20 Nov 2020 08:00
LONDON STOCK EXCHANGE ANNOUNCEMENT
JPMORGAN ELECT PLC
ANNUAL RESULTS FOR THE YEAR ENDED 31ST AUGUST 2020
Legal Entity Identifier: 549300FIUYKKL39ILD07
Information disclosed in accordance with DTR 4.1.3
CHAIRMAN'S STATEMENT
I hope that you are all safe and healthy during these uncertain times. I am pleased to present the Company's results for the year ended 31st August 2020. It was a most unusual and challenging year for investment, with a variety of macro factors resulting in significant volatility. Returns for the year under review were dominated by the outbreak of the COVID-19 pandemic in the early months of 2020. Against this backdrop, it is good to be able to report that our Managed Income and Managed Growth portfolios both achieved returns in excess of their respective benchmarks, although their share prices performed less well, as discounts widened.
In line with our guidance last year, dividends for the Managed Income class increased to 4.7p per share, as revenue reserves were utilised to make up for a sharp decline in dividends from the UK market.
Managed Growth
The Managed Growth portfolio has delivered a total return on net assets of +0.4%, compared with the portfolio's benchmark which returned -3.3%. Over the medium and longer term, performance remains well ahead of benchmark.
The objective of this share class is long-term capital growth delivered by investing in a range of investment trusts and open-ended funds managed principally by JPMorgan Asset Management. At the year-end, 33% of the portfolio was invested in non-JPMorgan funds.
For the year ended 31st August 2020, the Board declared dividends of 16.7p per Managed Growth share compared to 15.5p for the year ended 31st August 2019. Shareholders are reminded that this share class is a growth vehicle. Any net income generated during the year is generally distributed to shareholders but investment decisions are not made with the objective of maintaining or growing income.
Managed Income
I am pleased to report that dividends for the year ended 31st August 2020 totalled 4.7p per share (2019: 4.65p per share). In determining the level of the fourth interim dividend payable by the Managed Income Class the Board took into account the level of dividends received and to be received by the Company, the anticipated dividends for the coming financial year and the commitment made in the 2019 Annual Report. Dividend growth of 1.1% is consistent with our aim to increase the total dividends by at least inflation. The portfolio delivered a total return on net assets of -12.1% in comparison to the benchmark return of -12.7%.
The objective of the Managed Income Class remains to provide a growing income return with the potential for long-term capital growth, with the aim of increasing total dividends each year by at least inflation. However, the Board highlights that the risk remains of a potentially large negative impact from continuing dividend cuts and cancellations. The Board will keep under review the level of dividends received, and expected to be received from portfolio companies.
The fourth interim dividend was not fully covered by the income earned in the financial year and therefore the Company utilised the Managed Income Class revenue reserves which have built up over previous years to support this dividend. Following payment of this fourth interim dividend, the Managed Income Class revenue reserve will equate to approximately three quarters of the full year dividend.
In the absence of unforeseen circumstances, the Board intends to declare the first three interim dividends for the year ending 31st August 2021 at 1.1p per share. The level of the fourth interim dividend will be determined by the Board towards the end of the Company's 2020/21 financial year and will depend on the level of dividends received and expected by the Company.
Managed Cash
The portfolio's objective and policy is to achieve a return in excess of sterling money markets by investing primarily in GBP denominated short-term debt securities through investment in JPMorgan Funds - Sterling Managed Reserves Fund (JSMRF). The Managed Cash share class returned +0.5% on net assets and an interim dividend of 0.4p per share was paid for the year ended 31st August 2020.
The Board considers this class to be an asset allocation tool which continues to benefit shareholders of the Company's other share classes, offering the opportunity to switch into a safer share class in times of market volatility.
The Investment Managers' reports provide more detail on the positioning and performance of the three separate share class portfolios.
Conversions and Redemptions
During the year, shareholders took the opportunity to convert between share classes. This resulted in a decrease in the Managed Growth share class shares in issue of 61,003, a decrease in the Managed Income share class shares in issue of 1,202,274 and an increase in the Managed Cash share class shares in issue of 1,558,492. In addition, 815,206 Managed Cash shares were redeemed.
Gearing
The Board's policy is to not utilise borrowings to increase the funds available for investment for the Managed Growth share class. The Board monitors closely the level of indirect gearing through the underlying investments. The Managed Income share class has the ability to use short-term borrowings to increase potential returns to shareholders. Its policy is to operate within a range of 85% to 112.5% invested.
During the year, the Company renewed its £20 million multicurrency revolving credit facility with Scotiabank, extending its maturity date to June 2021. At the year-end, £5 million was drawn and the Managed Income portfolio was 5.9% geared.
Environmental, Social and Corporate Governance ('ESG')
The Board has increased its focus on ESG matters, improving its understanding of how the Manager embeds these principles into the day-to-day management of the portfolios. More information on the Manager's ESG investment philosophy can be found on page 36 of the Annual Report.
The Board
As previously announced, in anticipation of my retirement at the Annual General Meeting ('AGM') in January 2021 and our longer-term succession planning, the Board has, with effect from 15th October 2020, appointed as Directors, Mr. Steve Bates and Mrs. Davina Walter. It is the Board's intention that Steve will assume the role of the Chairman of the Company when I step down. Both Davina and Steve bring a significant range of corporate and strategic knowledge and perspective to the Board. For more information about their background and experience, please refer to the Director's biographies on page 40 of the Annual Report.
I became a Director of the company in January 2012 and the Chairman in January 2018. I have thoroughly enjoyed serving on the Board of JPMorgan Elect and it has been a privilege to be Chairman for the past few years. I would like to thank the shareholders, my fellow Directors and the team at JPMorgan for their many years of support. The Board supports the annual re-election for all Directors, as recommended by the UK Corporate Governance Code, and therefore all Directors, save for myself, will stand for election/re-election at the forthcoming AGM.
During the year, the Board carried out its customary evaluation of the Directors, the Chairman, the Committees and the working of the Board as a whole. It was concluded that the Board and its procedures were operating effectively.
COVID-19 and the Company's Key Service Providers
The Board is pleased to report that, since the on-set of the pandemic, the Manager and the Company's other service providers have been able to adjust their business models to accommodate working from home. The Board has received assurances that the Company's operations, including the management of the portfolio and the maintenance of a strong controls environment, have continued as normal with no issues being identified. The Board has also functioned fully despite needing to work from home due to the lockdown measures.
Annual General Meeting
As the lockdown measures remain in place at the time of writing this Report, the Board has reluctantly decided to proceed with the forthcoming AGM by limiting attendance in person to only Directors or their proxies and representatives from JPMorgan.
We are holding the Company's AGM at 60 Victoria Embankment, London EC4Y 0JP on 20th January 2021 at 12.30 p.m. Please note that only the formal business will be conducted at the AGM and the minimum legal requirements for an AGM will be followed. There will be no investor presentation in person by the investment team. Shareholders will not be allowed to attend the AGM and indeed entry will be refused in line with the prevailing protocol. In light of the changed format, the Board strongly encourages all shareholders to exercise their votes in respect of the meeting in advance, by completing and returning their proxy forms. This will ensure that the votes are registered.
The Board is aware that many shareholders look forward to hearing the views of the Investment Managers and perhaps particularly this year given the uncertainties that lie ahead for the UK economy and markets. Accordingly a presentation with the Investment Managers, which would have been delivered at the AGM, will be available for shareholders to watch on the Company's website approximately one week in advance of the AGM. Shareholders are invited to address any questions they have for the Investment Managers or the Board by writing to the Company Secretary in advance of the AGM via the 'Ask the Question' link found under the 'Contact Us' section on the Company's website www.jpmelect.co.uk or by email at invtrusts.cosec@jpmorgan.com. Any questions received will be replied to via the Company Secretary.
In the event that the situation changes the Company will update shareholders through an announcement to the London Stock Exchange and on the Company's website.
Outlook
It is easy to highlight the uncertainties and continuing risk of market volatility, harder to provide any useful insight into what to expect from here. The Company has survived the turmoil of the last 12 months and continued to provide returns consistent with our objectives. The business structure of the Company and the Manager have been severely tested and have proved to be robust. I very much hope that 2021 will see society returning to some 'normality' and that government stimulus packages will do enough to protect the most vulnerable, whilst providing some stability for economies and markets.
As I step down from the chair of JPMorgan Elect, I am confident that the Board is well qualified to manage through these uncertain times, and I look forward to remaining as a shareholder of the Company.
Alan Hodson
Chairman 20th November 2020
INVESTMENT MANAGERS' REPORT - MANAGED GROWTH
Performance Review
The Managed Growth portfolio outperformed its benchmark for the year to the end of August, returning +0.4% versus the benchmark return of -3.3%. However, the discount widened over the period, delivering a total return to shareholders of -3.8%.
Managed Growth (%) | 1 Year | 3 Years p.a. | 5 Years p.a. | 10 Years p.a. |
Total return on net assets | 0.4% | 4.5% | 8.8% | 10.7% |
Total return to shareholders | -3.8% | 3.0% | 7.8% | 10.2% |
Benchmark total return | -3.3% | 2.7% | 8.5% | 9.0% |
FTSE All-Share Index | -12.7% | -2.8% | 3.2% | 5.9% |
FTSE World ex UK | 7.4% | 8.9% | 14.6% | 12.8% |
The key driver of the portfolio's outperformance was stock selection.
Performance was mixed across underlying holdings, with our North American and global strategies delivering the strongest positive absolute returns. JPM American Investment Trust was the largest positive contributor to absolute return, with the trust benefitting from strong stock selection in the consumer discretionary, information technology and health care sectors. However, the majority of our UK and European holdings delivered negative absolute returns; by way of example, JPM Claverhouse Investment Trust posted negative returns driven by its cyclical bias and high gearing as we entered the period of extreme volatility in March. In addition, our holdings in emerging markets generated negative returns in aggregate.
Relative performance across the period was mixed, with 21 strategies outperforming, whilst 15 strategies underperformed their benchmark. JPM Japanese Investment Trust was a notable outperformer, delivering an excess return of 17% over the year against its benchmark (TOPIX). The trust benefitted from the quality growth tilt in the portfolio and the higher allocation to internet businesses.
31st August 2019 to | |
Top 5 Holdings By Absolute Performance (%) | 31st August 2020 |
Baillie Gifford US Growth Trust | 67.0 |
Polar Capital Technology Trust | 51.1 |
Allianz Technology Trust | 48.7 |
JPMorgan China Growth & Income | 33.1 |
Worldwide Healthcare Trust | 25.2 |
31st August 2019 to | |
Bottom 5 by Absolute Performance (%) | 31st August 2020 |
Fidelity Special Values Investment Trust | -25.6 |
BlackRock Frontiers Investment Trust | -25.3 |
City of London Investment Trust | -17.1 |
JPMorgan Claverhouse Investment Trust | -16.8 |
European Opportunities Trust | -16.1 |
PERFORMANCE ATTRIBUTION
FOR THE YEAR ENDED 31ST AUGUST 2020
% | % | |
Benchmark Total Return | -3.3 | |
Asset Allocation | -1.1 | |
Stock Selection | 5.2 | |
Investment Manager Contribution | 4.1 | |
Portfolio Total Return | 0.8 | |
Management Fees/Other Expenses | -0.5 | |
Share Buy-Back/Issuance | 0.1 | |
Other Effects | -0.4 | |
Net Asset Value Cum Income Total Return | 0.4 | |
Share Price Total Return | -3.8 |
Source: JPMAM and Morningstar. All figures are on a total return basis.
Performance attribution analyses how the Company achieved its recorded performance relative to its benchmark index.
A glossary of terms and APMs is provided on pages 103 to 106 of the Annual Report.
At the year end, the investment trust sector (excluding private equity, hedge funds and direct property) average discount was -5.2%, compared with -4.6% at the previous year end (Source: Winterflood).
Portfolio Activity
At the end of August 2020, 37% of the portfolio was invested in JPMorgan managed investment trusts, 27% in JPMorgan managed open-ended funds and 33% in investment trusts managed by third party managers with the balance held in futures and cash.
During the first six months of the financial year the portfolio maintained an underweight position to Japan and Europe and an overweight position to the US. We started the financial year with a slight overweight position to the UK, before reducing that position in October by selling some of the Edinburgh Investment Trust holding (completing the disposal in February) and remained close to neutral until the end of January 2020. We increased our emerging market equity exposure, adding Genesis and Templeton Emerging Markets trusts in December and January respectively, as the global manufacturing sector started to recover from the suppressed levels of 2019. At the end of January 2020 the investment trust sector average discount had tightened to 2.2% before widening to 6.0% at the end of February as the impact of Covid-19 started to be felt.
We reduced our allocation to JPMorgan Claverhouse, BlackRock Smaller Companies and JPMorgan Smaller Companies in March, in order to lower exposure to the UK and small and mid-cap companies. We further reduced this in April and May, increasing our underweight position to the region versus benchmark given the prevailing economic backdrop and impact of Covid-19. As we moved into the second quarter, we made some further changes in our emerging market equity holdings, reducing exposure to trusts that offer broad emerging market exposure and adding a small position in JPMorgan China Growth and Income Trust. We also moved from an underweight to an overweight position in Europe, adding to the European Opportunities Trust and the Growth class of JPMorgan European Investment Trust. Our relative overweight position in the US increased during the year due to market movements; however, we scaled this back in August through selling some of our JPM US Equity All Cap and JPM US Select Equity fund exposure.
On a regional basis US, Europe and Asia continue to be the largest overweight positions across our portfolio holdings. We have recently become more constructive on the UK given the attractive valuations on a relative basis and added to the JPM UK Equity Plus Fund in August. Having said this, the uncertainty around Brexit and the impact of Covid-19 still leads us to an underweight position for the region.
We have maintained our preference for the US as economic data revealed a solid recovery, though at a moderating pace. Furthermore, the US Federal Reserve's intentions to maintain extraordinarily accommodative monetary policy for as long as necessary to support the economy further supports US stocks. Europe and emerging markets are favoured but their growth will be dependent on global growth.
Outlook
After a short but deep recessionary period, triggered by measures to control the spread of Covid-19, the world has entered into a new phase of growth. This is characterised by persistent and highly supportive monetary policy accommodation, which should remain a tailwind for growth and financial markets for the foreseeable future. Medium term, we expect fresh rounds of fiscal stimulus and the prospect for higher inflation. Although the final results of the US election are as yet unknown, a Biden presidency with split Congress seems most likely and election uncertainty has faded as an influence on markets. In recent weeks we have seen a rise in Covid-19 infection rates and a return to lockdown measures in some European countries. More positively, reports of success in Covid-19 vaccination trials has driven equity markets higher and could prove a catalyst for a rotation away from this year's equity sector winners.
Our favoured regions remain US, Europe and Asia as their growth is levered to global growth. We still expect above-trend growth, on average, through 2021, although most economies have made the transition to a more normal pace of early-cycle expansion after the explosive initial rebound in April 2020.
Investment trust discounts widened at the height of market volatility in March, which proved to be a headwind for the portfolio. Whilst there has been a subsequent narrowing across the sector, we will look carefully for opportunities that these discounts bring, while maintaining exposure to those funds that we believe will be able to perform over the long term.
Katy Thorneycroft
Simin Li
Peter Malone
Investment Managers 20th November 2020
INVESTMENT MANAGERS' REPORT - MANAGED INCOME
Dividend Review
The impact of Covid-19 on dividend payments is without precedent. Since the onset of the virus, three quarters of UK listed companies scheduled to pay dividends either cut or cancelled their pay-outs. The value of dividends paid by the constituents of the FTSE All Share Index fell by 57% in total. Dividends from the largest 100 companies in the FTSE Index fell by 45% while those from mid cap companies (FTSE 250) fell by 76%. With economies in lock-down across the world the over-riding imperative for companies was to preserve cash flow to shore up balance sheets.
A large proportion of the total cut came from financials after the Bank of England required banks to suspend their dividend payments. Pressure was also brought to bear on insurance companies to suspend pay outs. It is noteworthy that Legal & General, confident in the resilience of its balance sheet, decided to pay its dividend. However, Royal Dutch Shell and BP, stalwarts of the dividend list for generations, both cut their payments. In the case of Royal Dutch Shell this was for the first time since the Second World War. Consumer staples companies such as food retailers, drinks producers and food producers whose revenues are less volatile proved to be more resilient with some companies such as Tesco increasing their pay-outs.
Performance Review
For the Company's financial year ended 31st August 2020 the Managed Income portfolio delivered a total return of -12.1% in comparison to the benchmark return of -12.7%.
PERFORMANCE ATTRIBUTION
FOR THE YEAR ENDED 31ST AUGUST 2020
% | % | |
Benchmark Total Return | -12.7 | |
Equity Returns | ||
Asset allocation | N/A | |
Stock Selection | 1.8 | |
Gearing/cash | -0.8 | |
Investment manager contribution | 1.0 | |
Portfolio total return | -11.7 | |
Management Fees/Other Expenses | -0.8 | |
Share Buy-Back/Issuance | 0.4 | |
Other effects | -0.4 | |
Net Asset Value Cum Income Total Return | -12.1 | |
Share Price Total Return | -14.2 |
Source: JPMAM and Morningstar. All figures are on a total return basis. Performance attribution analyses how the Company achieved its recorded performance relative to its benchmark index.
A Alternative performance measure ('APM').
A glossary of terms and APMs is provided on pages 103 to 106 of the Annual Report.
Our holdings in Games Workshop, Dunelm and Polymetal were amongst the biggest contributors to performance. Despite the closure of their physical stores both Games Workshop and Dunelm experienced stronger than expected sales performances thanks to rapid growth in their on-line presence. Polymetal's earnings and share price performance benefited from the rising gold price.
On the other hand, detractors from performance included National Express, Royal Dutch Shell and Cineworld. Lockdown meant a collapse in passenger traffic for National Express and the closure of Cineworld's cinemas. Royal Dutch Shell's shares fell as the oil price collapsed and the company announced its dividend cut.
Portfolio Activity
In early March we took the decision to reduce the gearing of the portfolio as markets fell in response to the pandemic and the associated impact on economic growth and corporate profitability.
The general exposure of the portfolio by sector did not change materially. Life Insurance and Home Construction remain our two largest sector exposures. As noted in the Half Year Report we were pleased that our largest holding in the Life Insurance Sector, Phoenix Group, increased its cash flow guidance and committed to paying the dividend. Legal & General also confirmed that they would pay their dividend. Aviva cancelled their final 2019 dividend and will communicate a decision on a new dividend policy in the last quarter of 2020. Whilst the dividend is likely to be reduced the resultant yield should still compare favourably to the market. We also believe that the shares offer good value at these levels. It is encouraging that our two largest holdings in the Home Construction sector, Berkeley Group and Persimmon have resumed paying dividends as building activity has recommenced.
Transactions
We sold International Consolidated Airlines; we believe that there will be a structural change in the demand for business travel as remote working and teleconferencing appears to have come of age. Alpha Financial Markets Consulting was sold following a strong recovery in the share price and as we saw more attractive stock opportunities elsewhere following the market sell-off. We also sold our holding in IWG as the demand for office space is also likely to be structurally lower.
We added selectively to some of our holdings such as Next, OneSavings Bank and Persimmon to take advantage of valuation opportunities. Despite near term uncertainty we believe that these businesses are fundamentally sound. We acquired Brewin Dolphin, a leading UK wealth manager, following an impressive set of results amid the crisis and an attractive valuation. Assuming a payout ratio towards the lower end of the guided range (60-80% of net profits), the shares currently yield 4.3%.
We also participated in several equity re-financings - Hollywood Bowl, SSP and WH Smith. With stronger balance sheets these companies are now in a position to weather any reasonable disruption from the pandemic and benefit from business opportunities at the expense of weaker competitors with capital constraints.
Gearing at the financial year end was 5.9%.
Outlook
We expect markets to remain volatile over the next few months primarily due to Covid-19 and Brexit negotiations. A rise in Covid-19 infection rates in October led to a reversal of progress towards the re-opening of economies in the UK and a number of other countries although we do not believe that total lock downs will be imposed with educational facilities, manufacturing and construction sites remaining open. The economic damage should therefore be much lower than Q2. More encouragingly, reports of success in Covid-19 vaccination trials has driven equity markets higher. Monitoring the impact of Brexit negotiations, we believe a limited free trade agreement with considerable transition arrangements to ease the 'day one' burden of change is likely.
Corporate earnings and dividends will be appreciably lower this year, with the financials and energy sectors especially badly affected, and although 2021 will see recovery it will again take many quarters before profitability returns to pre-crisis levels. It is likely that the fall in dividends in 2020 will be approximately 40%. However we believe that we have seen the worst of the dividend cuts. Companies in the FTSE All Share Index are currently forecast to deliver 20% growth in aggregate though this is subject to great uncertainty.
Relative to sovereign bonds, cash and other equity markets, UK equities still offer an extremely attractive yield and we should remember that the nature of economic cycles is that short-term hits to profitability and dividends tend to presage longer recoveries. Following large share price falls, many stocks are looking very attractively valued. Therefore we believe that there continue to be good opportunities for stock pickers to add value.
John Baker
Katen Patel
Investment Managers 20th November 2020
INVESTMENT MANAGERS' REPORT - MANAGED CASH
The Managed Cash share class returned +0.5% on net assets over the 12 month period to 31st August 2020. The Managed Cash class invests its assets in the Sterling Managed Reserves Fund which has an objective to invest in a blend of money market securities and short term bonds.
During this 12 month period, the Bank of England's (BoE) Monetary Policy Committee (MPC) reduced the deposit rate by a total of 0.65% in two stages. The first cut of 0.50% took place on 11th March 2020 with the second cut of 0.15% taking place shortly after on 19th March. These cuts were implemented alongside several other programmes in order to support the UK economy in the face of the Covid-19 crisis which significantly increased volatility across risk assets. As at 17th November 2020, the base rate set by the BoE is 0.10%.
The Covid-19 pandemic shook markets in March. However, as outlined in the Global Markets Review on page 8 of the Annual Report, following record breaking fiscal and monetary stimulus from governments and central banks, risk markets subsequently recovered. As economies began to reopen, credit spreads tightened and the measures that were imposed were extremely successful in depressing volatility. This trend has continued since April and can be seen by looking at GBP Corporate 1-3 year credit spreads, which tightened from a peak of 272 bps on 24th March 2020 to 105 bps at the end of August 2020.
During this time, Brexit is another topic that has come into focus and is a risk that we continue to monitor closely. UK PM Boris Johnson and EU Commission President Ursula von der Leyen did not agree to an extension to the transition period by the 30th June deadline. Accordingly, the UK has until the end of the year to agree and formalise a deal with the EU. There are doubts as to whether a deal, and if so a constructive deal, can be struck in this timeframe.
Portfolio Commentary
At the end of August 2019, with risk assets performing and market sentiment strong, the fund's duration stood at 0.59 years. Heading into 2020, as concerns around Brexit came into focus and the impact of Covid-19 became clear, we increased the quality of the assets in the portfolio, retaining a strategic overweight to credit but reducing allocations to securitised credit (AAA Mortgage Backed Securities for example) and BBB rated assets. Additionally, we increased our allocations to sub 3-month maturity assets to build liquidity into the fund. BBB exposure was halved during March and sub 3-month exposure over the year increased from 19.6% to 42.1%. Following the crisis, in the second quarter of 2020 we selectively added corporate credit into the fund, taking advantage of attractive valuations following the significant widening of credit spreads. Subsequent spread compression has since helped to generate total returns.
Outlook
As we look into the final quarter of the year, we expect to see volatility as the market contends with second waves and localised lockdowns. Specific risks such as Brexit and longer term trends such as US/China relations could keep risk markets choppier than we felt over the summer. Following the US election, Joe Biden is projected to have won enough electoral college votes to become president. However, the margin of victory was smaller than expected and the split of seats within the Senate will moderate the size of a fiscal stimulus package or corporate tax increases. Nonetheless, any package that will be passed, combined with accommodative monetary policy should be positive for growth.
We have decreased risk slightly, reducing overall credit risk and taking some profits considering the repricing that has occurred since March. Nonetheless, with the Bank of England likely to maintain an accommodative stance and potentially cut interest rates into negative territory some time in 2021, we still have exposure to longer-dated assets whilst maintaining high levels of liquidity within the portfolio.
JPMorgan Asset Management
Investment Manager 20th November 2020
PRINCIPAL AND EMERGING RISKS
Principal Risks
• Investment underperformance against benchmark
An inappropriate investment strategy or poor performance may lead to underperformance against the relevant benchmark index and peer companies, resulting in the Company's shares trading on a wider discount. The Board monitors the implementation and results of the investment process with the Investment Managers, who attend all board meetings. In addition, to ensure the investment strategy remains relevant the Board regularly reviews whether the rationale for each share class is still appropriate.
• Fraud and Cybercrime
The Manager is committed to combatting fraud and financial crime and devotes significant resources to its cyber and fraud protection systems. It performs ongoing internal monitoring of processes and controls, including daily reconciliations and monthly compliance reporting. 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 the Company benefits directly or indirectly from all elements of JPMorgan's cyber security programme
• Dividends
Insufficient income may be generated by the Managed Income portfolio to enable the Company to meet the Managed Income class's objective of achieving a growing income return. The Board regularly reviews the income generated by the Managed Income portfolio and discusses the appropriate dividend policy at least annually.
• Accounting, Legal and Regulatory
Political or regulatory considerations, for example changes in financial or tax legislation, may reduce the attractiveness or marketability of the Company. The Board receives regular briefings from the Manager on any changes which could impact the Company's ability to implement its strategy and adopts revised policies, where required.
• Business Strategy
A share class may fall beneath a viable size, resulting in limited liquidity for the shares or a high ongoing charges ratio. The Manager monitors the fund sizes, providing detailed financial information to the Board and advising the Board, as appropriate.
• Board loses confidence in Investment Manager
The Board may lose confidence in the Investment Manager's ability to generate returns following ongoing underperformance in any of the classes. The Board meets with the Investment Managers at each board meeting to understand the reasons for performance and monitors performance against the Company's objectives and its peers. The Board will discuss any performance concerns with senior representatives of the Manager.
• Third Party Risk
Inadequate controls maintained by the Manager, JPMorgan Asset Management, the Depositary or the Custodian could prevent accurate reporting and monitoring of the Company's financial position. The Board acknowledges the risks inherent from having outsourced or sub-contracted relationships with its critical service providers and has put in place policies to obtain confirmation that the relevant controls are exercised by third parties. Under the terms of its agreement, the Depositary has strict liability for the loss or misappropriation of assets held in custody. Details of how the Board monitors the services provided by JPMF and its associates and the key elements designed to provide effective internal controls are included within the Risk Management and Internal Control section of the Corporate Governance Statement on page 49 of the Annual Report.
• Global Pandemic
The recent spread of coronavirus (COVID-19) has raised the emerging risk of global pandemics. The global reach and disruption to markets of this pandemic is unprecedented, so there are no direct comparisons from history from which to learn. The Company is exposed to the risk of market volatility and falling equity markets which may be brought about by the pandemic. The resilience of the operational services provided to the Company could be reduced as a result of the effects of the pandemic, representing a risk to the Company. The Board regularly reviews the mitigation measures which JPMorgan Asset Management and other key service providers have in place to maintain operational resilience and is satisfied that these are appropriate even in the current conditions. Relevant business continuity plans have been invoked and the Board has been given regular updates. Arrangements for working from home have been implemented where appropriate and government guidance is being followed. The Board has not experienced and does not anticipate a fall in the level of service from any service provider. The pandemic has also triggered periodic episodes of volatility in global stock markets and created uncertainty around the path of future economic growth.
Emerging Risks
• 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. ESG factors are incorporated into the Managers' investment process. 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 is also considering the threat posed by the direct impact of climate change on the operations of the Manager and other major service providers. As extreme weather events become more common, the resiliency, business continuity planning and the location strategies of our service providers will come under greater scrutiny.
TRANSACTIONS WITH THE MANAGER AND RELATED PARTIES
Details of the management contract are set out in the Directors' Report on page 42 in the Annual Report. The total amount payable to the Manager for the year in respect of these contracts was £1,418,000 (2019: £1,486,000) net of rebates, of which £nil (2019: £nil) was outstanding at the year end. In addition £nil (2019: £82,000) was payable to the Manager for the administration of savings scheme products of which £nil (2019: £nil) was outstanding at the year end.
Included in other administration expenses in note 6 on page 75 of the Annual Report are safe custody fees amounting to £4,000 (2019: £4,000) payable to JPMorgan Chase of which £1,000 (2019: £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. Commission amounting to £21,000 (2019: £nil) was payable to JPMorgan Securities Limited for the year of which £nil (2019: £nil) was outstanding at the year end.
The Company holds investments in funds managed by JPMAM. At 31st August 2020 these were valued at £167.2 million (2019: £190.2 million) and represented 51.5% (2019: 53.1%) of the Company's investment portfolio. During the year the Company made £6.4 million purchases of such investments (2019: £13.2 million) and sales with a total value of £28.6 million (2019: £23.8 million). Income amounting to £3.7 million (2019: £4.0 million) was receivable from these investments during the year of which £564,000 (2019: £775,000) was outstanding at the year end.
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), including 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, 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 order to provide these confirmations, and in preparing these financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and estimates that are reasonable and prudent;
• state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
• prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Company will continue in business
and the Directors confirm that they have done so.
The Directors are responsible for keeping proper accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The accounts are published on the www.jpmelect.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 accounts since they were initially presented on the website. The accounts are prepared in accordance with UK legislation, which may differ from legislation in other jurisdictions.
Under applicable law and regulations, the Directors are also responsible for preparing a Directors' Report, Strategic Report, Statement of Corporate Governance and Directors' Remuneration Report that comply with that law and those regulations.
Each of the Directors, whose names and functions are listed on pages 40 and 41 of the Annual Report, confirms that, to the best of their knowledge:
• the financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards) and applicable law, give a true and fair view of the assets, liabilities, financial position and return of the Company; and
• the Strategic Report and Directors' Report include a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.
The Board confirms that it is satisfied that the Annual Report and Financial Statements taken as a whole are fair, balanced and understandable and provide the information necessary for shareholders to assess the strategy and business model of the Company.
For and on behalf of the Board
Alan Hodson
Chairman
20th November 2020
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31ST AUGUST 2020
2020 | 2019 |
| |||||
Revenue | Capital | Total | Revenue | Capital | Total | ||
£'000 | £'000 | £'000 | £'000 | £'000 | £'000 | ||
Losses on investments held at | |||||||
fair value through profit or loss | - | (16,083) | (16,083) | - | (12,960) | (12,960) | |
Net foreign currency gains | - | 48 | 48 | - | 5 | 5 | |
Income from investments | 9,127 | - | 9,127 | 10,036 | - | 10,036 | |
Interest receivable and similar income | 42 | - | 42 | 92 | - | 92 | |
Gross return/(loss) | 9,169 | (16,035) | (6,866) | 10,128 | (12,955) | (2,827) | |
Management fee | (480) | (938) | (1,418) | (491) | (995) | (1,486) | |
Other administrative expenses | (612) | (251) | (863) | (670) | (24) | (694) | |
Net return/(loss) before finance costs | |||||||
and taxation | 8,077 | (17,224) | (9,147) | 8,967 | (13,974) | (5,007) | |
Finance costs | (84) | (87) | (171) | (82) | (83) | (165) | |
Net return/(loss) before taxation | 7,993 | (17,311) | (9,318) | 8,885 | (14,057) | (5,172) | |
Taxation (charge)/credit | (14) | 3 | (11) | (3) | - | (3) | |
Net return/(loss) after taxation | 7,979 | (17,308) | (9,329) | 8,882 | (14,057) | (5,175) | |
Return/(loss) per share (note 2): | |||||||
Managed Growth | 16.56p | (14.35)p | 2.21p | 15.54p | (17.04)p | (1.50)p | |
Managed Income | 3.53p | (15.50)p | (11.97)p | 5.45p | (12.02)p | (6.57)p | |
Managed Cash | 0.40p | 0.29p | 0.69p | 0.33p | 0.77p | 1.10p | |
STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31ST AUGUST 2020
Called up | Capital | ||||||
share | Share | redemption | Other | Capital | Revenue | ||
capital | premium | reserve | reserve | reserves1 | reserve1 | Total | |
£'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
At 31st August 2018 | 16 | 134,673 | 8 | 4,762 | 223,391 | 6,713 | 369,563 |
Repurchase and cancellation of the | |||||||
Company's own shares | - | - | - | (400) | (2,260) | - | (2,660) |
Repurchase of shares into Treasury | - | - | - | (3,279) | (13,984) | - | (17,263) |
Shares issued as a result of Company | |||||||
rollovers (net of costs) | - | 26,171 | - | - | - | - | 26,171 |
Share conversions during the year | - | 5,921 | - | (1,083) | (4,838) | - | - |
Net (loss)/return | - | - | - | - | (14,057) | 8,882 | (5,175) |
Dividends paid in the year (note 3) | - | - | - | - | - | (8,326) | (8,326) |
At 31st August 2019 | 16 | 166,765 | 8 | - | 188,252 | 7,269 | 362,310 |
Repurchase and cancellation of the | |||||||
Company's own shares | - | - | - | - | (949) | - | (949) |
Repurchase of shares into Treasury | - | - | - | - | (13,878) | - | (13,878) |
Share conversions during the year | - | 7,188 | - | - | (7,188) | - | - |
Project costs in relation to shares as a result of | |||||||
Company rollover | - | (373) | - | - | - | - | (373) |
Net (loss)/return | - | - | - | - | (17,308) | 7,979 | (9,329) |
Dividends paid in the year (note 3) | - | - | - | - | - | (8,675) | (8,675) |
At 31st August 2020 | 16 | 173,580 | 8 | - | 148,929 | 6,573 | 329,106 |
1 These reserves form the distributable reserves of the Company and may be used to fund distributions to investors.
STATEMENT OF FINANCIAL POSITION
AT 31ST AUGUST 2020
2020 |
| ||||
Managed | Managed | Managed | 2019 | ||
Growth | Income | Cash | Audited | Audited | |
(Unaudited) | (Unaudited) | (Unaudited) | Total | Total | |
£'000 | £'000 | £'000 | £'000 | £'000 | |
Fixed assets | |||||
Investments held at fair value through | |||||
profit or loss | 244,721 | 74,463 | 5,484 | 324,668 | 357,984 |
Current assets | |||||
Derivative financial assets | 71 | - | - | 71 | 61 |
Debtors | 4,478 | 669 | - | 5,147 | 4,570 |
Cash and cash equivalents | 7,489 | 1,026 | 889 | 9,404 | 7,061 |
12,038 | 1,695 | 889 | 14,622 | 11,692 | |
Current liabilities | |||||
Creditors: amounts falling due within one year | (3,916) | (5,834) | (201) | (9,951) | (7,045) |
Derivative financial liabilities | (233) | - | - | (233) | (321) |
Net current assets/(liabilities) | 7,889 | (4,139) | 688 | 4,438 | 4,326 |
Total assets less current liabilities | 252,610 | 70,324 | 6,172 | 329,106 | 362,310 |
Net assets | 252,610 | 70,324 | 6,172 | 329,106 | 362,310 |
Capital and reserves | |||||
Called up share capital | 15 | 1 | - | 16 | 16 |
Share premium | 50,681 | 92,519 | 30,380 | 173,580 | 166,765 |
Capital redemption reserve | 3 | 3 | 2 | 8 | 8 |
Other reserve | 25,819 | (5,572) | (20,247) | - | - |
Capital reserves | 173,796 | (20,823) | (4,044) | 148,929 | 188,252 |
Revenue reserve | 2,296 | 4,196 | 81 | 6,573 | 7,269 |
Total shareholders' funds | 252,610 | 70,324 | 6,172 | 329,106 | 362,310 |
31st August 2020 | 31st August 2019 | |||
Net asset value | Net assets | Net asset value | Net assets | |
per share | attributable | per share | attributable | |
(pence) | £'000 | (pence) | £'000 | |
Managed Growth | 851.9 | 252,610 | 863.8 | 266,517 |
Managed Income | 87.6 | 70,324 | 104.4 | 90,291 |
Managed Cash | 103.8 | 6,172 | 103.7 | 5,502 |
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31ST AUGUST 2020
2020 | 2019 | |
£'000 | £'000 | |
Net cash outflow from operations before dividends and interest | (2,190) | (2,153) |
Dividends received | 9,674 | 9,756 |
Interest received | 64 | 88 |
Interest paid | (166) | (143) |
Overseas tax recovered | - | 25 |
Net cash inflow from operating activities | 7,382 | 7,573 |
Purchases of investments and derivatives1 | (47,244) | (68,802) |
Sales of investments and derivatives | 66,163 | 87,500 |
Settlement of future contracts | 761 | (58) |
Settlement of forward currency contracts | 20 | (6) |
Net cash inflow from investing activities | 19,700 | 18,634 |
Dividends paid | (8,675) | (8,326) |
Repurchase of shares into Treasury | (13,977) | (17,164) |
Repurchase and cancellation of the Company's own shares | (2,343) | (1,232) |
Drawdown of bank loan | 5,000 | - |
Repayment of bank loan | (5,000) | - |
Utilisation of bank overdraft | 648 | 91 |
Cash element of shares issued as a result of Company rollover (net of costs)1 | - | 668 |
Project costs in relation to shares issued as a result of Company rollover | (373) | - |
Net cash outflow from financing activities | (24,720) | (25,963) |
Increase in cash and cash equivalents | 2,362 | 244 |
Cash and cash equivalents at start of year | 7,061 | 6,817 |
Exchange movements | (19) | - |
Cash and cash equivalents at end of year | 9,404 | 7,061 |
Increase in cash and cash equivalents | 2,362 | 244 |
Cash and cash equivalents consist of: | ||
Cash held in JPMorgan Sterling Liquidity Fund | 1,192 | 5,483 |
Cash and short term deposits | 8,212 | 1,578 |
Total | 9,404 | 7,061 |
1 Excluding In-specie stocks with a value of £25,503,000 as a result of Company rollover in the year ended 31st August 2019.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31ST AUGUST 2020
1. Accounting policies
(a) 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 2019.
All of the Company's operations are of a continuing nature.
The financial statements for the Company comprise the Statement of Comprehensive Income, the Statement of Changes in Equity, the 'Total' column of the Statement of Financial Position, the Statement of Cash Flows, and the 'Total' column within the Notes to the financial statements.
The Managed Growth, Managed Income and Managed Cash Statement of Financial Position, together with the notes to those statements are not required under UK GAAP or the SORP, and have not been audited but have been disclosed to assist shareholders' understanding of the net assets and liabilities, and income and expenses of the different share classes.
The financial statements have been prepared on a going concern basis. In forming this opinion, the directors have considered any potential impact of the Covid-19 pandemic on the going concern and viability of the Company. They have considered the potential impact of Covid-19 and the mitigation measures which key service providers, including the Manager, have in place to maintain operational resilience particularly in light of Covid-19. The Directors have reviewed the compliance with debt covenants in assessing the going concern and viability of the Company. The Directors have reviewed income and expense projections and the liquidity of the investment portfolio in making their assessment.
The policies applied in these financial statements are consistent with those applied in the preceding year,
2. Return/(loss) per share
2020 | 2019 | |
£'000 | £'000 | |
Managed Growth | ||
Return/(loss) per Managed Growth share is based on the following: | ||
Revenue return | 5,002 | 4,889 |
Capital loss | (4,337) | (5,361) |
Total return/(loss) | 665 | (472) |
Weighted average number of shares in issue during the year | 30,220,043 | 31,462,931 |
Revenue return per share | 16.56p | 15.54p |
Capital loss per share | (14.35)p | (17.04)p |
Total return/(loss) per share | 2.21p | (1.50)p |
2020 | 2019 | |
£'000 | £'000 | |
Managed Income | ||
Loss per Managed Income share is based on the following: | ||
Revenue return | 2,956 | 3,970 |
Capital loss | (12,986) | (8,750) |
Total loss | (10,030) | (4,780) |
Weighted average number of shares in issue during the year | 83,811,388 | 72,790,021 |
Revenue return per share | 3.53p | 5.45p |
Capital loss per share | (15.50)p | (12.02)p |
Total loss per share | (11.97)p | (6.57)p |
2020 | 2019 | |
£'000 | £'000 | |
Managed Cash | ||
Return per Managed Cash share is based on the following: | ||
Revenue return | 21 | 23 |
Capital return | 15 | 54 |
Total return | 36 | 77 |
Weighted average number of shares in issue during the year | 5,231,111 | 7,010,826 |
Revenue return per share | 0.40p | 0.33p |
Capital return per share | 0.29p | 0.77p |
Total return per share | 0.69p | 1.10p |
3. Dividends
(a) Dividends paid
2020 | 2019 | |
£'000 | £'000 | |
Managed Growth shares 2019 4th interim dividend paid of 3.49p (2018: 3.90p) | 1,080 | 1,254 |
Managed Growth shares 2020 1st interim dividend paid of 3.50p (2019: 3.45p) | 1,069 | 1,096 |
Managed Growth shares 2020 2nd interim dividend paid of 5.45p (2019: 4.11p) | 1,652 | 1,300 |
Managed Growth shares 2020 3rd interim dividend paid of 3.00p (2019: 4.45p) | 900 | 1,391 |
Managed Income shares 2019 4th interim dividend paid of 1.35p (2018: 1.35p) | 1,167 | 961 |
Managed Income shares 2020 1st interim dividend paid of 1.10p (2019: 1.10p) | 946 | 777 |
Managed Income shares 2020 2nd interim dividend paid of 1.10p (2019: 1.10p) | 924 | 782 |
Managed Income shares 2020 3rd interim dividend paid of 1.10p (2019: 1.10p) | 909 | 743 |
Managed Cash 2019 interim dividend of 0.40p (2018: 0.35p) | 28 | 22 |
Total dividends paid in the year | 8,675 | 8,326 |
In respect of dividends paid during the year ended 31st August 2020:
The 2019 4th interim dividends were paid on 19th September 2019 to shareholders on the register as at the close of business on 16th August 2019.
The 1st interim dividends were paid on 20th December 2019 to shareholders on the register as at the close of business on 22nd November 2019.
The 2nd interim dividends were paid on 20th March 2020 to shareholders on the register as at the close of business on 14th February 2020.
The 3rd interim dividends were paid on 19th June 2020 to shareholders on the register as at the close of business on 15th May 2020.
(b) Dividends declared
2020 | 2019 | |
£'000 | £'000 | |
Managed Growth shares 2020 4th interim dividend of 4.75p (2019: 3.49p) | 1,409 | 1,080 |
Managed Income shares 2020 4th interim dividend of 1.40p (2019: 1.35p) | 1,138 | 1,167 |
Managed Cash shares 2020 interim dividend of 0.40p (2019: 0.40p) | 21 | 28 |
Total dividends declared | 2,568 | 2,275 |
In respect of the dividends declared, but not paid, during the year ended 31st August 2020, the dividends were paid on 21st September 2020 to shareholders on the register as at the close of business on 14th August 2020.
All dividends in the year have been funded from the revenue reserve.
4. Net asset value per share
The net asset values per share are calculated as follows:
2020 | 2019 | |||||
Managed | Managed | Managed | Managed | Managed | Managed | |
Growth | Income | Cash | Growth | Income | Cash | |
Net assets (£'000) | 252,610 | 70,324 | 6,172 | 266,517 | 90,291 | 5,502 |
Number of shares in issue (excluding shares | ||||||
held in Treasury) | 29,653,205 | 80,253,693 | 5,946,758 | 30,852,899 | 86,483,880 | 5,303,472 |
Net asset value per share | 851.9p | 87.6p | 103.8p | 863.8p | 104.4p | 103.7p |
5. Status of announcement
2019 Financial Information
The figures and financial information for 2019 are extracted from the Annual Report and Financial Statements for the year ended 31st August 2019 and do not constitute the statutory accounts for that year. The Annual Report and Financial Statements 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.
2020 Financial Information
The figures and financial information for 2020 are extracted from the Annual Report and Financial Statements for the year ended 31st August 2020 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 Registrar 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.
20th November 2020
For further information:
Priyanka Vijay Anand,
JPMorgan Funds Limited
ENDS
A copy of the 2020 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 annual report will also shortly be available on the Company's website at www.jpmelect.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