issuance after costs is of benefit to existing shareholders and not dilutive to NAV.
Shareholder Base
The Directors have continued to make progress on their objective to broaden the shareholder base to include more wealth managers and retail investors and the share register is now significantly more diversified than in the past. Institutional shareholders now comprise 35% of the share register, down from 46% in June 2020 and 65% five years ago. The Company's excellent long-term investment performance record has enabled both J.P.Morgan and the Company's broker Stifel to promote the Company to attract new investors.
Revenue and Dividends
The Board has been consistent in communicating to shareholders that the Company is managed to produce total return rather than any particular level of dividend and that the level of dividends will vary. For individual years dividends received in sterling terms may fluctuate in line with underlying earnings, as well as currency movements and any changes in the portfolio. In the financial year just ended the revenue return per share decreased for the second year running with the revenue return per share for the year falling to 1.02 pence from 1.17 pence in 2020 (adjusted for the 10:1 share split on 6th November 2020) which is a decrease of 12.8%.
However, one of the advantages of being an investment trust rather than an open-ended fund is the ability to use the Company's revenue reserves to smooth dividends paid to shareholders from year to year. The proposed level of dividend achieves an appropriate balance between using revenue reserves to smooth the dividend payments whilst maintaining some surplus revenue reserves should they be needed in future. The Board proposes a final dividend of 0.83 pence per share, subject to shareholder approval at the forthcoming Annual General Meeting ('AGM'). Together with the interim dividend of 0.52 pence paid in April, the total dividend for the year will be 1.35 pence against an adjusted 1.42 pence last year, which is a reduction of 4.9%.
Environment, Social and Governance ('ESG') Issues
The search for tomorrow's emerging market leaders requires our Manager to look beyond the pure financial attributes of a company or its shares. In looking for sustainable business models and long lasting competitive advantages they are increasingly looking at the environmental, social and governance ('ESG') aspects of the companies in which we invest. During the year the Directors spent some time looking at examples of how the Manager's materiality framework works in practice when selecting stocks and satisfied themselves that ESG considerations are fully integrated into the Manager's investment process. The Board shares the Manager's 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. Further information on the Manager's ESG process and engagement is set out in the ESG Report on pages 15 to 19.
The Manager
Covid restrictions have been a feature of most global economies over the financial year. J.P.Morgan's analysts and portfolio managers have been working remotely for most of the financial year but it is important to note that the investment process and emphasis on research done through company meetings has continued as before and a similar number of company meetings have been undertaken as in the previous year.
The Company was pleased to announce earlier this year that John Citron, a long serving member of the Emerging Markets Asia Pacific Equities team, had been designated as an additional named investment manager assisting lead fund manager Austin Forey on the Company's portfolio. John is also the named investment manager on a number of other emerging market mandates and has worked closely with Austin for a number of years. As an analyst, he was instrumental in Austin investing in both EPAM and Globant, which have been significant contributors to the performance of your portfolio.
The Board monitors the performance of our Manager through its Management Engagement Committee. It judges performance over the longer term and thus we remain pleased with the Manager's overall performance, not only in terms of investment performance but also in terms of risk management, administration, controls and compliance, where we continue to be very well served by J.P.Morgan.
Investment Management Fee
Following a review of fees in the industry, the investment management fee has been changed. With effect from 1st July 2021, the investment management fee will be charged at the rate of 0.75% per annum on the value of the Company's total assets less current liabilities (previously at the rate of 1% up to £500 million and at the rate of 0.75% thereafter). This will bring the Company's ongoing charges ratio down to approximately 0.83 which continued to be the lowest in the emerging markets investment trust sector and one of the lowest ratios across the emerging markets open ended investment companies (OEICs) as at the end of the financial year. The Directors will continue to monitor the Company's fees to ensure that they remain competitive against the peer group and remain attractive for our shareholders against the other emerging market options available to them.
Adoption of New Articles of Association
The Company's Articles of Association, the document that specifies the regulations for a company's operations and defines a company's purpose, was last amended following shareholder approval in 2013. Resolution 15 within the Notice of Meeting, which will be proposed as a special resolution, seeks shareholder approval to adopt new Articles of Association (the 'New Articles') in order to update the Company's current Articles of Association (the 'Existing Articles'). A summary of the principal amendments being introduced in the New Articles is set out in the appendix to the Annual General Meeting Notice on pages 87 to 88 of the Annual Report. The proposed amendments, if approved, include the possibility of the Company holding the Company's general meetings by virtual means only. This will facilitate shareholder attendance in situations where they are prevented, through laws or regulations, from attending at a physical location. The Board would like to emphasise that this format will only be utilised as a contingency to ensure the continued smooth operation of the Company where physical meetings are prohibited; 'virtual-only' meetings would only be held in extreme circumstances as a temporary measure. Other amendments, which are of a minor, technical or clarifying nature, have been summarised in the appendix.
Continuation of the Company
Every three years the Company offers shareholders a Continuation Vote to determine whether the Company should continue in existence. Shareholders were last asked to vote on this in a resolution put to shareholders at the 2020 AGM, at which shareholders almost unanimously voted in favour of the continuation of the Company, with 99.97% of votes in favour. The next continuation vote resolution will be put to shareholders in 2023.
AGM
Regrettably COVID-19 restrictions prevented the holding of the Company's AGM in 2020 in the usual format. The Directors were disappointed not to be able to have the usual interaction with shareholders at this forum. Current indications are that a more familiar format for the AGM may be permissible in November this year and to that end the AGM is scheduled to be held at 3.00pm on Thursday 4th November 2021 at 60 Victoria Embankment, London EC4Y 0JP.
We do of course strongly advise all shareholders to consider their own personal circumstances before attending the AGM in person. For shareholders wishing to follow the AGM proceedings but choosing not to attend, we will be able to welcome you through conferencing software. Details on how to register together with access details can be found on the Company's website: www.jpmemergingmarkets.co.uk, or by contacting the Company Secretary at invtrusts.cosec@jpmorgan.com.
As is 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 exercise their votes in advance of the meeting by completing and submitting their form of proxy. 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 the Company's website and, as appropriate, through an announcement on the London Stock Exchange.
Outlook
Global economies have recovered strongly from the lows seen at the start of the pandemic. Worries now centre around the return of inflation as strong demand is being accompanied by supply side constraints, with bottlenecks being seen in a number of areas. It is, as yet, unclear whether the pick up in inflation we are currently experiencing will turn out to be temporary or of a more prolonged nature. Stock markets have been fuelled by extremely easy money monetary policy and low interest rates and, as a result, valuations of stock markets have risen to levels that are looking fairly stretched, particularly if there were to be any tightening in monetary policy or pick up in interest rates.
In emerging markets the outlook has been clouded by the Chinese authorities imposing regulatory policy changes in a number of high profile sectors which has resulted in a number of widely held Chinese stocks seeing sharp falls. This has caused foreign investors to reassess the valuations that Chinese companies should command and any resulting volatility in markets could give rise to some interesting opportunities.
Your Investment Manager has a diversified portfolio that invests across a wide range of countries and sectors and, as these economies grow and develop, there will continue to be a number of new and attractive potential investments. There may be periods when your Investment Manager's approach of focusing on sustainable high-quality growth companies underperforms the index but the Directors believe that over the longer term the strategy will outperform, as has been the case over a number of years.
Sarah ArkleChairman
29th September 2021
INVESTMENT MANAGER'S REPORT
Objectives & outcomes
Purpose & Approach
The primary purpose of your company remains unchanged: it is to achieve good investment returns for you, its shareholders. As the trust's investment managers, we aim to achieve this by taking a long term approach to investment, based on fundamental research, and focused on selecting stocks rather than countries or industries. We continue to look for high quality franchises able to compound intrinsic value through economic cycles, and when we find them we expect to own them for a long time.
We also strive to be a responsible and engaged investor in the companies in which your portfolio is invested. As we have explained in previous years, a long term approach to investment leads naturally to a consideration of sustainability in the widest sense, and we have always sought to incorporate this in our investment process. This year, we give more details on both our approach and on portfolio characteristics in our ESG Report, which highlights how we analyse and engage with our investee companies with regards to sustainability.
Returns for shareholders
Compared to last year's market gyrations caused by the sudden spread of the pandemic, this latest twelve month reporting period has seen a smoother progression in markets, though as always there have been some marked divergences from that general trend. Investment outcomes from both the asset class as a whole and from your company's portfolio have also been better than in the previous financial year: the benchmark index returned 26.8%, while the total return from your company's net asset value was 32.8%. The gain in value experienced by shareholders - the total return in share price terms - was higher still, at 36.2%, because the trust's share price discount to net asset value narrowed as well.
Active management
As noted last year, one way of judging the value added to the trust by active management is to look at what we term the "investment manager contribution", measuring any excess portfolio return before costs against the index return in a simple arithmetic way; over the last twenty years this has averaged 4.5% annually. In this latest year that figure was 7.5%. This figure will vary from year to year for a variety of reasons, including the investment conditions experienced in markets, as well as the success or failure of your manager's decisions. Clearly the last twelve months have provided a relatively favourable set of conditions for us, though as we explain below, there have been plenty of challenges too.
The year and the portfolio
The past year
From the end of June 2020 to February 2021, emerging equity markets' recovery from the pandemic-induced sell-off was in full swing; the benchmark index rose during every month from July to January except one, appreciating by over 40% by the middle of February. But that high point in February has not been reached again since, and was followed by a relatively sharp drop in share prices, especially in some sectors in China, which was enough to stall the upwards progression of the asset class overall. Despite this, by the end of June 2021 the asset class had returned over 25% in sterling terms since June 2019, which was long before the pandemic had entered anyone's consciousness. Given how damaging an episode it has been for economies, that seems a remarkable outcome, and one which bears some explanation.
To understand how such an outcome can come about we need to think about two factors which can vary significantly from the general macroeconomic backdrop: first, how corporate profits have evolved, and second, the valuations the market is applying to those corporate results. Both of these elements have played a part in driving the asset class, and indeed the trust's net asset value, to an all-time high during the last year.
Corporate profits
One of the main reasons why the benchmark index is higher by a quarter since before the pandemic is that companies which benefited from the pandemic are much more important components of the opportunity set than those which were adversely affected. The last year has seen a wide range of business outcomes experienced by companies around the world. In industries like travel, hospitality and restaurants, demand was severely reduced by lockdowns and restrictions in many countries. Companies in these sectors have been in survival mode, simply focusing on making it through until something more like normal life resumes. Fortunately, the trust has had very little by way of investments in the areas most directly affected by the pandemic, and the two stocks that it does own (the restaurant business YUM China and the hotel company Huazhu) were both in China, where the effects of the pandemic were briefer, and something approaching normality was regained much more quickly than elsewhere. Other industries felt secondary consequences of the slowdown caused by the pandemic - banks' profits were reduced as they raised provisions, for example, and commodity companies saw less demand for their products as activity slumped, resulting in declines in commodity prices. Towards the end of 2020, though, there were already signs of recovery in demand visible in the results that companies were announcing even in these areas.
On a more positive note, some sectors were clear beneficiaries of the changes that the pandemic brought to all our lives. The rise of internet-based companies accelerated, and digital business models in general prospered as never before. E-commerce businesses gained market share rapidly; the trust holds shares in five e-commerce companies operating respectively in Latin America, Poland, China (two) and South East Asia; simple revenue growth for these five companies in 2020 averaged 58%, with the slowest-growing company among our holdings still expanding its sales by almost 30%. Those are exceptional outcomes, which not surprisingly led to strong gains in share prices for all but one of these companies, and made a notable contribution to the trust's aggregate results.
So overall, the consequences of the pandemic in terms of corporate profits have been much less adverse, both for emerging markets as a whole, and for your portfolio, than might be assumed if one simply looks at macroeconomic data.
Valuations
The valuations applied to companies have also diverged during the year. With financial stimulus at unprecedented levels, interest rates have been as low as ever for most of the last twelve months. This produces a double effect: first, it lowers the overall discount rate that markets apply to all future corporate profit streams, thus raising their value in the present; second, it has the effect of raising the value of each additional point of growth in profits, producing therefore a pronounced skew in valuations on top of the diverging profits. Put simply, the fastest-growing companies have also seen their valuations rise, while the sectors where profits are struggling to grow have seen valuations compress even as their profits have suffered. Valuations now probably offer something of a headwind for overall equity returns, as discussed further below.
The portfolio
During the last year we made few changes to the portfolio; investment turnover was below 10%, and the majority of holdings remained unchanged. This low rate of turnover is both consistent with previous years, and deliberate. It also means, of course, that many of the existing structural biases in your company's portfolio remain in place: we retain significant exposure to IT services, e-commerce, technology hardware, financials, particularly banks and insurance, and finally to a range of consumer companies across emerging markets. During the year we also added several investments in healthcare, especially in China.
China
Building the conviction to make investments in China has not been easy, and although policy changes there may not make headlines in London, recent developments have been significant enough to merit a separate comment. Since last year, we have seen a number of regulatory policy changes that have depressed share prices in high profile sectors in China, from online gaming to e-commerce to education and delivery services. How can we make sense of what has been happening? In the first place, we must remember that the corporate sector in China is still relatively immature compared not just to the West, but to other emerging markets too: it is only a few decades since private enterprise was officially sanctioned. Alongside that, inevitably, the regulatory infrastructure is also relatively immature. And of course, China's political system leans instinctively towards intervention and control, especially in areas which are deemed to have broader consequences for society; nor are policies shaped through transparency and political debate to the extent that they might be elsewhere. That just leads to uncertainty for investors, and uncertainty needs to be priced into equity markets.
Even so, we can establish some framework for thinking about risks in a more interventionist environment in China. First, much of the recent regulation is concerned with issues which would be familiar anywhere: anti-competitive behaviour, anti-monopoly regulation, consumer protection, data privacy, cybersecurity: these are all right at the centre of regulatory efforts in the West too, and that is neither unexpected nor controversial. In other areas, however, regulation reaches right into the realm of social policy and addresses issues which elsewhere would be handled by politicians rather than regulators. Second, it is clear that some sectors have heightened political sensitivity in China: strategic industries like finance, energy, healthcare, communications, media and internet services, are likely to be subject to greater scrutiny than industrial manufacturing, exports, consumer products, and so on. And third, the way companies behave also has a bearing on their vulnerability: those that aggressively maximise profits while sailing close to the wind where regulation is concerned are more vulnerable that those which seek to manage their own risks prudently to extend the duration of their business.
None of this is new: China has always been a place where the state exercises significant influence over commercial activity: in some industries, all the large companies are state-owned entities; in all sectors, the state is reluctant to let market forces alone determine outcomes. If this reduces the returns to corporate skill, which it probably does, then that will affect our view of fair values for companies; and if inconsistent policy-making raises uncertainty for investors, then that too must be taken into account when thinking about share prices. It is not coincidental that your company's aggregate exposure to China has always been lower than its weight in the index; the difficulty we found in pricing these risks has always acted as something of a deterrent, and more so at times when the rest of the market seemed ready to overlook them.
But it would be a mistake to be too negative, especially at a time when some share prices have declined significantly. In spite of the risks set out above, investors in successful Chinese companies have been handsomely rewarded over the last twenty years. China remains a country with high levels of entrepreneurial activity, and the government knows that it is the private sector which has created employment, innovation and unprecedented economic advancement in recent decades. That is veryunlikely to change, and so China will remain a market that is important for us as investors, and for the results we can achieve for shareholders.
The year and the portfolio
The past year
PERFORMANCE ATTRIBUTION
YEAR ENDED 30TH JUNE 2021
% | % | |
Contributions to total returns | ||
Benchmark return | 26.0 | |
Asset allocation | -1.1 | |
Stock selection | 10.2 | |
Currency effect | -1.3 | |
Net cash | -0.3 | |
Investment Manager contribution | 7.5 | |
Portfolio return | 33.5 | |
Management fee and expenses | -0.9 | |
Share buybacks | 0.1 | |
Return on net assetsA | 32.7 | |
Return to shareholdersA | 36.2 |
Source: JPMAM/Morningstar.
All figures are on a total return basis.
Performance attribution analyses how the Company achieved its recorded performance relative to its benchmark.
A Alternative Performance Measure ('APM').
A glossary of terms and APMs is provided on pages 89 and 90.
What next?
A recovering world?
It is too early to know what the lasting consequences of the pandemic will be. One reads much about the opportunity that we now have to redraw societal norms, and about the "roaring twenties" as a period of innovation and excess spurred in part by the last great global pandemic. Thus far, the experience of the last eighteen months seems likely to exacerbate and extend inequalities in societies around the world, which cannot be good news; yet as recent policy shifts in China show, addressing inequality brings plenty of challenges too. More narrowly, this has also been a time of financial experimentation as governments have created unprecedented amounts of liquidity to support economies that were in part simply closed down in an attempt to prevent the spread of infection. How that cost, and the debts incurred, will be repaid in the long run remains far from clear. For those countries within our investment universe which already had structural economic vulnerabilities, the pandemic is likely to leave them in a more challenging position still. That in itself need not be an impediment to finding good investments, but it does leave us looking more at export-related companies, and at those with a really significant opportunity to take market share. Nevertheless, the trust has invested through a wide range of conditions over the last three decades,and in the corporate sector there will always be winners to choose and losers to avoid, whatever the economic weather.
Winners and losers
Fortunately, then, this is also a period of high innovation and change in the business world, not just in the West, but everywhere. The spread of smartphones and the revolution in data they bring for companies is producing an age of unusual disruption and creating some huge winners as well as some significant losers. In some places, corporate value seems to be being created faster than ever before, while those businesses on the wrong side of these trends can seem mired in an intractable and possibly terminal decline.
New industries
On the side of the winners lie many companies whose businesses are based on digital technology, but even in more traditional sectors, we are seeing rapid change. Although we have no investments yet to show for it, we have spent considerable time in the last year reviewing companies related to electric vehicles and the associated supply chain, as well as those whose products serve the renewable energy industry. It is quite possible that oligopolistic parts of the supply chain will prove a better place to invest than the final assemblers, just as it has in most of the computer industry, and we look forward to opportunities in these areas.
Old favourites
Alongside the excitement of the new, however, we need to have some confidence in the familiar and established. A few of the positions the trust owns have now been in the portfolio for two decades already. If you find a great business, it has always seemed to us that you should own it for as long as possible, unless the valuation become so extreme compared to all your other choices that you have already realised many years of future value in today's share price. That does not mean a 10 or 15% premium over fair value - it needs much, much more than that, and the stronger the business, the more it takes. So there is a direct correlation between the strength and duration of a company and the length of time for which we are prepared to hold it. Those rare companies whose competitive position endures for a very long time, and which are also able to keep growing, represent the core of the portfolio, for the simple reason that they still offer some of the best combinations of risk and reward that we can find anywhere.
Valuations again
Before we get too excited by the changes which are happening in the business world, we should not forget that the market knows everything we know already, and is probably reflecting it in share prices. Our primary concern today is not the outlook for profits among the companies held in the portfolio (we feel reasonably confident on that front), it is how much to pay for them. Valuations are higher than before, both for the portfolio and for markets as a whole. This is partly because interest rates are very low; yet the reason interest rates are low is because economies needed support and growth has, until very recently, looked uncertain. That combination - rising valuations alongside economic concerns - risks becoming contradictory eventually, and even if markets grow into their valuations gradually, it still suggests that overall returns may be partially restrained by compression in valuations.
Closing thoughts
Regardless of the ups and downs of markets, regardless of the pandemic even, there is always opportunity somewhere. We count ourselves lucky to work in some of the most dynamic and interesting countries in the world, and privileged to act as stewards of your capital. It's always important in investment to keep a clear view of one's decision hierarchy, and recognise what matters the most. For us, that is always going to be the selection of businesses with the potential to create and grow intrinsic value for a long time. If we can record enough successes on that front, most of the rest will take care of itself.
Austin ForeyJohn CitronInvestment Managers
29th September 2021
PRINCIPAL RISKS AND EMERGING RISKS
The Directors confirm that they have carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. The risks identified, including emerging risks, and the ways in which they are managed or mitigated are summarised below. The ongoing impact of the COVID-19 pandemic is inherent in all of these risks and is discussed by the Board on a regular basis.
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 key risks and emerging risks and how they can be mitigated, the Board has given particular attention to those issues that threaten the viability of the Company. These key risks fall broadly under the following categories:
• Investment Underperformance
An inappropriate investment strategy, for example poor stock selection, the level of gearing or the degree of portfolio risk, could lead to underperformance against the Company's benchmark index and peer companies, resulting in the Company's shares trading on a wider discount. The Board manages these risks by diversification of investments and through a set of investment restrictions and guidelines which are monitored and reported on by the Manager. The Manager provides the Directors with timely and accurate management information, including performance data and attribution analyses, revenue estimates, liquidity reports and shareholder analyses. The Board monitors the implementation and results of the investment process with the Manager, whose representatives attend all Board meetings, and reviews data which show statistical measures of the Company's risk profile.
• Loss of Investment Team or Investment Manager
A sudden departure of an investment manager or several members of the investment management team could result in a short-term deterioration in investment performance. 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.
• Political and Economic
Historically, emerging market companies (and investments in their shares) have shown greater volatility and may be subject to certain political and corporate governance risks which are not typically associated with more developed markets and economies. Sustained underperformance of emerging markets as an asset class may occur as a result of risks such as the imposition of restrictions on the free movement of capital or other government regulatory changes. These risks are discussed by the Board on a regular basis.
• Strategy/Business Management
An inappropriate corporate initiative, for example a takeover of another company or an issue of new capital; misuse of the investment trust structure, for example inappropriate gearing; or if the Company's business strategy is no longer appropriate, may lead to a lack of investor demand. The Board discusses these risks regularly and takes advice from the Manager and its professional advisers.
• Operational and Counterparty Failure
Disruption to, or failure of, the Manager's or a counterparty'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. This includes the failure of the Manager's continuity plans in the face of systems outage, office disruption or a pandemic and the risk of cyber crime and the consequent potential threat to security and business continuity. Under the terms of its agreement, the Depositary has strict liability for the loss or misappropriation of assets held in custody. See note 21(c) 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 controls are included within the Risk Management and Internal Controls section of the Corporate Governance Statement on page 41 of the Annual Report.
• 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 assured Directors that the Company benefits directly or indirectly from all elements of J.P.Morgan's Cyber Security programme. The information technology controls around the physical security of J.P.Morgan's data centres, security of its networks and security of its trading applications are tested by an independent third party and reported every six months against the AAF Standard.
• Share Price Discount
A disproportionate widening of the share price discount relative to the Company's peers could result in loss of value for shareholders. The Board regularly discusses discount policy and has set parameters for the Manager and the Company's broker to follow.
• Change of Corporate Control of the Manager
The Board holds regular meetings with senior representatives of JPMF in order to obtain assurance that the Manager continues to demonstrate a high degree of commitment to its investment trusts business through the provision of significant resources.
• Legal and Regulatory
In order to qualify as an investment trust, the Company must comply with Section 1158. Details of the Company's approval are given under 'Structure and Objective of the Company' on page 27 of the Annual Report. Should the Company breach Section 1158, it might 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 the Manager 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 UKLA Listing Rules and Disclosure Guidance and Transparency Rules ('DTRs'). 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 UKLA Listing Rules or DTRs could result in the Company's shares being suspended from listing which in turn would breach Section 1158. TheBoard relies on the services of its Company Secretary and its professional advisers to ensure compliance with the Companies Act and the UKLA Listing Rules and DTRs.
• 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 on pages 39 to 43 of the Annual Report .
• Financial
The financial risks faced by the Company include market price risk, interest rate risk and credit risk. Further details are disclosed in note 21 on pages 73 to 78 of the Annual Report.
TRANSACTIONS WITH THE MANAGER AND RELATED PARTIES
Details of the management contract are set out in the Directors' Report on page 36 of the Annual Report. The management fee payable to the Manager for the year was £12,660,000 (2020: £10,770,000) of which £nil (2020: £nil) was outstanding at the year end.
During the year £nil (2020: £64,000), including VAT, was payable to the Manager for the administration of savings scheme products, of which £nil (2020: £nil) was outstanding at the year end.
Safe custody fees amounting to £495,000 (2020: £490,000) were payable during the year to JPMorgan Chase N.A. of which £301,000 (2020: £100,000) was outstanding at the year end.
The Manager may carry out some of its dealing transactions through group subsidiaries. These transactions are carried out at arm's length. The commission payable to JPMorgan Securities Limited for the year was £1,000 (2020: £9,000) of which £nil (2020: £nil) was outstanding at the year end.
The Company also holds cash in the JPMorgan US Dollar Liquidity Fund, which is managed by JPMF. At the year end this was valued at £0.3 million (2020: £12.8 million). Interest amounting to £23,000 (2020: £134,000) was received during the year of which £nil (2020: £nil) was outstanding at the year end.
Handling charges on dealing transactions amounting to £39,000 (2020: £34,000) were payable to JPMorgan Chase N.A. during the year of which £16,000 (2020: £16,000) was outstanding at the year end.
At the year end, total cash of £232,000 (2020: £747,000) was held with JPMorgan Chase. A net amount of interest of £92,000 (2020: £2,000) was receivable by the Company during the year from JPMorgan Chase of which £nil (2020: £nil) was outstanding at the year end.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulation.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' and applicable law). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing the financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• state whether applicable United Kingdom Accounting Standards, comprising FRS 102, have been followed, subject to any material departures disclosed and explained in the financial statements;
• make judgements and accounting estimates that are reasonable and prudent; and
• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
and the Directors confirm that they have done so.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006. 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 accounts are published on the www.jpmemergingmarkets.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 Directors are responsible for the maintenance and integrity of the corporate and financial information on the company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Under applicable law and regulations the Directors are also responsible for preparing a Strategic Report, a Directors' Report and Directors' Remuneration Report that comply with the law and those regulations.
Each of the Directors, whose names and functions are listed in Directors' Report confirm that, to the best of their knowledge:
• the Company's financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland', and applicable law), give a true and fair view of the assets, liabilities, financial position and profit of the Company; and
• the Directors' Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.
The Directors consider that the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy.
For and on behalf of the BoardSarah ArkleChairman
29th September 2021
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30TH JUNE 2021
2021 | 2020 | ||||||
Notes | Revenue£'000 | Capital£'000 | Total£'000 | Revenue£'000 | Capital£'000 | Total£'000 | |
Gains on investments held at fair valuethrough profit or loss | - | 420,640 | 420,640 | - | 23,660 | 23,660 | |
Net foreign currency (losses)/gains | - | (2,201) | (2,201) | - | 292 | 292 | |
Income from investments | 4 | 19,508 | - | 19,508 | 20,247 | - | 20,247 |
Interest receivable | 4 | 115 | - | 115 | 136 | - | 136 |
Gross return | 19,623 | 418,439 | 438,062 | 20,383 | 23,952 | 44,335 | |
Management fee | (3,798) | (8,862) | (12,660) | (3,231) | (7,539) | (10,770) | |
Other administrative expenses | (1,420) | - | (1,420) | (1,324) | - | (1,324) | |
Net return before taxation | 14,405 | 409,577 | 423,982 | 15,828 | 16,413 | 32,241 | |
Taxation | (2,268) | - | (2,268) | (1,651) | - | (1,651) | |
Net return after taxation | 12,137 | 409,577 | 421,714 | 14,177 | 16,413 | 30,590 | |
Return per share1 | 2 | 1.02p | 34.38p | 35.40p | 1.17p | 1.36p | 2.53p |
1 Comparative figures at 30th June 2020 have been restated following the sub-division of each existing ordinary share of 25p into ten ordinary shares of 2.5p each on 6th November 2020.
STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30TH JUNE 2021
Called upsharecapital£'000 | Sharepremium£'000 | Capital redemption reserve£'000 | Otherreserves£'000 | Capitalreserves£'000 | Revenue reserve1£'000 | Total£'000 | |
At 30th June 2019 | 33,091 | 173,657 | 1,665 | 69,939 | 1,009,708 | 25,709 | 1,313,769 |
Repurchase of shares into Treasury | - | - | - | - | (23,293) | - | (23,293) |
Net return | - | - | - | - | 16,413 | 14,177 | 30,590 |
Dividends paid in the year (note 3) | - | - | - | - | - | (17,151) | (17,151) |
At 30th June 2020 | 33,091 | 173,657 | 1,665 | 69,939 | 1,002,828 | 22,735 | 1,303,915 |
Repurchase of shares into Treasury | - | - | - | - | (10,662) | - | (10,662) |
Share split charges | - | (26) | - | - | - | - | (26) |
Net return | - | - | - | - | 409,577 | 12,137 | 421,714 |
Dividend paid in the year (note 3) | - | - | - | - | - | (16,898) | (16,898) |
At 30th June 2021 | 33,091 | 173,631 | 1,665 | 69,939 | 1,401,743 | 17,974 | 1,698,043 |
1 This reserve forms the distributable reserve of the Company and is used to fund distributions to investors.
STATEMENT OF FINANCIAL POSITION
AT 30TH JUNE 2021
Notes | 2021£'000 | 2020£'000 | |
Fixed assets | |||
Investments held at fair value through profit or loss | 1,685,041 | 1,288,907 | |
Current assets | |||
Debtors | 13,869 | 1,703 | |
Cash and cash equivalents | 510 | 13,534 | |
14,379 | 15,237 | ||
Current liabilities | |||
Creditors: amounts falling due within one year | (1,376) | (229) | |
Derivative financial liabilities | (1) | - | |
Net current assets | 13,002 | 15,008 | |
Total assets less current liabilities | 1,698,043 | 1,303,915 | |
Net assets | 1,698,043 | 1,303,915 | |
Capital and reserves | |||
Called up share capital | 33,091 | 33,091 | |
Share premium | 173,631 | 173,657 | |
Capital redemption reserve | 1,665 | 1,665 | |
Other reserve | 69,939 | 69,939 | |
Capital reserves | 1,401,743 | 1,002,828 | |
Revenue reserve | 17,974 | 22,735 | |
Total shareholders' funds | 1,698,043 | 1,303,915 | |
Net asset value per share1 | 4 | 143.0p | 108.9p |
1 Comparative figures at 30th June 2020 have been restated following the sub-division of each existing ordinary share of 25p into ten ordinary shares of 2.5p each on 6th November 2020.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 30TH JUNE 2021
2021£'000 | 2020£'000 | ||
Net cash outflow from operations before dividends and interest1 | (15,601) | (12,390) | |
Dividends received | 16,618 | 19,859 | |
Interest received | 115 | 138 | |
Overseas tax recovered | 56 | 91 | |
Net cash inflow from operating activities | 1,188 | 7,698 | |
Purchases of investments | (132,793) | (133,905) | |
Sales of investments | 145,707 | 173,768 | |
Settlement of forward currency contracts | (197) | 257 | |
Net cash inflow from investing activities | 12,717 | 40,120 | |
Repurchase of shares into Treasury | (9,720) | (23,293) | |
Dividend paid | (16,898) | (17,151) | |
Costs in relation to share split | (26) | - | |
Net cash outflow from financing activities | (26,644) | (40,444) | |
(Decrease)/increase in cash and cash equivalents | (12,739) | 7,374 | |
Cash and cash equivalents at start of year | 13,534 | 5,947 | |
Unrealised (loss)/gain on foreign currency cash and cash equivalents1 | (285) | 213 | |
Cash and cash equivalents at end of year | 510 | 13,534 | |
(Decrease)/increase in cash and cash equivalents | (12,739) | 7,374 | |
Cash and cash equivalents consist of: | |||
Cash and short term deposits | 232 | 747 | |
Cash held in JPMorgan US Dollar Liquidity Fund | 278 | 12,787 | |
Total | 510 | 13,534 | |
1 The unrealised exchange gain on the JPMorgan US Dollar Liquidity Fund in the comparative column has been moved from theinitial "Net cash outflow from operations" total to be disclosed separately as the "unrealised gain on foreign currency cash andcash equivalents".
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30TH JUNE 2021
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 FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' (the 'SORP') issued by the Association of Investment Companies in October 2020.
All of the Company's operations are of a continuing nature.
The Directors believe that having considered the Company's investment objective (see page 27 of the Annual Report), risk management policies (see pages 73 to 78 of the Annual Report), capital management policies and procedures (see page 79 of the Annual Report), 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 the foreseeable future. For these reasons, they consider that there is reasonable evidence to continue to adopt the going concern basis in preparing the financial statements. They have not identified any material uncertainties to the Company's ability to continue to do so over a period of at least twelve months from the date of these financial statements.
The policies applied in these financial statements are consistent with those applied in the preceding year.
2. Return per share
2021 £'000 | 2020 £'000 | |
Revenue return | 12,137 | 14,177 |
Capital return | 409,577 | 16,413 |
Total return | 421,714 | 30,590 |
Weighted average number of shares in issue during the year1 | 1,191,294,140 | 1,207,942,160 |
Revenue return per share1 | 1.02p | 1.17p |
Capital return per share1 | 34.38p | 1.36p |
Total return per share1 | 35.40p | 2.53p |
1 Comparative figures at 30th June 2020 have been restated following the sub-division of each existing ordinary share of 25p into ten ordinary shares of 2.5p each on 6th November 2020.
3. Dividends
Dividends paid and proposed
2021 £'000 | 2020 £'000 | |
Dividends paid | ||
2020 final dividend of 0.9p1 (2019: 0.9p1) per share | 10,710 | 10,895 |
2021 interim dividend of 0.52p1 (2020: 0.52p)1 per share | 6,188 | 6,256 |
Total dividends paid in the year | 16,898 | 17,151 |
Dividend proposed | ||
2021 final dividend proposed of 0.83p (2020: 0.9p)1 per share | 9,858 | 10,773 |
All dividends paid and proposed in the year have been funded from the revenue reserve.
The dividend proposed in respect of the year ended 30th June 2021 is subject to shareholder 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 30th June 2022.
2021 £'000 | 2020 £'000 | |
2021 interim dividend of 0.52p (2020: 0.52p)1 per share | 6,188 | 6,256 |
2021 final dividend proposed of 0.83p (2020: 0.9p)1 per share | 9,858 | 10,773 |
16,046 | 17,029 |
1 The dividend rate has been restated following the sub-division of each existing ordinary share of 25p into 2.5p each on 6th November 2020.
4. Net asset value per share
2021 | 2020 | |
Net assets (£'000) | 1,698,043 | 1,303,915 |
Number of shares in issue1 | 1,187,666,096 | 1,197,052,400 |
Net asset value per share1 | 143.0p | 108.9p |
1 Comparative figures at 30th June 2020 have been restated following the sub-division of each existing ordinary share of 25p into ten ordinary shares of 2.5p each on 6th November 2020.
5. Status of results announcement
2020 Financial Information
The figures and financial information for 2020 are extracted from the Annual Report and Accounts for the year ended 30th June 2020 and do not constitute the statutory accounts for the year. The Annual Report and Accounts include the Report of the Independent Auditors which is unqualified and does not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. The Annual Report and Accounts will be delivered to the Register of Companies in due course.
2021 Financial Information
The Figures and financial information for 2021 are extracted from the published Annual Report and Accounts for the year ended 30th June 2021 and do not constitute the statutory accounts for that year. The Annual Report and Accounts has been delivered to the Registrar of Companies and included the Report of the Independent Auditors which was unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006.
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.
29th September 2021
For further information:
Nira Mistry,
JPMorgan Funds Limited
020 7742 4000
ENDS
A copy of the 2021 Annual Report will shortly be submitted to the FCA's National Storage Mechanism and will be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism
The 2021 Annual Report will shortly be available on the Company's website at www.jpmemergingmarkets.co.uk where up-to-date information on the Company, including daily NAV and share prices, factsheets and portfolio information can also be found.
JPMORGAN FUNDS LIMITED