JUS.L Regulatory News (JUS)

Jupiter US Smaller Companies PLC

Half Yearly Financial Report for the six months to 31 December 2017

Financial Highlights

Chairman's Statement

Performance

I am pleased to report that the NAV per share of your Company increased by 7.4% in the six month period to 31 December 2017. This compared to a rise of 4.2% for the Company's benchmark the sterling-adjusted Russell 2000.

Despite this, our performance over the past few years has been disappointing and, as a result, the Board has undertaken an extensive review to try and address the reasons.

This revealed a number of areas in the portfolio which had negatively impacted investment performance. These included the selling of successful positions too soon, the tendency to retain poorly performing stocks for too long and trading the portfolio too quickly. It has been agreed with the manager that, in future, poorly performing positions should be sold promptly, successful positions should be 'run' for longer, and that the portfolio should be more concentrated, that is have a smaller number of stocks.

Portfolio Review

Following the review of the portfolio detailed above, the manager made changes to the portfolio construction to increase the Company's holdings in the fund's strongest investments. As a result the weighting in the ten largest holdings increased from 25% of net assets at the end of June to 35% at the end of December. In addition, sell disciplines were tightened up so that "winners" are now held for longer and "losers" are cut sooner. As a result several positions were sold and the total number of holdings was reduced to 46 from 58 at the end of June.

The manager increased holdings in smaller regional banks following underperformance of the sector over the summer, focusing on stocks where management had substantial shareholdings, the company has a strict credit underwriting disciplines and the local economy is strong. The positions in Home Bancshares and Pacific Premier Bancorp are new to the portfolio and the holding in CoBiz Financial was increased.

Good performance in the period came from The Chefs Warehouse, a distributor of speciality food to upmarket restaurants, that saw improved growth; DMC Global, a manufacturer of explosive devices used to perforate oil and gas drill pipes, whose new ultra-safe product line was well received; and MSC Industrial Direct A, a distributor of metalworking supplies, which was added in the period, and benefitted from a pickup in industrial demand. Stocks which detracted from performance were Acadia Healthcare, because its UK subsidiary the Priory Group is facing difficult conditions and the holding was sold; Tivity Health which lost an opportunity for its Silver Sneakers service at a large health plan customer; and ATN International that suffered delays in final approval at its Indian solar power venture and a decline in US wholesale cellular revenues.

Amplify Snack Brands received an agreed bid from Hershey in the period. The producer of the leading "better for you" popcorn brand SkinnyPop had struggled with its acquisition of UK-based Tyrrells Crisps. The takeover premium of 70% meant that the investment finally yielded a profit.

Market Review

Equities rallied in the period led by large companies and technology stocks. In dollar terms, the Russell 2000 Index rose 8.5% but the S&P 500 Index gained 10.3% and the technology oriented NASDAQ Index climbed 12.4%. The dollar declined 4.0% against sterling meaning that shareholders suffered from the exchange rate movement because the Company's assets are valued in sterling.

The major US equity indices hit new highs in the period. The factors that helped the market were positive US economic momentum and the passage of the Trump Tax Reform Act. In addition, the Federal Reserve's (Fed's) fourth increase to interest rates was delayed until December. US inflation continued to be benign despite tightening labour markets. Industrial activity accelerated over the summer, as indicated by the normally reliable ISM Manufacturing indicator (purchasing managers' index) which hit levels not seen since 2004. This was coupled with accelerating economic activity in other major economies. As a result market interest rates rose sharply, especially three month US dollar LIBOR and two year US Treasuries (the latter reached almost 2%). Enthusiasm for future corporate profits growth led to a further drop in US corporate bond spreads (the difference between the interest rates on corporate bonds and less risky US Treasuries). For example BAA corporate bond spreads fell to 1.8%, a level of narrowness close to that at the peak of the last cycle. Oil prices rose significantly in the last six months with West Texas Intermediate oil reaching $60 at the end of December, helped by growth in global demand and OPEC production discipline.

The improved showing for the economy has fed through into corporate profits: whereas analysts' estimates normally decline over the year as their assumptions and managements' guidance prove to be overly optimistic, in the last six months these estimates have held up unusually well. Medium-sized companies have delivered around 10% growth in EPS whilst smaller ones have produced a 6% increase.

All sectors of the Russell 2000 rose in the six months (although the gain was marginal for utilities): the best performers were producer durables, energy and consumer discretionary, all over-weighted in the portfolio, whereas the laggards were utilities, financial services and technology. Small cap technology fared worse than large cap, which, led by the "FAANGs" (Facebook, Amazon, Apple, Netflix and Alphabet's Google), performed strongly.

Gearing Facility

During the period the Company used its new flexible loan facility with Scotia Bank to borrow $25 million. The current maximum gearing is set at 20% of the Company's assets. At 31 December 2017 the net gearing (i.e. debt less cash compared to its equity capital) was 4.1%. As at 28 February 2018, gearing was 0.7%.

Share price and discount

The price of the shares gained 7.5% to 894p over the period. The discount to NAV was 8.5% at the end of the period, which compared to a discount of 8.7% at 30 June 2017.

The Company bought back 2,994,639 shares in the period at an average discount of 8.2%. Of these, 1,276,124 were held in Treasury at 31 December 2017. 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% in normal market conditions.

Outlook

The outlook for US economic growth is better than it has been in several years with robust industrial activity helped by stimulus from Tax Reform and a weaker dollar. For now the Fed seems to be in no hurry to raise interest rates.

The US smaller company sector is still an attractive and interesting one for long term investors. It is generally under-researched and offers areas of undiscovered value.

Gordon Grender

Chairman

7 March 2018

Twenty largest equity holdings as at 31 December 2017

The value of the twenty largest equity holdings represents £99.7 million (2017: £79.2 million) and 57.6% (2017: 45.6%) 

of the Company's total investments.

Cross Holdings in other Investment Companies 

As at 30 June 2017 and 31 December 2017, none of the Company's assets were invested in the securities of other listed closed-ended investment companies.

Interim Management Report

Related Party Transactions

During the first six months of the current financial year no transactions with related parties have taken place which have materially affected the financial position or performance of the Company. Details of related party transactions are contained in the Annual Report & Accounts for the year ended 30 June 2017 and in the Notes to the Accounts of this report.

Principal Risks and Uncertainties

The principal risks and uncertainties associated with the Company's business are set out on pages 15 and 16 of the 2017 Annual Report & Accounts.

In the view of the Board these principal risks and uncertainties are as applicable to the remaining six months of the financial year as they were to the six months under review.

Going Concern

The Half Yearly Financial Report has been prepared on a going concern basis. The Directors consider that this is the appropriate basis as they have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. In considering this, the Directors took into account the Company's investment objective, risk management policies and capital management policies, the diversified portfolio of readily realisable securities which can be used to meet short-term funding commitments and the ability of the Company to meet all of its liabilities and ongoing expenses. Thus the Directors continue to adopt the going concern basis of accounting in preparing the financial statements.

Directors' Responsibility Statement

The Directors of Jupiter US Smaller Companies PLC confirm to the best of their knowledge that:

(a) the condensed set of financial statements, prepared in accordance with the applicable set of accounting standards gives a true and fair view of the assets, liabilities, financial position and profit or loss of the Company at, or, as applicable, for the period ended 31 December 2017.

(b) the Chairman's Statement and the Interim Management Report include a fair review of the information required by DTR 4.2.7R of the Disclosure and Transparency Rules; and

(c) the Interim Management Report includes a fair review of the information required by DTR 4.2.8R of the Disclosure and Transparency Rules.

The Half Yearly Financial Report has not been audited or reviewed by the Company's auditor.

For and on behalf of the Board

Gordon Grender

Chairman

7 March 2018

Income Statement

The total column of this statement is the profit and loss account of the Company prepared in accordance with UK Generally Accepted Accounting Practice ('UK GAAP').

All revenue and capital items in the above statement derive from continuing operations. 

No operations were acquired or discontinued in the period.

The financial information does not constitute 'accounts' as defined in section 434 of the Companies Act 2006.

Statement of Changes in Equity

Statement of Financial Position

+ Under the Company's Articles of Association any dividends are distributed only from the revenue element of retained earnings.

Notes to the Accounts

1. Accounting policies

The significant accounting policies, which have not been changed and have been applied consistently during the period ended31 December 2017 (except to align with changes to the AIC SORP and FRS 102 - the impact of which is substantially in relation to presentational, disclosure and non-quantifiable aspects).

FRS 104, 'Interim Financial Reporting', issued by the FRC in March 2015 has been applied in preparing the financial statements included in this half yearly report.

2. Gains on investments held at fair value through profit or loss

3. Return per share

4. Transaction Costs

During the period expenses were incurred in acquiring or disposing of investments classified as fair value through profit or loss. These have been expensed through capital and are included within gains on investments in the Income Statement. The total costs were as follows:

5. Net Asset Value per Ordinary share

The Net Asset Value per Ordinary Income share as at 31 December 2017, calculated in accordance with the Articles of Association, was as follows:

Net Asset Value per Ordinary share on the balance sheet is based on net assets of £165,779,000 (30 June 2017: £181,687,000) and on 16,947,289 (30 June 2017: 19,941,928) Ordinary shares, being the number of Ordinary shares in issue at the end of the period.

6. Related Parties

Transactions with the Investment Adviser and related parties

There are no transactions with the Board other than remuneration paid to the Directors as disclosed in the Directors' Remuneration Report on page 28 of the 2017 Annual Report & Accounts and as set out in note 5 to the accounts therein and the beneficial interests of the Directors in the ordinary shares of the Company as disclosed on page 29 thereof.

With effect from 1 July 2017, Jupiter Unit Trust Managers Limited ('JUTM') and the Board have agreed to terminate the performance related fee.

With effect from 1 October 2017, JUTM and the Board have agreed to a revised investment management fee from 0.80% per annum to the following tiered base fee which will be paid quarterly in arrears:

0.75% on net assets up to £150 million

0.65% on assets over £150 million and up to £250 million

0.55% on assets over £250 million.

Availability of Half Yearly Financial Report

The Half Yearly Financial Report will shortly be available for download from the Company's website www.jupiteram.com/JUS. 

By order of the Board

Jupiter Asset Management Limited, Company Secretary

The Zig Zag Building

70 Victoria Street

London SW1E 6SQ

7 March 2018

For further information, please contact:

Richard Pavry

Head of Investment Trusts

Jupiter Asset Management Limited

investmentcompanies@jupiteram.com

020 3817 1496

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