27 Sep 2018 11:58
Jupiter US Smaller Companies plc (the 'Company')
Legal Entity Identifier: 549300HKKL9K1NY4TW55
Annual Financial Report for the year ended 30 June 2018
This announcement contains regulated information
Dear fellow shareholder
I am pleased to report that the Net Asset Value ("NAV") per share of your Company increased by 21.1% in the twelve months
to 30 June 2018, which compares to a rise of 14.2% for the Company's benchmark, the sterling adjusted Russell 2000 (price return)
Index. Since the current manager took over the management of the Company's portfolio, the NAV per share has risen 385% compared
to 284% for the benchmark and since the Company's formation on 11 March 1993, the NAV per share has increased 1100% compared
with a gain of 676% for the benchmark.
The year's results are an improvement following disappointing results in the previous financial year. The Board of Directors ("Board") encouraged the manager to look more closely at portfolio construction this year and this seems to have helped. Further details are set out in the Investment Adviser's Review.
Market review
During the year under review, in dollar terms, the Russell 2000 Index of smaller companies gained 16.1% beating the Standard & Poor's Composite Index which rose 12.2%. The more technology-oriented NASDAQ Composite Index managed the best increase of the three with a gain of 22.3%.
Sterling investors suffered slightly from the weakness of the US dollar, which lost 1.6% in the year. The Company's investments are denominated in dollars but are valued for reporting purposes in sterling.
The US smaller companies sector advanced steadily during most of the year, despite occasional concerns about rising interest rates. Economic activity stepped up in the period helped by the Trump tax cuts and a revival in the energy industry. Corporate profits growth accelerated especially for more domestically focused smaller companies. Pressures from rising labour and logistics costs have begun to appear but so far have not had a significant impact on corporate margins. Despite general economic strength, rising gasoline prices and mortgage rates have been a restraint on growth.
Most indicators of underlying inflation are picking up but have shown only a modest rise. At this stage inflationary wage pressures seem limited to certain geographies and industries where there are labour shortages. The Federal Reserve raised the Fed Funds interest rate three times. The yields on US treasuries increased as well, with corporate bond yields rising further still.
Against this backdrop the best performing sectors were healthcare (biotech was particularly strong), energy and consumer discretionary, whereas the laggards were utilities, financial services, and materials & processing. Value stocks in general continued to suffer in what has now been a 12-year trend of lagging the market (your manager uses a value style of investing).
Discount management
The Board remains committed to its stated policy of using share buy backs with the intention of ensuring that, in normal market conditions, the market price of its shares reflects a discount of less than 10% of Net Asset Value per share.
During the year, the Company bought back 5,139,109 Ordinary shares. At 30 June 2018 there were 3,420,594 Ordinary shares held in Treasury.
The price of the Ordinary shares rose by 23.8% to 1,030p over the year. The discount to NAV per Ordinary share was 6.7% at the end of the period compared to 8.7% on 30 June 2017.
Gearing
'Gearing' may be defined as the ratio of a company's debt, less cash held, compared to its equity capital, expressed as a percentage. The effect of gearing is that where the value of the investment portfolio increases, all the increase accrues to the shareholders whereas when the value falls, the shareholders suffer the whole of the reduction. Holders of the Company's debt are not affected by such increases or reductions, provided that the portfolio value remains sufficient to cover the debt.
In order to improve the potential for capital returns to shareholders the Company currently has access to a flexible loan facility with Scotiabank (Ireland) Designated Activity Company for amounts up to £20 million (with an option to increase this to £30 million if desired). The ability to borrow in this way is seen as a clear advantage enjoyed by investment trusts as compared with open ended investment vehicles such as unit trusts. During the year the Company used its new borrowing facility to help manage the changes to portfolio construction and the buy-back as well as provide gearing at appropriate times. As at 30 June 2018 the Company had a cash position net of borrowings of 0.5% and at 21 September 2018 it was 0.1%.
Board composition
We are aware of recent corporate governance changes that will automatically treat directors who have served more than nine years as no longer independent; and we will keep these developments under review. However, in my view one needs to balance the need to refresh the composition of the Board from time to time with the advantage of retaining directors with relevant and sometimes long-standing experience, particularly in a specialist area such as US Smaller Companies. There will be a change of chairmanship of the Audit & Management Engagement Committee on 20 November 2018.
All the current directors will offer themselves for re-election at the AGM.
PRIIPS key information documents
We are required by new EU regulations introduced at the beginning of 2018 to provide investors with a key information document ("KID") which includes performance projections which are the product of prescribed calculations based on the Company's past performance. Whilst the content and format of the KID cannot be amended under the applicable EU regulations, the Board does not believe that these projections are an appropriate or helpful way to assess the Company's future prospects. Moreover, the principle of using history to project the Company's future performance would appear to violate that oft-quoted mantra of "past performance is no guide to future performance", seemingly de rigeur on every marketing document.
Accordingly, the Board urges shareholders to concentrate on the more comprehensive information set out in this Annual Report & Accounts and the Company's Half Yearly Financial Report, together with the monthly fact sheets and daily Net Asset Value announcements, when considering an investment in the Company's shares. These documents, together with a link to Edison's third-party research coverage of the Company are published at www.jupiteram.com/JUS.
Annual General Meeting
The Annual General Meeting will be held at 10.30 am on Tuesday, 20 November 2018 and I hope that you will attend. The meeting will be held in the offices of Jupiter Asset Management Limited at The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ. In addition to the formal business, the Investment Adviser will provide a short presentation to shareholders.
Outlook
With the Federal Reserve seemingly intent on tightening policy as well as reducing its vast balance sheet holdings of US Treasuries there is always potential for market disruption. Additional risk comes from slower economic growth abroad should this spill over to the US.
It seems that the Federal Reserve is willing to tighten at a moderate pace so the more domestically focused smaller company market which benefits from a growing economy could continue to rise.
The US smaller company sector is an attractive one and interesting for long term investors. Generally it is under-researched and offers areas of undiscovered value. Shareholders should benefit from the Company's conservative investment approach that focuses on buying good companies when their shares are out of favour.
Gordon Grender
Chairman
26 September 2018
Financial Highlights for the year ended 30 June 2018
Performance
| Ordinary Share Performance |
|
|
|
|
|
|
| 30 June | 30 June |
|
|
|
| 2018 | 2017 | % change |
|
|
|
|
|
|
| Net Asset Value (pence) |
| 1,103.43 | 911.08 | +21.1 |
|
|
|
|
|
|
| Middle Market Price (pence) |
| 1,030.00 | 832.00 | +23.8 |
|
|
|
|
|
|
| Russell 2000 Index (sterling adjusted) |
| 1,244.47 | 1,089.62 | +14.2 |
|
|
|
|
|
|
| Discount to Net Asset Value (%) |
| (6.7) | (8.7) | - |
|
|
|
|
|
|
| Ongoing charges ratio (%) |
| 1.02 | 1.01 | - |
|
|
|
|
|
|
|
|
|
|
|
|
| Ten year record |
|
|
|
|
|
|
|
| Year- |
|
|
|
| Net | on-year |
|
|
|
| Asset | change in | Year- |
|
|
| Value | Net Asset | on-year |
|
|
| per | Value per | change in |
|
| Net | Ordinary | Ordinary | Benchmark |
|
| Assets | Share | Share | Index* |
| Year ended 30 June | £'000 | p | % | % |
|
|
|
|
|
|
| 2008 | 55,982 | 269.3 | - | - |
|
|
|
|
|
|
| 2009 | 60,607 | 292.7 | +8.7 | -10.9 |
|
|
|
|
|
|
| 2010 | 77,298 | 373.3 | +27.5 | +32.0 |
|
|
|
|
|
|
| 2011 | 96,201 | 464.6 | +24.5 | +26.5 |
|
|
|
|
|
|
| 2012 | 99,248 | 468.3 | +0.8 | -1.2 |
|
|
|
|
|
|
| 2013 | 147,688 | 618.4 | +32.1 | +26.6 |
|
|
|
|
|
|
| 2014 | 164,957 | 686.3 | +11.0 | +8.3 |
|
|
|
|
|
|
| 2015 | 174,033 | 724.1 | +5.5 | +14.3 |
|
|
|
|
|
|
| 2016 | 174,163 | 787.3 | +8.7 | +8.1 |
|
|
|
|
|
|
| 2017 | 181,687 | 911.1 | +15.7 | +26.5 |
|
|
|
|
|
|
| 2018 | 163,339 | 1,103.4 | +21.1 | +14.2 |
* Russell 2000 Index (sterling adjusted).
Investment Adviser's Review
At the instigation of the Board, we took a close look at the portfolio activity over the previous three years to see if any lessons could be learned. The review suggested that although stock selection had been good, not enough had been held in the best performers, winners had been sold too early and losers had been held too long. As a result, there were two changes to portfolio construction starting in October 2017: the portfolio's holdings were increased in stocks where we saw greatest long-term potential and sell disciplines were tightened up. The portfolio's weighting in the top ten positions increased from 24% a year ago to 36% at the end of the period and the number of holdings was cut from 58 to 42.
Investment approach
Despite these changes, there is no change to the Company's investment philosophy or the way the manager chooses stocks. The Company takes a conservative investment approach that aims to preserve capital rather than to chase growth. The approach is not particularly fashionable and does not necessarily produce good results every year but over time it should lead to superior returns. This approach concentrates on taking a long term view of company business prospects and buying shares when they are cheap and have substantial appreciation potential. As a result, the portfolio tends to emphasise areas of the market that are out of favour or where companies have lower risk businesses. Conversely, popular market sectors tend to be shunned and stocks that can offer steady, if unspectacular, returns are preferred. An example of this is companies that can compound growth in book value per share, such as disciplined insurance underwriters.
Performance
The changes to portfolio construction and sell disciplines had a beneficial effect this year. Net asset value per share gained 21.1% in the twelve months to 30 June 2018, which compared to a rise of 14.2% in the benchmark, the sterling adjusted Russell 2000 Index. This outperformance came from the smallest stocks in the portfolio (those under $1 billion in market cap) and stock selection was good in materials & processing, consumer staples, producer durables and technology sectors. It was however poor in health care and energy.
Three stocks contributed especially strongly to stock selection. DMC Global rose 238% helped by strong sales of its new drill pipe perforation guns. These are used in fracking shale wells and DMC's product is very safe, making it easier to handle and saving the customer time. The company announced an expansion of capacity. The Chefs' Warehouse added 116% following good results and improving profit margins for this distributor of food to upmarket restaurants. It had struggled to get the best from acquisitions but is now reaping benefit from the experience of new management and board directors with skills in merger integration. Ollie's Bargain Outlet Holdings, the regional off-price retailer whose motto is "good stuff cheap", is benefiting from Amazon's growth. The bankruptcy of retail chains is resulting in greater availability of heavily discounted branded goods. It gained 67% as same store sales advanced and the company expands the number of stores it operates: it still has only 280 stores.
The fintech company Bottomline Technologies, which automates corporate payments, gained 91% after surmounting high start-up costs in its digital banking service. It is also experiencing strong growth in its other products. The Ensign Group, run by serial nursing home entrepreneur Roy Christensen and his son Christopher, specialises in acquiring struggling nursing homes then fixing them: it rose 63% having overcome digestion problems with a larger than usual Texas chain and is now back on a growth track. America's Car-Mart is benefiting from a tightening of standards by new car lenders who compete with used car retailers like Car-Mart who provide their own finance. Used cars are a staple product in small town America and the shares appreciated by 56% as sales growth and credit losses improved.
As ever in small company investing, there are disappointments. Acadia Healthcare, an operator of addiction and psychiatric centres, dropped 39% over the year as a result of problems at its UK subsidiary, The Priory Group. Tivity Health fell 14% and this large position had a significant negative overall effect. Tivity provides the Silver Sneakers exercise program for the elderly members of health plans. Although the stock performed very well since a turnaround in 2016 it now faces a struggle to maintain growth and The Priory Group was sold: health plans are looking to insource the service and new low cost competitors threaten the company's profit margins. Lions Gate Entertainment, the production and distribution company, another large position, lost 13%: it has been left out of the current round of media consolidation. It also disappointed investors when it announced that this year's film slate would be smaller than expected and that it would invest more heavily to promote its programming over the internet. It owns some of the best assets in media and the stock was retained. ATN International declined by 23% after a series of disappointments: its Caribbean mobile phone service was heavily damaged by hurricanes and there were delays in receiving regulatory approval for its Indian solar power venture. The company has a very strong balance sheet and a good record of investing successfully in underserved markets and we held on to it. RPC is a $3 billion market cap oil services company engaged in pressure pumping in the Permian basin: CEO Gary Rollins controls around 67% of the stock. The company's business is oriented to spot-pricing and suffered from bad winter weather as well as price competition in the spring as activity in the Permian basin was curtailed by a temporary lack of spare pipeline capacity. There are still good prospects for an improvement in pricing as new pipeline capacity comes on line later in 2018. We held on to this stock but not Murphy USA, the operator of gas stations and convenience stores. It lost 20% as its growth strategy seemed to be unravelling; Walmart elected not to expand their partnership, industry capacity is growing too fast and vaping is having a deleterious effect on cigarette sales.
There were three takeovers in the period, all agreed bids: Amplify Snack Brands received a bid from Hershey at a large premium. There were lower premium takeovers of two regional banks, State Bank Financial (based in Atlanta), by Houston-based Cadence Bancorp, and CoBiz Financial (based in Denver) by Tulsa-based BOK Financial.
Portfolio
The Company's conservative investment approach leads it to own four kinds of stocks, namely compounders, valuable assets, recovery stocks and turnarounds. Compounders are companies capable of delivering reliable earnings growth over a long period and where the stock price at purchase is very cheap compared to the underlying business value. Valuable assets are companies that own assets which can be exploited to increase overall shareholder value. Recovery stocks refer to shares that are deeply depressed and are very cheap in absolute terms. Turnarounds are troubled companies that require new management to set them on the right track.
Two bank stock compounders were bought in summer 2017 when the sector dipped: both have excellent credit underwriting records, operate in areas of the US with buoyant economies and have high insider ownership. These were Pacific Premier Bancorp and Home Bancshares. We also bought the recovery stock INTL FCStone, a commodity-oriented financial service company, where management owns 17%. It benefits from rising rates as it earns interest on customer deposits, which are about three times the size of its market cap.
Temporary industry overcapacity can create the conditions to find recovery stocks and an example of this was Sanderson Farms, a niche producer of chickens for the big bird deboned market, where insiders own 12%. Chicken consumption is growing in the US because it is cheaper than red meat and perceived as a healthy choice.
An example of a turnaround was Brookdale Senior Living where occupancy is depressed because of problems exiting unprofitable leases. New management have fixed the balance sheet and are focusing efforts on marketing; current headwinds from rising industry capacity should fade over the next year.
The television broadcasting industry is under pressure from declining advertising and the loss of cable subscribers to internet TV viewing. This can create opportunities from consolidation. We bought Gray Television A, a recovery stock, which owns highly rated TV stations in small cities. The stock subsequently jumped after it acquired the similar company Raycom Media. The combination allows them to pool their internet efforts and gives them greater power in negotiating industry deals. Free cash flow is very strong and will be used to reduce debt.
As mentioned above there was a focus on selling stocks where growth prospects were diminishing or under threat. Most sales occurred in the consumer and health care sectors: two examples of the latter are highlighted above as well as Murphy USA in consumer. LKQ and Service Corp International were both large positions that were sold in the period. LKQ is a distributor of alternative car parts and lost key operating management during the year. It seems to have become too reliant on large overseas acquisitions to sustain growth. Subsequent to the sale the shares suffered a large drop. The funeral home operator Service Corp International was sold because of the threat from low cost competition and an adverse trend towards less profitable cremations as opposed to burials. Growth in recent years has been boosted by preneed sales of plots and these are now running out.
Outlook
The more domestically focused smaller companies sector appears to have shaken off concerns about rising interest rates: the outlook for profits growth is quite good. The Fed may find that it is unable to raise interest rates too fast because of the knock-on problems this would create for developing economies that have borrowed heavily in US dollars.
The portfolio holds many exciting undervalued entrepreneurial companies with excellent long term prospects where insiders have substantial personal investment. These should benefit shareholders in the future.
Robert Siddles
Fund Manager
Jupiter Asset Management Limited
Investment Adviser
26 September 2018
Strategic Review
The Strategic Report has been prepared in accordance with the Companies Act 2006 (Strategic Report and Directors' Report) Regulations 2013.
The Strategic Report seeks to provide shareholders with the relevant information to enable them to assess the performance of the Directors of the Company during the period under review.
Business and Status
During the year the Company carried on business as an investment trust with its principal activity being portfolio investment. The Company has been approved by HM Revenue & Customs as an investment trust subject to the Company continuing to meet the eligibility conditions of sections 1158 and 1159 of the Corporation Tax Act 2010 ('CTA 2010') and the ongoing requirements for approved companies as detailed in Chapter 3 of Part 2 of the Investment Trust (Approved Company) (Tax) Regulations 2011. In the opinion of the Directors, the Company has conducted its affairs in the appropriate manner to retain its status as an investment trust.
The Company is an investment company within the meaning of section 833 of the Companies Act 2006.
The Company is not a close company within the meaning of the provisions of the CTA 2010 and has no employees.
The Company was incorporated in England & Wales on 15 January 1993.
Reviews of the Company's activities are included in the Chairman's Statement and Investment Adviser's Review.
There has been no significant change in the activities of the Company during the year to 30 June 2018 and the Directors anticipate that the Company will continue to operate in the same manner during the current financial year.
Investment Objective
The Company's investment objective is to achieve long-term capital growth by investing in a diversified portfolio of primarily quoted US smaller and medium-sized companies.
Strategy
The Board recognises that by its nature the US smaller companies sector can be a risky asset class in which to invest. The sector is highly diversified with a great many companies from which to choose. Many companies are relatively immature, whether financially or operationally or in terms of management or market position. They tend to be highly geared to growth and are particularly vulnerable to market and other changes. Against this background, the Company has adopted a disciplined and relatively conservative investment style that focuses on companies with a strong franchise, free cash flow, insider ownership by management and whose shares are considered by the Investment Adviser to be cheap at the time of investment. Whilst shares in these companies will not always be the best performing, the Directors believe that this is an excellent approach to long-term investment in this sector.
Investment Policy
The investment policy of the Company is to invest in quoted US smaller and medium-sized companies and its objective is achieved through diversification of holdings across a variety of economic/industrial sectors.
No more than 10% of the total assets of the Company may be invested in other listed investment companies (including investment trusts) except in such other investment companies which themselves have stated that they will invest no more than 15% of their total assets in other listed investment companies, in which case the limit is 15%.
Benchmark Index
The Company's benchmark index is the sterling adjusted Russell 2000 Index.
Gearing
Gearing is defined as the ratio of a company's debt less cash held compared to its equity capital, expressed as a percentage. The effect of gearing is that, in rising markets, the Company tends to benefit from any growth of the Company's investment portfolio above the cost of payment of the prior ranking entitlements of any lenders and other creditors. Conversely, in falling markets the Company suffers more if the Company's investment portfolio underperforms the cost of those prior entitlements.
In order to improve the potential for capital returns to shareholders the Company has, with effect from 29 September 2017, negotiateda flexible loan facility with Scotiabank (Ireland) Designated Activity Company for up to £20 million (with an option to increase to £30 million if desired). It is intended that the use of this facility should be a clear differentiator for the Company relative to the open-ended Jupiter US Small & MidCap Fund, which is prevented by the applicable FCA rules from applying any gearing to its portfolio.
Key Performance Indicators
At their quarterly Board meetings the Directors consider a number of performance indicators to help assess the Company's success in achieving its objectives. The key performance indicators used to measure the performance of the Company over time are as follows:
· Net Asset Value changes;
· The premium or discount of share price to Net Asset Value over time;
· A comparison of the absolute and relative performance of the Ordinary share price and the Net Asset Value per share relative to the return on the Company's Benchmark Index and of our peers; and
· Ordinary share price movement.
Information on these Key Performance Indicators and how the Company has performed against them can be found within the Chairman's Statement above.
In addition, a history of the Net Asset Value, Ordinary share price and Benchmark Index are shown on the monthly factsheets which can be viewed on the Investment Adviser's website www.jupiteram.com/JUS and which are available on request from the Company Secretary.
Discount to Net Asset Value
The Directors review the level of the discount or premium between the middle market price of the Company's Ordinary shares and their Net Asset Value on a regular basis. The Directors have taken the opportunity to issue shares when there is sufficient demand.
Such issues are always at a price which is in excess of the NAV. No shares were issued during the year under review.
The Board will continue to apply its policy of buying back shares at appropriate times with a view to limiting any discount in the longer term to less than 10%. The Directors had powers granted to them at the last Annual General Meeting ('AGM') held on 21 November 2017 to purchase Ordinary shares and either cancel or hold them in treasury as a method of controlling the discount to Net Asset Value and enhancing shareholder value. This authority was subsequently renewed by shareholders at a General Meeting held on 9 May 2018.
The Company repurchased 5,139,109 Ordinary shares during the year under review at an average discount of 8.8%.
Under the Listing Rules, the maximum price that may currently be paid by the Company on the repurchase of any Ordinary shares is 105% of the average of the middle market quotations for the Ordinary shares for the five business days immediately preceding the date of repurchase.The minimum price will be the nominal value of the Ordinary shares. The Board is proposing that its authority to repurchase up to approximately 14.99% of its issued share capital be renewed at the AGM. The new authority to repurchase will last until the conclusion of the AGM of the Company in 2019 (unless renewed earlier). Any repurchase made will be at the discretion of the Board in light of prevailing market conditions and within guidelines set from time to time by the Board, the Companies Act, the Listing Rules and the Market Abuse Regulation.
Treasury Shares
In accordance with the Companies (Acquisition of Own Shares) (Treasury Shares) Regulations 2003 (the 'Regulations') which came into force on 1 December 2003 any Ordinary shares repurchased, pursuant to the above authority, may be held in treasury. These Ordinary shares may subsequently be cancelled or sold for cash. This would give the Company the ability to reissue shares quickly and cost effectively and provide the Company with additional flexibility in the management of its capital.
As at 30 June 2018 there were 3,420,594 Ordinary shares held in Treasury.
Management
The Company has no employees and most of its day to day responsibilities are delegated to Jupiter Asset Management Limited ('JAM'), which acts as the Company's Investment Adviser and Company Secretary.
J.P. Morgan Europe Limited ('JPMEL') acts as the Company's Depositary and the Company has entered into an outsourcing arrangement with J.P. Morgan Chase Bank N.A. ('JPMCB') as Custodian and for the provision of accounting and administrative services.
Although JAM is named as the Company Secretary, JPMEL provides administrative support to the Company Secretary as part of its formal mandate to provide broader fund administration services to the Company.
Viability Statement
In accordance with provision C.2.2 of the UK Corporate Governance Code as issued by the Financial Reporting Council ('FRC') in April 2016, the Board has assessed the viability of the Company over the next three years. The Company's investment objective is to achieve long term capital growth and the Board regards the Company's shares as a long-term investment. Three years is considered a reasonable period for investment in equities and is appropriate for the composition of the Company's portfolio. As part of its assessment, the Board has noted that shareholders will be required to vote on the continuation of the Company at the 2020 AGM. The Board is of the opinion that this is an appropriate timeframe as it will provide shareholders with assurances on the viability of the Company post the date of the continuation vote.
In carrying out its assessment, the Board has also considered the Company's business model including its investment objective and investment policy as well as the principal risks and uncertainties that may affect the Company as detailed below.
The Board has noted that:
• The Company holds a liquid portfolio invested predominantly in US listed equities; and
• No significant increase to ongoing charges or operational expenses is anticipated.
The Board has therefore concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the next three years.
Principal Risks and Uncertainties
The Board has undertaken a robust review of the principal risks and uncertainties that may affect the Company and its business which are described below:
Investment policy and process - Inappropriate investment policies and processes may result in under performance against the prescribed Benchmark Index and the Company's peer group. The Board manages these risks by ensuring a diversification of investments and regularly reviewing the portfolio asset allocation and investment process.
Investment Strategy and Share Price Movement - The Company is exposed to the effect of variations in the price of its investments. A fall in the value of its portfolio will have an adverse effect on shareholders' funds. It is not the aim of the Board to eliminate entirely the risk of capital loss, rather it is its aim to seek capital growth. The Board reviews the Company's investment strategy and the risk of adverse share price movements at its quarterly board meetings taking into account the economic climate, market conditions and other factors that may have an effect on the sectors in which the Company invests.
Liquidity Risk - The Company may invest in securities that have a very limited market which will affect the ability of the Investment Adviser to dispose of securities when it is no longer felt that they offer the potential for future returns. Likewise the Company's shares may experience liquidity problems when shareholders are unable to realise their investment in the Company because there is a lack of demand for the Company's shares. At its quarterly meetings the Board considers the current liquidity in the Company's investments when setting restrictions on the Company's exposure. The Board also reviews, on a quarterly basis, the Company's buyback programme and in doing so is mindful of the liquidity in the Company's shares.
Gearing Risk - The Company's gearing can impact the Company's performance by accelerating the decline in value of the Company's net assets at a time when the Company's portfolio is declining. Conversely gearing can have the effect of accelerating the increase in the value of the Company's net assets at a time when the Company's portfolio is rising. The Company's level of gearing is under constant review by the Board who take into account the economic environment and market conditions when reviewing the level.
Discount to Net Asset Value - A discount in the price at which the Company's shares trade to Net Asset Value would mean that shareholders would be unable to realise the true underlying value of their investment. The Directors had powers granted to them at the last Annual General Meeting to purchase Ordinary shares as a method of controlling the discount to Net Asset Value and enhancing shareholder value.
Regulatory Risk - The Company operates in a complex regulatory environment and faces a number of regulatory risks. A breach of section 1158 of the CTA 2010 could result in the Company being subject to capital gains tax on portfolio movements. Breaches of other regulations such as the UKLA Listing rules, could lead to a number of detrimental outcomes and reputational damage. Breaches of controls by service providers such as the Investment Adviser could also lead to reputational damage or loss. The Board relies on the services of its Company Secretary, JAM, and its professional advisers to ensure compliance with, amongst other regulations, the Companies Act 2006, the UKLA Listing Rules, the FCA's Disclosure and Transparency Rules and the Alternative Investment Fund Managers Directive. The Investment Adviser is contractually obliged to ensure that its conduct of business confirms to applicable laws and regulations.
Credit and Counterparty Risk - The failure of the counterparty to a transaction to discharge its obligations under that transaction could result in the Company suffering a loss.
Loss of Key Personnel - The day-to-day management of the Company has been delegated to the Investment Adviser. Loss of the Investment Adviser's key staff members could affect investment return. The Board is aware that JAM recognises the importance of its employees to the success of its business. Its remuneration policy is designed to be market competitive in order to motivate and retain staff and succession planning is regularly reviewed. The Board also believes that suitable alternative experienced personnel could be employed to manage the Company's portfolio in the event of an emergency.
Operational - Failure of the core accounting systems, or a disastrous disruption to the Investment Adviser's business or that of the administration provider, JPMCB, could lead to an inability to provide accurate reporting and monitoring. Details of how the Board monitors the services provided by JAM and its associates are included within the Internal Controls section of the Report of the Directors.
Financial - Inadequate financial controls could result in misappropriation of assets, loss of income and debtor receipts and inaccurate reporting of Net Asset Value per share. The Board annually reviews the Investment Adviser's report on its internal controls and procedures.
Directors
The Company's policy on Board diversity is included in the Corporate Governance section of the Report of the Directors.
As at 30 June 2018 the Board comprises one female and four male Directors.
Employees, Environmental, Social and Human Rights issues
The Company has no employees as the Board has delegated the day to day management and administration functions to JUTM, JAM and other third parties. There are therefore no disclosures to be made in respect of employees.
The Board has noted its Investment Adviser's policy on Environmental, Social and Human Rights issues as detailed below:
The Investment Adviser considers various factors when evaluating potential investments. While an investee company's policy towards its environmental and social responsibility, including with regard to human rights, is considered as part of the overall assessment of risk and suitability for the portfolio, the Investment Adviser does not necessarily decide to, or not to, make an investment on environmental and social grounds alone.
All of the Company's activities are outsourced to third parties.
Global Greenhouse Gas Emissions
The Company has no greenhouse gas emissions to report from its operations as its day to day management and administration functions have been outsourced to third parties and it neither owns physical assets or property nor has employees of its own. It therefore does not have responsibility for any other emissions producing sources under the Companies Act 2006 (Strategic Report on Directors' Reports) Regulations 2013.
For and on behalf of the Board
Gordon Grender
Chairman
26 September 2018
Statement of Directors' Responsibilities
The Directors are responsible for preparing the Annual Report and financial statements in accordance with applicable law and regulation.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable laws) including Financial Reporting Standard 102, the financial reporting standard applicable in the UK and the Republic of Ireland.
Under Company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the return or loss of the Company for that period. In preparing those financial statements, the Directors are required to:
(a) select suitable accounting policies and then apply them consistently;
(b) make judgments and accounting estimates that are reasonable and prudent;
(c) state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
(d) prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements 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.
Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Report of the Directors, Directors' Remuneration Report and Statement of Corporate Governance that comply with that law and those regulations.
The work carried out by the Auditors does not include consideration of the maintenance and integrity of the website and accordingly the Auditors accept no responsibility for any changes that have occurred to the financial statements when they are presented on the website.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website www.jupiteram.com/JUS, which is a website maintained by Jupiter Asset Management Limited. Visitors to the website need to be aware that legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Each of the Directors confirms to the best of their knowledge that:
(a) the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and
(b) the Strategic Report and Report of the Directors include a fair review of the development and performance of the Company, together with a description of the principal risks and uncertainties that the Company faces; and
(c) in their opinion the Annual Report & Accounts, taken as a whole, is fair, balanced and understandable and it provides the information necessary to assess the Company's position and performance, business model and strategy.
So far as each Director is aware at the time the report is approved:
(a) There is no relevant audit information of which the Company's Auditors are unaware; and
(b) The Directors have taken all steps required of a company director to make themselves aware of any relevant audit information and to establish that the Company's Auditors have been made aware of that information.
For and on behalf of the Board
Gordon Grender
Chairman
26 September 2018
Income Statement for the year ended 30 June 2018
|
| 2018 | 2017 | ||||
|
| Revenue | Capital |
| Revenue | Capital |
|
|
| Return | Return | Total | Return | Return | Total |
|
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 |
|
|
|
|
|
|
|
|
| Gain on investments at fair value |
|
|
|
|
|
|
| through profit or loss | - | 25,972 | 25,972 | - | 25,131 | 25,131 |
|
|
|
|
|
|
|
|
| Foreign exchange gain | - | 765 | 765 | - | 72 | 72 |
|
|
|
|
|
|
|
|
| Exchange loss on loan facility | - | (121) | (121) | - | - | - |
|
|
|
|
|
|
|
|
| Investment income | 1,378 | - | 1,378 | 1,314 | - | 1,314 |
|
|
|
|
|
|
|
|
| Other income | 3 | - | 3 | - | - | - |
|
|
|
|
|
|
|
|
| Total income | 1,381 | 26,616 | 27,997 | 1,314 | 25,203 | 26,517 |
|
|
|
|
|
|
|
|
| Investment management fee | (1,221) | - | (1,221) | (1,508) | - | (1,508) |
|
|
|
|
|
|
|
|
| Other expenses | (427) | (3) | (430) | (387) | (3) | (390) |
|
|
|
|
|
|
|
|
| Total expenses | (1,648) | (3) | (1,651) | (1,895) | (3) | (1,898) |
|
|
|
|
|
|
|
|
| (Loss)/return before finance |
|
|
|
|
|
|
| costs and taxation | (267) | 26,613 | 26,346 | (581) | 25,200 | 24,619 |
|
|
|
|
|
|
|
|
| Finance costs | (233) | - | (233) | - | - | - |
|
|
|
|
|
|
|
|
| (Loss)/return before taxation | (500) | 26,613 | 26,113 | (581) | 25,200 | 24,619 |
|
|
|
|
|
|
|
|
| Taxation | (130) | - | (130) | (222) | - | (222) |
|
|
|
|
|
|
|
|
| Net (loss)/return after taxation | (630) | 26,613 | 25,983 | (803) | 25,200 | 24,397 |
|
|
|
|
|
|
|
|
| Net (loss)/return per Ordinary |
|
|
|
|
|
|
| share | (3.70p) | 156.13p | 152.43p | (3.85p) | 120.81p | 116.96p |
The total column of this statement is the profit and loss account of the Company.
All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the year.
Statement of Financial Position as at 30 June 2018
|
| 2018 | 2017 |
|
| £'000 | £'000 |
| Fixed assets |
|
|
|
|
|
|
| Investments held at fair value through profit or loss | 162,528 | 173,938 |
|
|
|
|
| Current assets |
|
|
|
|
|
|
| Debtors | 132 | 1,645 |
| Cash at bank | 8,814 | 7,454 |
|
| 8,946 | 9,099 |
|
|
|
|
|
|
|
|
| Creditors: amounts falling due within one year | (8,135) | (1,350) |
|
|
|
|
| Net current assets | 811 | 7,749 |
|
|
|
|
| Net assets | 163,339 | 181,687 |
|
|
|
|
| Capital and reserves |
|
|
|
|
|
|
| Called up share capital | 4,555 | 4,985 |
|
|
|
|
| Share premium account | 19,550 | 19,550 |
|
|
|
|
| Non-distributable reserve | 841 | 841 |
|
|
|
|
| Capital redemption reserve | 9,628 | 9,198 |
|
|
|
|
| Retained earnings | 128,765 | 147,113 |
|
|
|
|
| Total shareholders' funds | 163,339 | 181,687 |
| Net Asset Value per Ordinary Share | 1,103.43p | 911.08p |
Approved by the Board of Directors and authorised for issue on 26 September 2018.
Gordon Grender
Chairman
Company Registration Number 02781968
Statement of Changes in Equity for the year ended 30 June 2018
|
| Called up |
| Non- | Capital |
|
|
|
| Share | Share | distributable | Redemption | Retained |
|
| For the year ended | Capital | Premium | Reserve | Reserve | Earnings | Total |
| 30 June 2018 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 |
|
|
|
|
|
|
|
|
| 1 July 2017 | 4,985 | 19,550 | 841 | 9,198 | 147,113 | 181,687 |
|
|
|
|
|
|
|
|
| Repurchase of Ordinary |
|
|
|
|
|
|
| shares for cancellation | (430) | - | - | 430 | (14,379) | (14,379) |
|
|
|
|
|
|
|
|
| Repurchase of Ordinary |
|
|
|
|
|
|
| to be held in Treasury | - | - | - | - | (29,952) | (29,952) |
|
|
|
|
|
|
|
|
| Net return for the year | - | - | - | - | 25,983 | 25,983 |
|
|
|
|
|
|
|
|
| Balance at 30 June 2018 | 4,555 | 19,550 | 841 | 9,628 | 128,765 | 163,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Called up |
| Non- | Capital |
|
|
|
| Share | Share | distributable | Redemption | Retained |
|
| For the year ended | Capital | Premium | Reserve | Reserve | Earnings | Total |
| 30 June 2017 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 |
|
|
|
|
|
|
|
|
| 1 July 2016 | 5,530 | 19,550 | 841 | 8,653 | 139,589 | 174,163 |
|
|
|
|
|
|
|
|
| Repurchase of Ordinary |
|
|
|
|
|
|
| shares for cancellation | (545) | - | - | 545 | (16,873) | (16,873) |
|
|
|
|
|
|
|
|
| Net return for the year | - | - | - | - | 24,397 | 24,397 |
|
|
|
|
|
|
|
|
| Balance at 30 June 2017 | 4,985 | 19,550 | 841 | 9,198 | 147,113 | 181,687 |
Notes to the Accounts for the year ended 30 June 2018
1. Accounting policies
Basis of Preparation
The financial statements for the year ended 30 June 2018 have been prepared in accordance with UK Generally Accepted Accounting Practice ('UK GAAP') including Financial Reporting Standard 102 ('FRS 102'), the financial reporting standard applicable in the UK and Republic of Ireland and with the Statement of Recommended Practice ('SORP') for Investment Trust Companies and Venture Capital Trusts issued by the Association of Investment Companies ('AIC') in November 2014 and updated in February 2018.
The Company continues to adopt the going concern basis in the preparation of the financial statements. The financial statements have been prepared in accordance with the Company's accounting policies as set out below. They are presented in accordance with the Companies Act 2006 (the 'Act') and the requirements of the SORP 'Financial Statements of Investment Trust Companies and Venture Capital Trusts'.
The Company has taken advantage of the exemption from preparing a Cash Flow Statement under FRS 102, as it is an investment fund and the investments are substantially all highly liquid and carried at fair (market) value.
In accordance with FRS 102, the Company is required to nominate a functional reporting currency in which the Company predominantly operates. Having regard to the Company's share capital and the predominant currency in which its shareholders operate, pounds sterling is the nominated functional reporting currency of the Company.
Statement of Compliance
The financial statements of the Company have been prepared in compliance with United Kingdom Accounting Standards, including FRS 102 and the Companies Act 2006.
Significant accounting judgements, estimates and assumptions
The preparation of the Company's financial statements on occasion requires management to make judgements, estimates and assumptions that affect the reported amounts in the primary financial statements and the accompanying disclosures. These assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in the current and future periods, depending on circumstance.
Management do not believe that any significant accounting judgements have been applied to this set of financial statements other than the allocations between capital and revenue.
2. Net (loss)/return per Ordinary share
|
| 2018 | 2017 |
|
| £'000 | £'000 |
|
|
|
|
| Net revenue loss | (630) | (803) |
|
|
|
|
| Net capital return | 26,613 | 25,200 |
|
|
|
|
| Net return | 25,983 | 24,397 |
|
|
|
|
| Weighted average number of Ordinary shares in issue during the year | 17,045,300 | 20,859,319 |
|
|
|
|
| Revenue loss per Ordinary share | (3.70p) | (3.85p) |
|
|
|
|
| Capital return per Ordinary share | 156.13p | 120.81p |
|
|
|
|
| Total return per Ordinary share | 152.43p | 116.96p |
3. Net Asset Value per Ordinary share
The Net Asset Value per Ordinary share is based on the net assets attributable to the equity shareholders of £163,339,000 (2017: £181,687,000) and on 14,802,819 (2017: 19,941,928) Ordinary shares, being the number of Ordinary shares in issue at the year end.
4. Related parties and transactions with the Manager
There are no transactions with the Directors other than aggregated remuneration for services as Directors and the beneficial interests of the Directors in the Ordinary shares of the Company.
JUTM is contracted to provide investment management services to the Company, subject to termination by not less than twelve months notice by either party).
Prior to 1 October 2017, the base management fee payable to JUTM was quarterly fee of 0.20% of the net assets of the Company, excluding the value of any Jupiter managed investments. However, with effect from the change in the Company's investment strategy agreed by JUTM and the Board, the base investment management fee was reduced to a quarterly fee of 0.75% pa of Net Assets. This fee was further reduced to 0.65% pa to the extent that the Company's Net Assets come to exceed £150 million and up to £250 million and will be reduced further to 0.55% pa to the extent that the Company's Net Assets come to exceed over £250 million.
The investment management fee payable to JUTM for the year 1 July 2017 to 30 June 2018 was £1,221,000 (2017: £1,508,000) with £303,000 outstanding as at 30 June 2018 (2017: £364,000).
The portfolio management of the Company is carried out by Jupiter Asset Management Limited ("JAM") under delegation from JUTM.
5. Contingent liabilities and capital commitments
There were no contingent liabilities or capital commitments outstanding as at 30 June 2018 (2017: nil).
6. Annual Results
This Annual Results announcement does not constitute the Company's statutory accounts for the years ended 30 June 2018 and 30 June 2017 but is derived from those accounts. Statutory accounts for the year ended 30 June 2017 have been delivered to the Registrar of Companies. The statutory accounts for the year ended 30 September 2018 and the year ended 30 September 2017 both received an audit report which was unqualified and did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report and did not include statements under Section 498 of the Companies Act 2006 respectively. The statutory accounts for the year ended 30 June 2018 have not yet been delivered to the Registrar of Companies and will be delivered following the Annual General Meeting.
The Annual General Meeting of the Company will be held on Tuesday, 20 November 2018.
A copy of the Annual Report & Accounts will shortly be submitted to the National Storage Mechanism and will be available for inspection at www.morningstar.co.uk/uk/NSM.
The Annual Report & Accounts will also be available for download from the Company's section of Jupiter Asset Management's website www.jupiteram.com/JUS
Hard copies of the Annual Report & Accounts will also be available upon request from the registered office of the Company at The Zig Zag Building, 70 Victoria Street, London SW1E 6SQ
For further information, please contact:
Richard Pavry
Head of Investment Trusts
Jupiter Asset Management Limited, Company Secretary
investmentcompanies@jupiteram.com
020 3817 1496
27 September 2018
[END]