12 Oct 2023 16:15
LONDON STOCK EXCHANGE ANNOUNCEMENT
JPMORGAN UK SMALLER COMPANIES INVESTMENT TRUST PLC
(the 'Company')
FINAL RESULTS FOR THE YEAR ENDED 31ST JULY 2023
Legal Entity Identifier: 549300PXALXKUMU9JM18
Information disclosed in accordance with DTR 4.2.2
The Directors announce the Company's results for the year ended 31st July 2023
CHAIRMAN'S STATEMENT
Investment Comment & Performance
The year under review was the second year in a row that UK smaller companies faced a challenging environment. It was a year of continuous volatility as markets struggled with a poisonous cocktail of headwinds. Despite recovering quickly from the October 2022 lows, induced by the policies of the short lived Truss premiership, market conditions did not improve. Stubbornly high UK inflation, stoked by high energy and food prices, led to rapid interest rate rises not seen in a generation and subsequently dwindling consumer confidence and house prices. These factors weighed heavily on UK markets and, in particular, the more domestically facing smaller companies whose already relatively cheap valuations became even more attractive.
The global background was also challenging. China failed to sustain its post COVID-19 economic recovery and whilst the much predicted recession in the US has so far failed to materialise the spectre still stalked the markets. Geopolitical tensions increased as the Ukrainian conflict escalated and western relations with China cooled further.
The Company performed slightly behind its benchmark but ahead of the sector average. Over the period, the total return on net assets (with net dividends reinvested) was -5.0% as compared to the Numis Smaller Companies plus AIM Index (excluding investment companies) which returned -4.6%. The Company's share price discount to NAV narrowed slightly from 11.0% on 31st July 2022 to 10.7% on 31st July 2023. As a result, the share price total return to shareholders was -4.4%, modestly ahead of the benchmark.
Since the year-end, the discount has widened to 13.0%, as at 9th October 2023. The return on net assets was -7.0% compared to a decrease in the benchmark of -8.7% and the return to shareholders was -9.4%.
We are fortunate to have dedicated and experienced managers who rise to the challenges thrown at them and, in particular, the Board would like to acknowledge the long service provided to the company by Georgina Brittain who has completed 25 years' service this year. The team's hard work is reflected in the longer term performance which remains well ahead of the benchmark (see Continuation below).
In their report, the Portfolio Managers provide a review of the Company's performance for the period and the outlook for the remainder of the year.
Revenue and Dividends
Net revenue increased strongly for the second year in a row, growing by 9.1% to £7,147,000 in the financial year to 31st July 2023. This partly reflected a continued post-COVID-19 recovery but also the strong financial position of the businesses in which the Company is invested.
The Directors are recommending a final dividend of 7.7p (2022: 6.9p) per share, an increase of 11.6%. If approved by shareholders at the Annual General Meeting, the dividend will be paid on 7th December 2023 to shareholders on the register at close of business on 27th October 2023. Over the past three and five years, which have encompassed some challenging market conditions, the dividends paid to shareholders have increased by 40.0% and 42.6% respectively, supported by utilisation of the Revenue Reserve in 2020 and 2021.
Costs
The cost pressures faced by the Company and the broader sector have increased in general with inflation and there have been some specific items, such as the Auditor's fees, which have been driven up by changes in regulation. These pressures have coincided with decreasing asset values resulting in an increase in the ongoing charge ratio ('OCR') from 0.99% to 1.02%. This represents the Company's total costs expressed as percentage of the Company's assets. The Board is acutely aware of the increase in OCR and has focused on containing costs as far as is possible. This is reflected in a reduction in other administrative expenses. Since the year end, and effective from 1st August 2023, the Board has negotiated a reduction in the management fee. The reduced rate is 0.65% on net assets up to £300 million and 0.55% thereafter. If applied in the year under review, this would have reduced the OCR by approximately 0.1%.
Gearing
The Board believes that a moderate level of gearing is an efficient way to enhance long-term returns to shareholders, albeit at the cost of a small increase in short-term volatility. The Board takes into consideration the cost of borrowing when arranging facilities available to the Portfolio Managers. The level of gearing is regularly discussed with the Portfolio Managers and is adjusted by them, to reflect short-term considerations, within parameters set by the Board.
To allow the Portfolio Managers to retain the flexibility to maintain gearing up to the maximum permitted level, on 29th September 2023, the Company's £50 million borrowing facility expired and was renewed with Scotiabank for a period of 364 days. Inevitably the cost of debt has increased with rising interest rates though, after reviewing various options, the Board believes that the terms agreed remain competitive.
At the year-end, £27 million (2022: £25 million) was drawn on the loan facility with the gearing level of 9.5% (2022: 5.8%) of net assets. As at 9th October 2023, gearing was 10.2%.
Share Repurchases and Issuance
At last year's Annual General Meeting (AGM), shareholders granted the Directors authority to allot new shares and to repurchase the Company's shares for cancellation or to be held in Treasury for possible re-sale. During the financial year the Company did not repurchase or allot any shares. There are currently 79,611,410 shares in issue, including 1,559,741 shares which are held in Treasury and available for sale. Treasury shares will only be sold at a premium to net asset value thus enhancing shareholder value.
As in previous years, the Board's objective is to use the repurchase and allotment authorities to manage imbalances between the supply and demand of the Company's shares, with the intention of reducing the volatility of the discount or premium. The Company's broker and the Manager constantly review the Company's rating and utilise the authority, in consultation with the Board, in normal market conditions and when it is considered that it will be effective and in the interests of all shareholders. During the financial year, the Company's discount volatility was comfortably less than the sector group average and consequently the Company did not repurchase or allot any shares. The discount ended the year narrower than the sector average, as was the average over the year.
The Board believes this mechanism can be helpful and therefore proposes and recommends that powers to repurchase up to 14.99% of the Company's shares (less shares held in Treasury) and the allotment of new shares or sale of shares out of Treasury up to approximately 10% as at the date of the AGM be renewed.
Board of Directors and Succession Planning
During the year, the Board, through its Nomination Committee, employed an independent board advisory consultant to facilitate a comprehensive evaluation of the Board, its committees, the individual Directors and the Chairman. The evaluation comprised the annual on-line evaluation as well as the triennial individual interview with each of the Directors and Chairman in-line with the Company's policy. Their report confirmed the efficacy of the Board. Therefore, in accordance with good corporate governance practice, all the Directors will stand for reappointment at the forthcoming AGM.
As highlighted in my previous interim Chairman's statement in March this year, I will be retiring at the 2024 AGM in-line with good corporate governance practice. As part of succession planning, the Board will consider my replacement. It is also the Board's intention to appoint a new Director in the first half of 2024. The recruitment process will therefore commence in the first quarter of 2024. The Board recognises the importance of diversity in its various forms and has had a good gender balance for many years; it also benefits from healthy cognitive diversity. In light of the FCA's rules on diversity and inclusion we take seriously the importance of having ethnic diversity and this will be a significant consideration in recruitment together with maintaining an appropriate balance between ability, demographic, the size of the Board and the cost to shareholders.
Environment, Social and Governance (ESG) considerations
The Board has continued to engage with the Manager on the integration of ESG factors into its investment process. The Board has conducted a review during the year to satisfy itself that the Manager has a robust process in place with sufficient resources behind it and that ESG considerations are considered by the Portfolio Managers at every stage of the investment decision.
The Board shares the Manager's view of the importance of financially material ESG factors when making investments for the long term and, in particular, the necessity of continued engagement with investee companies throughout the duration of the investment. The Portfolio Managers' ESG report describes the developments in the ESG process that have taken place during the year together with examples of how these are implemented in practice.
Task Force on Climate-related Financial Disclosures (TCFD)
The Investment Manager published its first UK TCFD Report for the Company in respect of the year ended 31st December 2022 on 30th June 2023. The report discloses the portfolio's climate-related risks and opportunities according to the FCA Environmental, Social and Governance Sourcebook and the TCFD Recommendations. The report is available on the Company's website: https://am.jpmorgan.com/content/dam/jpm-am-aem/emea/regional/en/regulatory/esg-information/jpmorgan-uk-smaller-companies-investment-trust-plc-esg-fund-report.pdf
This is the first report under the new guidelines and disclosure requirements and the Board will continue to monitor them as these reports evolve.
Continuation of the Company
In accordance with the Company's Articles of Association, an ordinary resolution will be put to shareholders at the forthcoming AGM that the Company continues in existence as an investment trust for a further three year period.
The Board continues to believe that there is a strong case for long-term investment in UK smaller companies. The valuations are attractive in absolute and relative terms, the outlook remains favourable despite some near term challenges, and the Company provides access to investments in a controlled risk environment that individual investors would find difficult to replicate on their own. Over the three, five and ten years to 31st July 2023, the total return from the Company's net assets was 21.7%, 19.8% and 116.2% respectively, significantly outperforming its benchmark which returned 20.5%, 5.1% and 72.3% over the same periods. The share price outperformance of the benchmark has been considerably stronger (see graphs in annual report). Since the last continuation vote, this good performance has been externally recognised by several industry awards including Citywire winner UK smaller companies investment trust 2021 and Investment Week winner UK smaller companies investment company of the year 2021.
During the last 12 months, the Board, via the Management Engagement Committee, has undertaken a detailed review of the Manager and their investment approach. Whilst all investment styles will deliver returns that vary over time, the Board believes that the Manager's approach continues to be appropriate for the Company and that JPMorgan Asset Management has the appropriate resources to continue to manage the Company successfully.
Accordingly, the Board believes that the continuation of the Company is in the best interests of all shareholders and strongly recommends that shareholders vote in favour of the resolution at the AGM on 23rd November 2023, as the Directors intend to do in respect of their own holdings.
Annual General Meeting
The Company's thirty-third Annual General Meeting will be held at 60 Victoria Embankment, London EC4Y 0JP on Thursday 23rd November 2023 at 3.00 p.m. The Board cannot stress strongly enough the importance of all shareholders exercising their right to vote, regardless of their size of holding, and hopes to welcome as many shareholders as possible to the AGM.
As with previous years, you will have the opportunity to hear from the Portfolio Managers and their presentation will be followed by a question and answer session. Shareholders wishing to follow the AGM proceedings but choosing not to attend will be able to view them live and ask questions through conferencing software. Details on how to register, together with access details, can be found on the Company's website: www.jpmuksmallercompanies.co.uk, or by contacting the Company Secretary at invtrusts.cosec@jpmorgan.com.
In accordance with normal practice, all voting on the resolutions will be conducted on a poll. Due to technological reasons, shareholders viewing the meeting via conferencing software will not be able to vote on the poll and we therefore encourage all shareholders, and particularly those who cannot attend physically, to submit their proxy votes in advance of the meeting, so that they are registered and recorded at the AGM. Proxy votes can be lodged in advance of the AGM either by post or electronically: detailed instructions are included in the Notes to the Notice of Annual General Meeting in the Annual Report. In addition, shareholders are encouraged to send any questions ahead of the AGM to the Board via the Company Secretary at the email address above. We will endeavour to answer relevant questions at the meeting or via the website depending on arrangements in place at the time.
If there are any changes to the above AGM arrangements, the Company will update shareholders through the Company's website and, if appropriate, through an announcement on the London Stock Exchange.
Outlook
Clearly there are major geopolitical and economic headwinds facing global markets. The US Presidential election and UK general election in 2024 will also sharpen investors' minds. The trajectory of interest rates is likely to be a major contributory factor to the direction of equity and bond markets over the coming period. The Bank of England has paused its relentless base rate increases as recent inflation numbers have shown a welcome, larger than expected fall. Only time will tell if the level of monetary tightening has been appropriate, as much of the increase has yet to be fully transmitted to the UK economy and consumer. Nevertheless, in the past, UK smaller companies have often outperformed following the peak in interest rates. In addition, the absolute and relative valuations of UK smaller companies are particularly attractive versus historical ratings. Admittedly this has been the case for some time but the Portfolio Managers present their case for optimism in their report and why they see plenty of opportunity in the coming period.
Andrew Impey
Chairman 12th October 2023
INVESTMENT MANAGER'S REPORT
Performance and Market Background
The financial year to July 2023 was a turbulent one. The atrocious war in Ukraine raged on and geopolitical uncertainties increased. Both the US and the UK avoided recession, surprising many economists, although the threat of a mild recession in both regions has not completely dissipated. Inflation in developed markets peaked, but the UK became an outlier, with stubbornly higher inflation than in Europe or the US. Interest rates rose at an astonishingly rapid pace and the Bank of England has now raised rates fourteen times from the absolute low in December 2021 to 5.25%. Markets are now pricing in peak rates of 5.5-6%, which is notably higher than forecasts one year ago. Political stability was re-established in the UK under Prime Minister Rishi Sunak. However, public sector strike action grew in response to the stark cost of living increase over the year, although the more recent decline in energy prices and the increase in nominal wages should provide some relief, as should the very low rate of unemployment.
Against this backdrop, the Numis Smaller Companies plus AIM (ex Investment Trusts) Index was down 4.6% for the financial year. The Company produced a total return on net asset value of -5.0% in the period, while the share price total return was marginally ahead of the index at -4.4%. As can be seen in the attribution table below, once again, stock selection contributed positively to performance during the year under review. The main detractor was an unfavourable sector bias in the portfolio. Gearing was also a small negative during the year.
Performance attribution
12 months to | 12 months to | 12 months to | ||||
31st July 2023 | 31st July 2022 | 31st July 2021 | ||||
% | % | % | % | % | % | |
Contributions to total returns |
|
|
|
|
|
|
Benchmark return |
| -4.6 |
| -16.0 |
| 50.3 |
£Stock selection | 3.3 | 0.6 | 1.1 | |||
£Sector Allocation | -2.2 | -5.8 | 12.3 | |||
£Gearing/net cash | -0.5 | -1.6 | 5.6 | |||
Investment Manager's contribution |
| 0.6 |
| -6.8 |
| 19.0 |
£Benchmark differentials | - | - | -0.3 | |||
Portfolio total return |
| -4.0 |
| -22.8 |
| 69.0 |
£Management fees/other expenses | -1.0 | -1.0 | -0.9 | |||
£Repurchase of shares for cancellation | - | - | - | |||
Other effects |
| -1.0 |
| -1.0 |
| -0.9 |
Return on net assetsA |
| -5.0 |
| -23.8 |
| 68.1 |
Impact of change in discount |
| 0.6 |
| -2.3 |
| 11.3 |
Return to shareholdersA |
| -4.4 |
| -26.1 |
| 79.4 |
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')
Portfolio
The three largest positive contributors to performance over the year were our sizeable positions in Bank of Georgia (one of the two dominant banks in the flourishing economy of Georgia), Ashtead Technology (sub-sea rental equipment into the oil and gas and renewables markets) and Alpha Group International (formerly named Alpha FX, a provider of FX management to corporates and alternative banking solutions to financial institutions). All three continued to grow significantly and produce strong results ahead of market expectations. In addition, two of our smaller positions in Warpaint London (affordable cosmetics) and Niox (a company focused on improving asthma diagnosis and management) produced outsized returns in the year.
On the negative side, the main detractors included Serica Energy, the North Sea gas producer, following the Government's extra tax levy on North Sea oil and gas producers and OSB, the buy-to-let bank which, despite strong current trading, disappointed the stockmarket with a negative update on the impact of higher term revisionary mortgage rates on short term profitability. Not owning Aston Martin also hurt performance on a relative basis. Two other disappointments were Jadestone Energy and TP ICAP, both of which were sold.
The portfolio continued to evolve as we adapted to the changes in the economic environment. New additions included XPS Pensions following significant positive changes to pension fund dynamics and Vertu Motors on improved trading and lowly valuation. We also bought a small position in hVIVO, the world leader in the small but growing market of testing infectious disease vaccines via human trials, and in Mitchells & Butler, the bar and pub company, as the consumer outlook improved and inflationary pressures began to ease. Over the year we also sold out of certain holdings including Wincantion and FRP Advisory on concerns over current trading, and Liontrust Asset Management on the proposed deal to buy GAM.
Environmental, Social, and Governance ('ESG') factors
Whilst the Company holds stocks based primarily on fundamentals, we also consider the potential impact of ESG factors on a company's ability to deliver shareholder value. We assess each company's strategy for dealing with these important matters and the consequent risks arising from them. Our analysis helps determine whether relevant ESG factors are financially material and, if so, whether they are reflected in the valuation of the company. Such analysis may influence not only our decision to own a stock but also, if we do, the size of that position in the portfolio.
Company meetings continue to be an important opportunity to engage with our portfolio companies on ESG issues. Examples of our engagement with companies during the year and details of our voting record are set out in the ESG Report in the Annual Report.
Outlook
The trajectory of inflation and interest rates are clearly key for the outlook. While we had expected a mild recession in the UK in the second half of 2023, the economy looks likely to avoid this - but UK growth prospects are pedestrian at best. Following the encouraging inflation figures over the summer we believe inflation has peaked in the UK, and we foresee a significant further decline from the current levels over the course of 2023, which will hopefully bring the UK more in line with other developed markets. Interest rates at 5.25% have risen significantly and we believe are close to peak levels. Consumer confidence has staged a significant recovery from its abject lows - largely we believe due to continuing very low unemployment rates and the wage increases that have been seen this year - although the recent spike in mortgage rates caused a setback in what had been an upward trend.
Clearly the stockmarket is currently extremely focused on the macro economic outlook. In this regard, the very recent historic revisions to GDP by the ONS are a notable positive, demonstrating that the growth of the UK economy post the pandemic has not been out of line with that of Europe. However, as always our focus is on the companies themselves. Overall the message we are hearing from them is a positive one. The majority of smaller companies are successfully navigating their way through the headwinds of cost inflation, labour inflation, labour shortages and higher interest costs. We continue to find exciting and undervalued (and often fairly unknown) investment opportunities, some of which we have outlined above.
History tells us that stockmarkets rally when investors believe that interest rates are close to peak levels - and this has especially been the case for the UK smaller companies sector. When this occurs, we believe the upside from current lowly valuation levels could be substantial. In addition, investors will be aware there is a significant focus by the Government on the future of the UK equity market, and a strong desire to improve its allure. Although not an instant fix, the change to pension investing proposed by the Mansion House reforms this summer, with DC pension providers being strongly encouraged to invest at least 5% of their funds in unlisted assets, should also be beneficial for small cap companies. This is because stocks on the AIM market are included in the definition of 'unlisted'. Additionally, M&A continues apace, and post year end we have received a bid for our holding in Ergomed.
The current gearing level of just under 10% in the portfolio, compared to 7.3% as at 12th October 2022, reflects our view of the compelling opportunities and valuations currently available.
Georgina Brittain
Katen Patel
Portfolio Managers 12th October 2023
PRINCIPAL AND EMERGING RISKS AND UNCERTAINTIES
The Directors confirm that they have carried out a robust assessment of the principal and emerging risks and uncertainties facing the Company, including those that would threaten its business model, future performance, solvency or liquidity.
With the assistance of the Manager, the Audit Committee maintains a risk matrix which identifies the principal risks to which the Company is exposed and methods of mitigating them as far as practicable. The Audit Committee has decided to hold a third meeting every year dedicated to the review of the Company's risk matrix. The risks identified and the broad categories in which they fall, and the ways in which they are managed or mitigated are summarised below.
Principal risk | Description | Mitigating activities | Movement from prior year |
Strategic and Performance Risk | The corporate strategy, including the investment objectives and policies, may not be of sufficient interest to current or prospective shareholders. Other factors, such as the size of the Company and level of liquidity in its shares, may also deter shareholder interest, resulting in the shares trading at an increased discount to net asset value. Poor investment performance, for example due to poor stock selection, asset allocation or an inappropriate level of gearing, may lead to under-performance against the Company's benchmark index and peer companies, resulting in the Company's shares trading on a wider discount. | The Board regularly reviews its strategy, and assesses, with its brokers, shareholder views. The Board manages these risks by diversification of the portfolio through its investment restrictions and guidelines which are monitored and reported on. The Manager provides the Directors with timely and accurate management information, including performance data and attribution analyses, revenue estimates and liquidity reports. The Board monitors the implementation and results of the investment process with the Investment Managers, who attend Board meetings, and reviews data which shows statistical measures of the Company's risk profile. The Investment Manager employs the Company's gearing, within a strategic range set by the Board. | This risk remains high but unchanged from 2022. |
Discount/ premium | A disproportionate widening of the discount or narrowing of the premium relative to the Company's peers could result in loss of value for shareholders, including as a result of lack of investor interest or reduction in market makers in the Company's shares. | In order to manage the volatility of the Company's discount the Company operates a share repurchase programme and the Board regularly discusses buyback policy and has set parameters for the Manager and the Company's broker to follow. The Board receives regular reports and is actively involved in the decision process. The Board receives shareholder feedback from the Company's brokers and Manager and agrees the Company's sales and marketing plan with the Manager. Meetings with the Chair are offered annually to the Company's largest holders and all shareholders are encouraged to attend the AGM. The Board regularly reviews and monitors the Company's objective and investment policy and strategy, the investment portfolio and its performance, the level of discount/premium to net asset value at which the shares trade and movements in the share register. | The risk remains high but unchanged from 2022. |
Smaller Company Investment and Market | Investing in smaller companies is inherently more risky and volatile, partly due to a lack of liquidity in the shares, plus AIM stocks are less regulated. | The Board discusses these risk factors at each Board meeting with the Investment Managers. The Investment Managers manage investment risk in a variety of ways including the limits in relation to individual stocks and sectors relative to the Benchmark, together with other investment restrictions and guidelines, which are agreed with the Board. These are monitored on an ongoing basis. | This risk remains high but unchanged from 2022. |
Economic Environment | The outlook for longer term inflation and the interest rate cycle has deteriorated and now presents a more serious risk to asset pricing and economic performance going forward. | The Manager takes account of macro economic/geopolitical backdrop in selecting and taking investment decisions and reports to the Directors at each Board meeting. In addition, the Board has open discussions with the Portfolio Managers at each Board meeting including around interest rates/GDP and all macro economic factors relative to the Company's business. | Risk has been heightened by the current unfavourable economic conditions, caused by the inflationary environment and rising interest rates. |
Political and Economic | Changes in financial or tax legislation, changes in government policies, financial crises, natural disasters and significant falls in the market could each adversely affect the Company's operation or performance. Increasing risk to market stability and investment opportunities from actual and potential geopolitical conflicts. | The Manager makes recommendations to the Board on accounting, dividend and tax policies, and seeks external advice where appropriate. In addition, the Board seeks to mitigate risks though portfolio diversification and limits on gearing and conducts a regular review of the Company's control environment to ensure the Company can continue to operate. The Manager has dedicated resources to evaluate this as well as abundant access to experts in the area. These sources are inputs into portfolio risk management. The Manager takes into account companies with the most geopolitical risks in selecting companies for investment. The Company discusses global developments with the Manager and continues to monitor these issues together with all other relevant considerations. | This risk is unchanged but remains highlighted due to the quick succession of the events which have unfolded in recent times i.e. Brexit, the ongoing COVID-19 pandemic and geopolitical crisis in Russia- Ukraine, adding significant pressure on markets and economies. |
Investment Management Team | Investment performance may suffer if the designated Portfolio Managers were to leave. | The Board considers that, though there may be short-term disruption, the risk would be mitigated by the substantial investment management resources of JPMorgan, and the use of an established investment methodology. | This risk remains relatively unchanged. The Board remains comfortable with the robustness of the succession plans within the Investment Management Team. |
Accounting, Legal and Regulatory | In order to qualify as an investment trust, the Company must comply with Section 1158 of the Income and Corporation Tax Act 2010 ('Section 1158'). Details of the Company's approval are given in the Annual Report. Should the Company breach Section 1158, it may lose its investment trust status and as a consequence capital gains within the Company's portfolio would be subject to Capital Gains Tax. The Company must also comply with the provisions of The Companies Act 2006 and, as its shares are listed on the London Stock Exchange, the UKLA Listing Rules and Disclosure and Transparency Rules ('DTRs'). A breach of the Companies Act 2006 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 may result in the Company's shares being suspended from listing which in turn would breach Section 1158. The Company is also subject to a number of other laws and regulations including AIFMD, MiFID II and the Market Abuse Regulations. Corporate governance risk arises if the Board fails to keep abreast of evolving best practice. | The Section 1158 qualification criteria are regularly monitored by the Manager and the results reported to the Board each month. The Board relies on the services of its Company Secretary, JPMFL and its professional advisers to monitor compliance with all relevant requirements. | This risk remains stable. Changes to the regulatory landscape are expected to be ongoing.
|
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. In addition to threatening the Company's operations, such an attack is likely to raise reputational issues which may damage the Company's share price and reduce demand for its shares. | 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 JPMorgan's Cyber Security programme. The information technology controls around the physical security of JPMorgan's data centres, security of its networks and security of its trading applications are tested by an independent third party and reported every six months against the AAF Standard. | This has remained stable during the year. To date the Manager's cyber security arrangements have proven robust and the Company has not been impacted by any cyber attacks threatening its operations. |
Climate change | Climate change, which barely registered with investors a decade ago, has today become one of the most critical issues confronting asset managers and their investors. Investors can no longer ignore the impact that the world's changing climate will have on their portfolios, with the impact of climate change on returns now inevitable. | Financial returns for long-term diversified investors should not be jeopardised given the investment opportunities created by the world's transition to a low-carbon economy. The Board also considers the threat posed by the physical impact of climate change on the operations of the Manager and other major service providers. As extreme weather events become more common, the resilience, business continuity planning and the location strategies of our services providers will come under greater scrutiny. In preparing the Company's financial statements the Directors have considered the impact of climate change risk (see note 1(a)). | Climate change continues to be a critical threat facing the natural environment and our societies. |
Emerging Risks
The AIC Code of Corporate Governance requires the Audit Committee to put in place procedures to identify emerging risks. At each meeting, the Board considers emerging risks which it defines as potential trends, sudden events or changing risks which are characterised by a high degree of uncertainty in terms of occurrence probability and possible effects on the Company. As the impact of emerging risks is understood, they may be entered on the Company's risk matrix and mitigating actions considered as necessary. The Board, through the Audit Committee, has not identified any emerging risks.
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 £1,937,000 (2022: £2,492,000) of which £nil (2022: £nil) was outstanding at the year end.
Included in administration expenses in note 6 in the Annual Report are safe custody fees amounting to £4,000 (2022: £6,000) payable to JPMorgan Chase of which £2,000 (2022: £1,000) 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 (2022: £nil) of which £nil (2022: £nil) was outstanding at the year end.
The Company also holds cash in the JPMorgan Sterling Liquidity Fund, which is managed by JPMorgan. At the year end this was valued at £3.8 million (2022: £9.4 million). Interest amounting to £151,000 (2022: £50,000) was receivable during the year of which £nil (2022: £nil) was outstanding at the year end.
Handling charges on dealing transactions amounting to £10,000 (2022: £9,000) were payable to JPMorgan Chase during the year of which £3,000 (2022: £2,000) was outstanding at the year end.
At the year end, total cash of £265,000 (2022: £294,000) was held with JPMorgan Chase. A net amount of interest of £1,000 (2022: £nil) was receivable by the Company during the year from JPMorgan Chase of which £nil (2022: £nil) was outstanding at the year end.
Full details of Directors' remuneration and shareholdings can be found in the Directors' Remuneration Report and in note 6 of the Annual Report.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and Financial Statements 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), 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, taken as a whole, the annual report and accounts are fair balanced and understandable and provide the information necessary, for shareholders to assess the Company's 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 preparing these financial statements, the Directors are required to:
? select suitable accounting policies and then apply them consistently;
? state whether applicable UK Accounting Standards, comprising FRS 102, have been followed, subject to any material departures disclosed and explained in the financial statements;
? make judgments and accounting estimates that are reasonable and prudent; 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 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.jpmuksmallercompanies.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 auditor does not involve consideration of the maintenance and integrity of this website and, accordingly, the auditor accepts no responsibility for any changes that have occurred to the Annual Report since it was initially presented on the website. The Annual Report is 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 Strategic Report, a Directors' Report and a Directors' Remuneration Report that comply with that 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 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 Financial Statements 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 Board
Andrew Impey
Chairman
12th October 2023
FINANCIAL STATEMENTS
STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31st July 2023
2023 | 2022 |
| |||||
Revenue | Capital | Total | Revenue | Capital | Total | ||
£'000 | £'000 | £'000 | £'000 | £'000 | £'000 | ||
Losses on investments held at fair value through | |||||||
£profit or loss | - | (17,843) | (17,843) | - | (85,781) | (85,781) | |
Net foreign currency losses | - | (2) | (2) | - | (2) | (2) | |
Income from investments | 8,515 | - | 8,515 | 8,101 | - | 8,101 | |
Interest receivable and similar income | 152 | - | 152 | 50 | - | 50 | |
Gross return/(loss) | 8,667 | (17,845) | (9,178) | 8,151 | (85,783) | (77,632) | |
Management fee | (581) | (1,356) | (1,937) | (748) | (1,744) | (2,492) | |
Other administrative expenses | (559) | - | (559) | (566) | - | (566) | |
Net return/(loss) before finance costs and taxation | 7,527 | (19,201) | (11,674) | 6,837 | (87,527) | (80,690) | |
Finance costs | (344) | (803) | (1,147) | (180) | (419) | (599) | |
Net return/(loss) before taxation | 7,183 | (20,004) | (12,821) | 6,657 | (87,946) | (81,289) | |
Taxation | (36) | - | (36) | (106) | - | (106) | |
Net return/(loss) after taxation | 7,147 | (20,004) | (12,857) | 6,551 | (87,946) | (81,395) | |
Return/(loss) per share (note 2) | 9.16p | (25.63)p | (16.47)p | 8.39p | (112.68)p | (104.29)p | |
A final dividend of 7.7p per share (2022: 6.9p per share) is proposed in respect of the year ended 31st July 2023 amounting to
£6,010,000 (2022: £5,386,000). Further information on dividends is given in note 10(a) in the Annual Report.
All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or
discontinued in the year.
The 'Total' column of this statement is the profit and loss account of the Company and the 'Revenue' and 'Capital' columns
represent supplementary information prepared under guidance issued by the Association of Investment Companies. Net
return/(loss) after taxation represents the profit/(loss) for the year and also Total Comprehensive Income.
STATEMENT OF CHANGES IN EQUITY
For the year ended 31st July 2023
Called up |
| Capital |
|
|
| |
share | Share | redemption | Capital | Revenue |
| |
capital | premium | reserve | reserves1 | reserve1 | Total | |
£'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
At 31st July 2021 | 3,981 | 25,895 | 2,903 | 308,194 | 5,318 | 346,291 |
Net (loss)/return | - | - | - | (87,946) | 6,551 | (81,395) |
Dividends paid in the year (note 3) | - | - | - | - | (4,449) | (4,449) |
At 31st July 2022 | 3,981 | 25,895 | 2,903 | 220,248 | 7,420 | 260,447 |
Net (loss)/return | - | - | - | (20,004) | 7,147 | (12,857) |
Dividends paid in the year (note 3) | - | - | - | - | (5,386) | (5,386) |
At 31st July 2023 | 3,981 | 25,895 | 2,903 | 200,244 | 9,181 | 242,204 |
1 These reserves form the distributable reserves of the Company and may be used to fund distribution of profits to investors.
STATEMENT OF FINANCIAL POSITION
At 31st July 2023
2023 | 2022 | |
£'000 | £'000 | |
Fixed assets |
|
|
Investments held at fair value through profit or loss | 265,249 | 275,604 |
Current assets |
|
|
Debtors | 705 | 1,476 |
Cash and cash equivalents | 4,027 | 9,650 |
4,732 | 11,126 | |
Current liabilities |
|
|
Creditors: amounts falling due within one year | (27,777) | (1,283) |
Net current (liabilities)/assets | (23,045) | 9,843 |
Total assets less current liabilities | 242,204 | 285,447 |
Non Current liabilities |
|
|
Creditors: amounts falling due after one year | - | (25,000) |
Net assets | 242,204 | 260,447 |
Capital and reserves |
|
|
Called up share capital | 3,981 | 3,981 |
Share premium | 25,895 | 25,895 |
Capital redemption reserve | 2,903 | 2,903 |
Capital reserves | 200,244 | 220,248 |
Revenue reserve | 9,181 | 7,420 |
Total shareholders' funds | 242,204 | 260,447 |
Net asset value per ordinary share (note 4) | 310.3p | 333.7p |
STATEMENT OF CASH FLOWS
For the year ended 31st July 2023
2023 | 20221 | |
£'000 | £'000 | |
Cash flows from operating activities |
|
|
Net loss before finance costs and taxation | (11,674) | (80,690) |
Adjustment for: | ||
£Net losses on investments held at fair value through profit or loss | 17,843 | 85,781 |
£Net foreign currency losses | 2 | 2 |
£Dividend income | (8,488) | (7,956) |
£Interest income | (152) | (50) |
£Scrip dividends received as income | (27) | (145) |
Realised loss/(gain) on foreign exchange transactions | (2) | 3 |
(Increase)/decrease in accrued income and other debtors | (6) | 1 |
Increase in accrued expenses | 68 | 36 |
| (2,436) | (3,018) |
Dividends received | 8,505 | 7,419 |
Interest received | 162 | 40 |
Net cash inflow from operating activities | 6,231 | 4,441 |
Purchases of investments | (92,884) | (105,409) |
Sales of investments | 85,485 | 122,651 |
Settlement of foreign currency spot contracts | - | (4) |
Net cash (outflow)/inflow from investing activities | (7,399) | 17,238 |
Dividends paid | (5,386) | (4,449) |
Repayment of bank loans | (6,000) | (18,000) |
Drawdown of bank loans | 8,000 | 8,000 |
Interest paid | (1,069) | (604) |
Litigation expense | - | (52) |
Net cash outflow from financing activities | (4,455) | (15,105) |
(Decrease)/increase in cash and cash equivalents | (5,623) | 6,574 |
Cash and cash equivalents at start of year | 9,650 | 3,077 |
Exchange movements | - | (1) |
Cash and cash equivalents at end of year | 4,027 | 9,650 |
Cash and cash equivalents consist of: |
|
|
Cash and short term deposits | 265 | 294 |
Cash held in JPMorgan Sterling Liquidity Fund | 3,762 | 9,356 |
Total | 4,027 | 9,650 |
1 The presentation of the Cash Flow Statement, as permitted under FRS 102, has been changed so as to present the reconciliation of 'net return/(loss) before finance costs and taxation' to 'net cash inflow from operating activities' on the face of the Cash Flow Statement. Previously, this was shown by way of note.
RECONCILIATION OF NET DEBT
As at |
| As at | |
31st July 2022 | Cash flows | 31st July 2023 | |
£'000 | £'000 | £'000 | |
Cash and cash equivalents |
|
|
|
Cash | 294 | (29) | 265 |
Cash equivalents | 9,356 | (5,594) | 3,762 |
9,650 | (5,623) | 4,027 | |
Borrowings |
|
|
|
Debt due within one year | - | (27,000) | (27,000) |
Debt due after one year | (25,000) | 25,000 | - |
Total | (15,350) | (7,623) | (22,973) |
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31st July 2023
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 July 2022. In preparing these financial statements the Directors have considered the impact of climate change risk as a principal risk as set out in the Annual Report, and have concluded that it does not have a material impact on the value of the Company's investments. In line with FRS 102 investments are valued at fair value, which for the Company are quoted bid prices for investments in active markets at 31st July 2023 and therefore reflect market participants' view of climate change risk.
The financial statements have been prepared on a going concern basis. In forming this opinion, the directors have considered the impact of heightened market volatility since the Russian invasion of Ukraine, the persistent inflationary environment, rising interest rates and other geopoliticall risks on the going concern and viability of the Company. Having consulted the Company's major shareholders through the remit of its advisers, the Directors have a reasonable belief that the continuation vote will be supported by the majority of shareholders at the 2023 AGM. They have considered the operational resiliency of its key service providers, including the Manager. The Directors have reviewed the compliance with loan covenants in assessing the going concern and viability of the Company and other market strains. The Directors will renew the Company's loan facility with Scotiabank for 364 days following the Company's year-end. The Directors have reviewed income and expense projections to 31st October 2024 and the liquidity of the investment portfolio in making their assessment.
The accounting policies applied in these financial statements are consistent with those applied in the preceding year.
2. Return/(loss) per share
2023 | 2022 | |
£'000 | £'000 | |
Revenue return | 7,147 | 6,551 |
Capital loss | (20,004) | (87,946) |
Total loss | (12,857) | (81,395) |
Weighted average number of shares in issue during the year | 78,051,669 | 78,051,669 |
Revenue return per share | 9.16p | 8.39p |
Capital loss per share | (25.63)p | (112.68)p |
Total loss per share | (16.47)p | (104.29)p |
There are no potentially dilutive shares in issue, therefore the basic total loss per share and diluted total loss per share are the same.
3. Dividends
(a) Dividends paid and proposed
| 2023 | 2022 |
| £'000 | £'000 |
Dividend paid |
|
|
2022 final dividend of 6.9p (2021: 5.7p) per share | 5,386 | 4,449 |
Dividend proposed |
|
|
2023 final dividend proposed of 7.7p (2022: 6.9p) per share | 6,010 | 5,386 |
All dividends paid and proposed in the period have been and will be funded from the revenue reserve.
The dividend proposed in respect of the year ended 31st July 2023 is subject to shareholder approval at the forthcoming AGM. In accordance with the accounting policy of the Company, this dividend will be reflected in the financial statements for the year ending 31st July 2024.
(b) Dividend 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 £7,147,000 (2022: £6,551,000). The revenue reserve after payment of the final dividend will amount to £3,171,000 (2022: £2,034,000).
2023 | 2022 | |
£'000 | £'000 | |
2023 final dividend of 7.7p (2022: 6.9p) per share | 6,010 | 5,386 |
4. Net asset value per share
| 2023 | 2022 |
Net assets (£'000) | 242,204 | 260,447 |
Number of shares in issue | 78,051,669 | 78,051,669 |
Net asset value per ordinary share | 310.3p | 333.7p |
5. Status of results announcement
2022 Financial Information
The figures and financial information for 2022 are extracted from the Annual Report and Financial Statements for the year ended 31st July 2022 and do not constitute the statutory accounts for the year. The Annual Report and Financial Statements has been delivered to the Registrar of Companies and included the Report of the Independent Auditor which was unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006.
2023 Financial Information
The Figures and financial information for 2023 are extracted from the published Annual Report and Financial Statements for the year ended 31st July 2023 and do not constitute the statutory accounts for that year. The Annual Report and Financial Statements includes the Report of the Independent Auditors which is unqualified and does not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. The Annual Report and Financial Statements will be delivered to the Register of Companies in due course.
Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.
12th October 2023
For further information:
Lucy Dina
JPMorgan Funds Limited
0800 20 40 20 or +44 1268 44 44 70
ENDS
A copy of the 2023 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 2023 Annual Report will shortly be available on the Company's website at www.jpmuksmallercompanies.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