Last checked at 18 Mar 2024 15:46
LONDON STOCK EXCHANGE ANNOUNCEMENT
JPMORGAN US SMALLER COMPANIES INVESTMENT TRUST PLC
FINAL RESULTS FOR THE YEAR ENDED31ST DECEMBER 2023
Legal Entity Identifier: 549300MDD7SOXDMBN667
Information disclosed in accordance with the DTR 4.1.3
CHAIR'S STATEMENT
Performance
I have great pleasure in presenting the Annual Report of JPMorgan US Smaller Companies Investment Trust plc ('the Company') for the year ended 31st December 2023.
2023 was not an easy year for investors in many major markets. During the year, US small caps faced continued volatility in the market caused by various factors, including numerous interest rate hikes, high inflation levels, continued supply chain constraints, fast-paced liquidity tightening and recessionary risks. The Company's total return on net assets over the year was +4.6% which compares unfavourably with the +10.1% return for our benchmark, the Russell 2000 index in sterling terms. Total return to shareholders was +4.0% for the year, with the discount at which the Company's shares traded over the 12 month period widening marginally. While the Company's short-term performance relative to the benchmark is obviously disappointing, the Company has maintained its longer-term track record of absolute gains over five and ten years, outperforming its benchmark over these periods. This reflects the Manager's disciplined focus on long-term growth opportunities.
Full details of investment performance, changes to the portfolio and the outlook can be found in the Investment Manager's Report in the Annual Report and Financial Statements.
Share Issuance and Buybacks
As has been said in the past, the Board aims to align the Company's share price movements to changes in its net asset value ('NAV') and monitors the discount or premium at which the shares trade on a daily basis with the assistance of its broker and Manager. However, a number of factors make it difficult to align share price and net asset value movements including the often volatile prices of US smaller companies investments and the additional volatility introduced by owning assets denominated in dollars whilst having a share price and net asset value reported in sterling.
The discount averaged 10.7% over the course of the year, ending the year at 7.9%. To help with the management of the discount, we have in place the authority to repurchase up to 14.99% of the Company's issued share capital and we will be seeking renewal of this authority at the AGM.
During the year to 31st December 2023, the Company bought back 975,473 shares into Treasury, at an average price of 358.4p and a total cost of £3.5 million, in periods when discount levels were particularly elevated, reflected in the weighted average discount of 12.8% at which these shares were acquired. Since the year end, the Company has repurchased an additional 384,096 shares into Treasury. The Company did not issue any shares from Treasury or any new ordinary shares during the year or since the year-end.
The Company's share buyback policy continues to have three major objectives: to buy back shares with the aim of enhancing the NAV for ongoing shareholders, to minimise discount volatility and ultimately to ensure that the shares do not trade at an excessive discount for a prolonged period of time. Of course, our ability to achieve these outcomes will depend on prevailing market conditions and the behaviour and risk appetites of investors.
The Company will also look to issue shares to enhance shareholders' NAV and to avoid the formation of an excessive premium which may not be in the best interests of incoming and continuing shareholders alike. Share issuance will only be at times where the share price is a premium to the NAV.
Revenue and Dividend
The impact of global concerns on the dividends received from the Company's portfolio has remained relatively muted. As a result, the Board is delighted to recommend a dividend of 3.0p in respect of the financial year ended 31st December 2023 (2022: 2.5p). Subject to shareholders' approval at the Annual General Meeting (AGM), this dividend will be paid on 17th May 2024 to shareholders on the register at the close of business on 19th April 2024. The ex dividend date is 18th April 2024.
Shareholders should note the Company's objective is unchanged and remains one of capital growth. The dividend distribution amount will normally be driven by the minimum dividend required to maintain the Company's investment trust status. Therefore the dividend level is likely to fluctuate year on year as the distributions will typically reflect the naturally occurring income on the underlying portfolio.
Gearing
During the year, the Company continued to utilise its US$30 million loan facility (with an option to draw a further US$10 million) revolving credit facility to maintain a meaningful but modest level of gearing. The current 2-year term facility matured on 27th October 2023 at which point the Board reviewed its borrowing requirements and decided to reduce the facility to US$20 million (with an option to draw a further US$10 million). The existing loan was extended (on the same terms) whilst certain points of the new facility were discussed and agreed.
On 15th March 2024 the Board renewed the facility with Scotiabank, the new facility being a secured 364 day facility for a reduced amount of US$20 million.
As at 31st December 2023, the Company had drawn down US$30 million (GBP 23.5 million). It closed the year with a gearing level of 1.5%. The Board believes that the use of gearing is a key advantage of the investment trust structure and has persistently used gearing over time within its permitted 10% cash to 15% geared range.
Our policy sees gearing levels adjusted to reflect changes in the Board's expectations for longer-term opportunities and market risks (with input from the Manager), rather than being used as a short-term market-timing tool.
Board Succession
In January 2024 the Board, through its Nomination Committee, carried out a comprehensive evaluation of the Board, its Committees, the individual Directors and the Chair. Topics discussed included the size and composition of the Board, Board information and processes, shareholder engagement, and training and accountability. The resulting report demonstrated the Board is working effectively and in line with expectations.
In accordance with good corporate governance practice, all Directors will retire at the forthcoming AGM and, being eligible, will offer themselves for reappointment by shareholders. As I indicated in the last Half Year Report, I will be retiring at the forthcoming Annual General Meeting ('AGM') in April 2024. It has been an honour to serve as the Chair and also to have the opportunity to work with the investment team in New York, all the many people at JPMorgan Asset Management who help support the Company and last, but not least, the current Board, as well as those that have retired. The Board has agreed that my successor as Chair of the Company should be Dr Dominic Neary. In addition, it has been agreed by the Directors that the size of the Board be reduced to four Directors following my retirement; we believe that this is an appropriate number given the size of the Company, and that the Board will continue to offer an appropriate balance of skills and diversity of membership.
Board Diversity
The Board recognises the value and importance of diversity in the boardroom. I am pleased to report that the Board meets the FCA Listing Rules targets on gender diversity criteria, female representation in a senior role and ethnic representation on the Board.
Review of services provided by the Manager
During the year, the Board, through its Management Engagement Committee, carried out a thorough review of the investment management, secretarial and marketing services provided to the Company by the Manager. Following this review, the Board has concluded that the continued appointment of the Manager on the terms agreed is in the interests of the shareholders as a whole.
The Company's ongoing charges for the financial year, as a percentage of the average of the daily net assets during the year, were 0.93% (2022: 0.95%).
Environment, Social and Governance (ESG) considerations
The Board has continued to engage with the Manager on the integration of ESG factors into its investment process. The Board has conducted a review during the year to satisfy itself that the Manager has a robust process in place with sufficient resources behind it and that ESG considerations are considered by the Portfolio Managers at every stage of the investment decision.
The Board shares the Manager's view of the importance of financially material ESG factors when making investments for the long term and, in particular, the necessity of continued engagement with investee companies throughout the duration of the investment. The Portfolio Managers' ESG report describes the developments in the ESG process that have taken place during the year together with examples of how these are implemented in practice.
Task Force on Climate-related Financial Disclosures
As a regulatory requirement, JPMorgan Asset Management (JPMAM) published its first UK Task Force on Climate-related Financial Disclosures ('TCFD') Report for the Company in respect of the year ended 31st December 2022 on 30th June 2023. The report discloses estimates of the Company's portfolio climate-related risks and opportunities according to the Financial Conduct Authority (FCA) Environmental, Social and Governance (ESG) Sourcebook and the TCFD. The report is available on the Company's website under the ESG documents section: https://am.jpmorgan.com/content/dam/jpm-am-aem/emea/regional/en/regulatory/esg-information/jpm-us-smaller-companies-investment-trust-plc-tcfd-report-uk-per.pdf
The Board is aware that best practice reporting under TCFD is still evolving with respect to metrics and input data quality, as well as the interpretation and implications of the outputs produced, and will continue to monitor developments, including Sustainability Disclosure Requirements ('SDR').
Annual General Meeting
We are inviting shareholders to join us in person for the Company's sixty-seventh AGM to be held on Monday, 22nd April 2024 at 2.30 p.m. at 60 Victoria Embankment, London EC4Y 0JP. The Board hopes to welcome as many shareholders as possible.
As with previous years, you will have the opportunity to hear from the Portfolio Managers. Their presentation will be followed by a question and answer session. There will also be refreshments afterwards, when shareholders will be able to meet members of the Board. Shareholders wishing to follow the AGM proceedings but choosing not to attend will be able to view them live and ask questions through conferencing software. Details on how to register together with access details can be found on the Company's website: www.jpmussmallercompanies.co.uk, or by contacting the Company Secretary at invtrusts.cosec@jpmorgan.com.
In accordance with normal practice, all voting on the resolutions will be conducted on a poll. Due to technological reasons, shareholders viewing the meeting via conferencing software will not be able to vote on the poll and we therefore encourage all shareholders, and particularly those who cannot attend physically, to submit their proxy votes in advance of the meeting, so that they are registered and recorded at the AGM. Proxy votes can be lodged in advance of the AGM either by post or electronically: detailed instructions are included in the Notes to the Notice of Annual General Meeting in the Annual Report. In addition, shareholders are encouraged to send any questions ahead of the AGM to the Board via the Company Secretary at the email address above. We will endeavour to answer relevant questions at the meeting or via the website depending on arrangements in place at the time.
If there are any changes to the above AGM arrangements, the Company will update shareholders through its website and, as appropriate, through an announcement on the London Stock Exchange.
My fellow Board members, representatives of JPMorgan and I look forward to the opportunity to meet and speak with shareholders after the formalities of the meeting have been concluded.
Stay Informed
The Company delivers email updates with regular news and views, as well as the latest performance. If you have not already signed up to receive these communications and you wish to do so, you can opt in via https://tinyurl.com/JUSC-Sign-Up or by scanning the QR code in the front of the Annual Report.
Outlook
We are encouraged by the outlook for the US small cap universe and the wider US economy. Inflation is receding and whilst growth in 2024 is expected to be muted, there are indications that there will be a soft landing for the US economy. As noted in the Investment Manager's report, the valuation case for US small companies remains positive and it is believed that the earnings from the Company's holdings will grow strongly from their current levels. Whilst it is hoped that the US will avoid a recession, uncertainties and threats do remain within the US and across the world. These include the impact of the outcome of the US presidential election and the potential for interest rates to fall slower than previously anticipated. We remain confident that the focused and disciplined process adopted by the Investment Manager will continue to deliver attractive long term returns to shareholders.
David Ross
Chair 18th March 2024
INVESTMENT MANAGER'S REPORT
Market Review
Markets defied expectations in 2023 and rose to near-record levels despite several headwinds. We started the year expecting that persistent inflation, rising interest rates and geopolitical concerns would lead to a recession. Instead, the economy was surprisingly strong, and a small group of mega cap tech stocks led equity markets higher.
An exaggerated January effect ensured the year got off to a good start. These gains were lost in February and March as the market witnessed the second largest bank failure in US history, but the adverse impact of this and related events on investor sentiment proved short-lived, and the market recovered all its lost ground over the summer, supported in part by mounting excitement about the potential of artificial intelligence (AI). Consumer spending remained resilient and business spending held up better than expected despite tighter lending standards. This was thanks mainly to increased spending on intellectual property, as companies focused on building and integrating artificial intelligence capabilities into their production, service and administrative processes. The prospect of interest rate cuts drove strong market gains in the fourth quarter. Moreover, 2024 earnings forecasts saw an uptick towards year end as recession fears subsided.
Driven by the expectations of interest rate cuts in 2024, small caps rallied sharply in the fourth quarter, outperforming large caps for the first time in five quarters. However, despite this year-end surge, small caps still lagged large caps by nearly 10 percentage points (in USD terms) over 2023 as a whole. The S&P 500 rose 26% (in USD terms) during the year, led by a handful of mega cap tech stocks, the so-called 'Magnificent 7'.
Performance
The Portfolio's net asset value increased by 4.6% (in GBP terms) in 2023, although the Trust underperformed its benchmark, the Russell 2000 Index (Net), which rose by 10.1% (in GBP terms). As mentioned above, the year was a challenging year for small caps, especially during the first nine months. However, the third quarter earnings of our portfolio companies, published in late October and early November, exceeded expectations. Yet despite these seemingly positive results, relative stock reactions were in line with the broader market, as the macro and interest rates outlook, rather than individual company fundamentals, drove stock movements.
Our sector allocation in industrials and stock selection in financials made positive contributions to performance.
Within industrials, our overweight position in Simpson Manufacturing, and our exposure to Azek, were the top contributors. Simpson Manufacturing is a market leader in the wood connectors building product space. The company outperformed, continuing its strong execution, and delivering robust quarterly results thanks to revenue growth and resilient profit margins. In addition, the long-term outlook for the US housing industry remains positive, and the company is maintaining its efforts to drive above-market growth through product differentiation and strategic initiatives. While we trimmed our position on strength, we still like the stock given its leading market share, solid free cash flow generation and experienced management team. Azek, a manufacturer of outdoor living products, rallied after reporting solid earnings and an impressive margin improvement. The company continued to execute on growth and productivity initiatives, with new business wins outpacing underlying repair and replacement demand. We retain our conviction in the stock given the company's solid fundamental trends, however we trimmed our position on outperformance.
At the security level, our overweight position in MACOM Technology Solutions proved beneficial. MACOM Technology Solutions designs and manufactures semiconductors for telecom, industrial, defence and data centre end markets. Its share price rallied throughout the year as results aligned with expectations and data centre revenues rose strongly. The stock also benefitted from an increase in AI-related spending and increasing demand for high-speed data centre products. Additionally, investor sentiment soared after the company announced its intention to acquire Wolfspeed's radio frequency business. We remain confident in the stock, given management's focus on innovation, the quality of the business and its ability to deliver profitable growth over the long term.
Stock selection was the primary driver of underperformance, with our holdings in the consumer discretionary and healthcare sectors detracting most.
Within consumer discretionary, our exposure to Driven Brands was the largest detractor over the year. Driven Brands, one of the largest auto services companies in North America, underperformed due to a decline in its car wash business, which was adversely impacted by the weaker macro environment, a resultant decline in consumer spending and greater competition. However, we maintain our conviction in the stock given the durability of the auto-services end-market.
Within health care, our overweight position in Agiliti, and our exposure to ICU Medical hurt performance. Agiliti, a medical device company, underperformed due to weaker than expected margins driven by reduced rental demand and cost headwinds associated with large new contracts. We remain comfortable with our position as we believe underlying fundamentals are healthy and the valuation is attractive. ICU Medical, a vertically integrated manufacturer of medical equipment used in intravenous (IV) therapy applications, plunged due to a decline in revenues and lowered guidance. The core business performed well, however weaker performance in the Smith's Vascular Access and IV Solutions businesses drove the underperformance. Additionally, management made the strategic decision to reduce inventory levels, which hurt gross margins. We are monitoring our position in the stock.
Performance Attribution
Year ended 31st December 2023
| % | % |
Contributions to total returns |
|
|
Benchmark return |
| 10.1% |
£Asset Allocation | 2.2% | |
£Stock Selection* | -7.2% | |
Investment Manager Contribution |
| -5.0% |
Portfolio total return |
| 5.1% |
£Impact of cash/gearing* | 0.2% | |
£Management fee/other expenses | -0.9% | |
£Share buybacks | 0.2% | |
Other effects |
| -0.5% |
Cum Income Net Asset Value Total Return |
| 4.6% |
Share Price Total Return |
| 4.0% |
* Includes impact of FX movement on USD loan
Source: Wilshire, 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.
Portfolio Positioning
With regard to our portfolio positioning, we continue to focus on finding companies with durable franchises, good management teams and stable earnings that trade at a discount to their intrinsic value. We continue to believe that smaller companies are worth investing in for long term investors as they include innovative companies that serve market niches and thereby can offer early access to innovative products and services.
We also remain focused on the quality of the portfolio, even as we initiate new ideas outside our typical universe, which included an energy name at compelling valuation and a cyber security software company with exceptional profitability. We also eliminated some names where we lost conviction in their investment cases, and we trimmed outperformers within industrials and materials. Our largest absolute and relative portfolio weight remains in industrials as we believe the sector offers many opportunities to find market share leaders serving durable, profitable end markets. Our second largest relative weight is within utilities, driven by our overweight in waste and disposal services, a sector we favour due to resilient demand characteristics.
Our largest underweights remain in the energy and health care sectors. While we have struggled to find high quality assets within most segments of the energy sector, we have found some interesting opportunities within the alternative energy and midstream areas. In healthcare, we continue to avoid the biotechnology sector and remain focused on owning more profitable and durable franchises within the products and services sectors.
Market Outlook
As 2024 unfolds, we are constructive on the outlook for small cap companies, given a compelling valuation case and potential for small caps to benefit as they have historically after similar periods of large cap concentration. In addition, the earnings picture looks robust for small caps, with earnings poised to grow twice as fast as large cap earnings after two consecutive years of declines. Falling interest rates and a dovish Fed also tend to provide a conducive environment for small cap stocks. Once investors begin to look beyond the risk of recession and sense the potential for an improvement in economic momentum, small caps should benefit.
We are also relatively upbeat about the macroeconomic backdrop. Easing inflation and improved growth prospects have helped fuel optimism for a soft landing, although growth will remain subdued by historical standards and risks remain. However, be it the U.S. election, higher policy rates or significant geopolitical tension, there are continuing risks that could push the economy into recession in 2024. Any resultant volatility will not distract us from our course. We will continue to focus on high conviction stocks and take advantage of market dislocations to access compelling stock selection opportunities.
Don San Jose
Jon Brachle
Dan Percella
Portfolio Managers 18th March 2024
PRINCIPAL AND EMERGING RISKS
The Directors confirm that they have carried out a robust assessment of the principal and emerging risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity.
With the assistance of the Manager, the Audit Committee maintains a risk matrix which identifies the principal risks to which the Company is exposed and methods of mitigating against them as far as practicable. The risks identified and the broad categories in which they fall, and the ways in which they are managed or mitigated are summarised below.
The AIC Code of Corporate Governance requires the Audit Committee to put in place procedures to identify emerging risks. At each meeting, the Board reviews all potential risks and considers emerging risks which it defines as potential trends, sudden events or changing risks which are characterised by a high degree of uncertainty in terms of occurrence probability and possible effects on the Company. As the impact of emerging risks is understood, these risks may be entered on the Company's risk matrix and mitigating actions considered as necessary.
In assessing the risks and how they can be mitigated, the Board has given particular attention to those risks that might threaten the viability of the Company.
These key and emerging risks are listed below. It should be noted that the emergence of, or a change in, a risk can have an impact on another risk:
|
|
| Movement in risk |
|
|
| status in year to |
Principal risk | Description | Mitigating activities | 31st December 2023 |
Investment Management and Performance | |||
Under-performance | Poor implementation of the investment strategy may lead to underperformance against the Company's benchmark index and peer companies. | A broadly diversified portfolio of equities is managed in line with Board-approved investment restrictions and guidelines. Investments are monitored and reported on by the Manager who provides the Board with regular information, including performance data and attribution analyses, revenue estimates, liquidity reports and shareholder analyses. The Board monitors the implementation and results of the investment process with the Portfolio Managers, who participate at all Board meetings, and reviews data which show statistical measures of the Company's risk profile. The Portfolio Managers employ the Company's gearing within a strategic range set by the Board. In addition to regular Board reviews of investment strategy, the Board holds a separate meeting devoted to strategy each year. | No change |
Market and Economic | Market risk arises from uncertainty about the future prices of the company's investments, which might result from economic, fiscal and regulatory change, including the risk of global economic disruption and market volatility in the aftermath of COVID-19. Geopolitical risks will also affect the market and are currently heightened due to the war between Ukraine and Russia and more recently the conflict in the Middle East, and ongoing tensions with China. Market factors such as interest rates, inflation, US presidential election and equity market performance may impact the value of investments and the performance of the Company. | This risk is managed to some extent by diversification of investments and by regular communication with the Manager on matters of investment strategy and portfolio construction which will directly or indirectly include an assessment of these risks. The Board considers asset allocation, stock selection and levels of gearing on a regular basis and has set investment restrictions and guidelines, which are monitored and reported on by the Manager. The Board monitors the implementation and results of the investment process with the Manager. The Manager's market strategists are available for the Board and can discuss market trends. External consultants and experts can be accessed by the Board. The Board can, with shareholder approval look to amend the investment policy and objectives of the Company, if required, to enable investment in companies or assets which offer more appealing risk/return characteristics in prevailing economic conditions. | Increased |
Operational Risks | |||
Discount Control | Investment trusts shares often trade at discounts to their underlying NAV; they can also trade at a premium. Discounts and premiums can fluctuate considerably leading to volatile returns for shareholders. | The Board monitors the share price against the absolute and sector relative premium/discount levels. The Board reviews sales and marketing activity and sector relative performance, which it believes are the primary drivers of the relative premium/discount level. The Company has authority to buy back its existing shares or issue new shares to enhance the NAV per share for remaining shareholders when deemed appropriate. | Increased |
Shareholder Demand | Certain buyers within the sector will only consider investing into an investment trust where its AUM is over a certain level; the Company's AUM currently stands below these levels. | The Board reviews sales and marketing activity and it also receives regular feedback via the Manager's sales team from both existing and prospective shareholders. | No change |
Loss of Investment Team or Portfolio Manager | A sudden departure of the Portfolio Managers, or several members of the investment management team could result in a short term deterioration in investment performance. | The Board seeks assurance that the Manager takes steps to reduce the likelihood of such an event by ensuring appropriate succession planning and the adoption of a team-based approach, as well as special efforts to retain key personnel. The Board engages with the senior management of the Manager in order to mitigate this risk. | No change |
Outsourcing | Disruption to, or failure of, the Manager's accounting, dealing or payments systems or the Registrar, Depositary or Custodian's records may prevent accurate reporting and monitoring of the Company's financial position or a misappropriation of assets. | Details of how the Board monitors the services provided by JPM and its associates and the key elements designed to provide effective risk management and internal control are included within the Risk Management and Internal Controls section of the Corporate Governance Statement in the Annual Report. The Manager has a comprehensive business continuity plan which facilitates continued operation of the business in the event of a service disruption (including disruption resulting from a pandemic). Directors have received evidence that the Manager and its key third party service providers have business continuity plans in place and that these are regularly tested. | No change |
Cyber Crime | The threat of cyber attack, in all guises, is regarded as at least as important as more traditional physical threats to business continuity and security. | The Company benefits directly and/or indirectly from all elements of JPMorgan's Cyber Security programme. The information technology controls around physical security of JPMorgan's data centres, security of its networks and security of its trading applications, are tested by independent auditors and reported every six months against the AAF Standard. The Company and the Manager have evidence from the major service providers that they have procedures in place to maintain the best practices in the fight against cybercrime and to ensure business resiliency. | No change |
Corporate Governance | |||
Statutory and Regulatory Compliance | Failure to comply with relevant statute law or regulation may have an impact on the Company both in terms of fines and in terms of its ability to continue to operate. Also, the Company's business model could become non-viable as a result of new or revised rules or regulations arising from, for example, policy change or political impact. | The Board relies on the services of its Company Secretary, the Manager and its professional advisers to ensure compliance with the Companies Act 2006, the UKLA Listing Rules, DTRs, MAR and AIFMD. Details of the Company's compliance with Corporate Governance best practice, are set out in the Corporate Governance Statement in the Annual Report. The Board receives regular reports from its broker, depositary, registrar and Manager as well as its legal advisers and the Association of Investment Companies on changes to regulations which could impact the Company and its industry. The Company monitors events and relies on the Manager and its key third party providers to manage this risk by preparing for any changes. | No change |
Environmental | |||
Climate Change | Climate change has become one of the most critical issues confronting companies and their investors. Climate change can have a significant impact on the business models, sustainability and even viability of individual companies, whole sectors and even asset classes. | The Board receives ESG reports from the Manager on the portfolio and the way ESG considerations are integrated into the investment decision-making, so as to mitigate risk at the level of stock selection and portfolio construction. As extreme weather events become more common, the resiliency, business continuity planning and the location strategies of the Company's services providers will come under greater scrutiny. | Increased |
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| Movement in risk |
|
|
| status in year to |
Emerging risk | Description | Mitigating activities | 31st December 2023 |
Political and Economic | Political issues and changes in financial or tax legislation in the UK or the US may lead to changes to the operating model of the Company and/or reduce the appeal of the Company to shareholders. | The Manager monitors events and makes recommendations to the Board on accounting, dividend and tax policies and the Board seeks external advice where appropriate. | Increased |
Artificial Intelligence (AI) | While it might equally be deemed a force for good, there appears to be an increasing risk to society from the threat posed by AI. Advances in computing power means that AI has become a powerful tool that will impact society, with a wide range of applications that include the potential to harm. The adoption of AI can also have an adverse impact on datacentres and their use of energy and water. This in turn has ESG implications. | The Board will work to monitor developments concerning AI as its use evolves and consider how it might threaten the Company's activities, which may include a heightened threat to cybersecurity. The Board will work closely with JPMF in identifying these threats and, in addition, monitor the strategies of our service providers. | Increased |
Global Pandemics | The outbreak and spread of COVID-19 in 2020 highlighted the speed and extent of economic damage that can arise from a pandemic. Should a new form of the virus or another pandemic emerge that spreads more aggressively or is more virulent, it may present risks to the operations of the Company, its Manager and other major service providers. | ?Time after time, markets have recovered, albeit over varying and sometimes extended time periods, and so the Board does have an expectation that the portfolio's holdings will not suffer a material long-term impact and should recover. The Board receives reports on the business continuity plans of the Manager and other key service providers. The effectiveness of these measures were assessed throughout the course of the COVID-19 pandemic and the Board continues to monitor developments as they occur and seek to learn lessons which may be of use in the event of future pandemics.
| No change |
Ongoing shareholder demand | Competing investment vehicles (e.g. ETFs) or new investment technologies may render the Company's shares unappealing to shareholders. | The Manager has a dedicated investment trust sales team that works closely with the Company's broker as well as current and prospective shareholders. Regular meetings are held with shareholders to try to ensure continued demand/interest. Both the Manager and the broker submit a sales activity report to each Board meeting and are available to discuss any issues throughout the year. In addition, the Manager's marketing team has focused on marketing more effectively to retail shareholders which represent a vast majority of the Company's shareholder base. | No change |
TRANSACTIONS WITH THE MANAGER
Details of the management contract are set out in the Directors' Report in the Annual Report and Financial Statements. The management fee payable to the Manager for the year was £2,003,000 (2022: £2,080,000) of which £nil (2022: £nil) was outstanding at the year end.
Included in administration expenses in note 6 in the Annual Report and Financial Statements are safe custody fees amounting to £3,000 (2022: £2,000) payable to JPMorgan Chase Bank, N.A. of which £1,000 (2022: £1,000) was outstanding at the year end.
The Company also holds cash in the JPMorgan US Dollar Liquidity Fund, which is managed by JPMorgan. At the year end this was valued at £19.2 million (2022: £6.6 million). Income amounting to £500,000 (2022: £118,000) was receivable during the year of which £nil (2022: £nil) was outstanding at the year end. The JPMorgan US Dollar Liquidity Fund does not charge a fee and the Company does not invest in any other investment fund managed or advised by JPMorgan.
Handling charges on dealing transactions amounting to £7,000 (2022: £6,000) were payable to JPMorgan Chase Bank, N.A. during the year of which £2,000 (2022: £1,000) was outstanding at the year end.
At the year end, total cash of £42,000 (2022: £3,000) was held with JPMorgan Chase Bank, N.A. A net amount of interest of £nil (2022: £nil) was receivable by the Company during the year from JPMorgan Chase Bank, N.A. of which £nil (2022: £nil) was outstanding at the year end.
TRANSACTIONS WITH RELATED PARTIES
Full details of Directors' remuneration and shareholdings can be found in the Directors' Remuneration Report and in note 6 of the Annual Report and Financial Statements.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and the Financial Statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare the Annual Report and Financial Statements for each financial year. Under that law, the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising Financial Reporting Standard 102, the Financial Reporting Standard applicable in the UK and Republic of Ireland (FRS 102) 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 Financial Statements are fair, balanced and understandable, provide the information necessary for shareholders to assess the Company's position and 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 net 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, comprising FRS 102, have been followed, subject to any material departures disclosed and explained in the financial statements;
? prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Company will continue in business; and
? notify the Company's shareholders in writing about the use, if any, of disclosure exemptions in FRS 102 in the preparation of the financial statements
and the Directors confirm that they have done so.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and 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 Financial Statements are published on the www.jpmussmallercompanies.co.uk website, which is maintained by the 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 Auditors 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 to 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 and Directors' Remuneration Report that comply with that law and those regulations.
Each of the Directors, whose names and functions are listed in the Board of Directors section in the Annual Report, 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 or loss of the Company; and
? the Strategic Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal and emerging 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 Company's position and performance, business model and strategy.
The Board also confirms that it is satisfied that the Strategic Report and Directors' Report include a fair review of the development and performance of the business, and the Company, together with a description of the principal risks and uncertainties that it faces.
For and on behalf of the Board
David Ross
Chair
18th March 2024
STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31st December 2023
2023 | 2022 | |||||
Revenue | Capital | Total | Revenue | Capital | Total | |
£'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
Gains/(losses) on investments held at fair value | ||||||
£through profit or loss | - | 10,889 | 10,889 | - | (22,082) | (22,082) |
Net foreign currency gains/(losses) | - | 825 | 825 | - | (2,513) | (2,513) |
Income from investments | 3,865 | 381 | 4,246 | 3,218 | - | 3,218 |
Interest receivable | 500 | - | 500 | 118 | - | 118 |
Gross return/(loss) | 4,365 | 12,095 | 16,460 | 3,336 | (24,595) | (21,259) |
Management fee | (401) | (1,602) | (2,003) | (416) | (1,664) | (2,080) |
Other administrative expenses | (520) | - | (520) | (547) | - | (547) |
Net return/(loss) before finance costs and taxation | 3,444 | 10,493 | 13,937 | 2,373 | (26,259) | (23,886) |
Finance costs | (304) | (1,218) | (1,522) | (135) | (539) | (674) |
Net return/(loss) before taxation | 3,140 | 9,275 | 12,415 | 2,238 | (26,798) | (24,560) |
Taxation | (573) | (57) | (630) | (466) | - | (466) |
Net return/(loss) after taxation | 2,567 | 9,218 | 11,785 | 1,772 | (26,798) | (25,026) |
Return/(loss) per share | 3.98p | 14.30p | 18.28p | 2.72p | (41.21)p | (38.49)p |
Dividend declared in respect of the financial year ended 31st December 2023 total 3.0p (2022: 2.5p) per share amounting to £1,913,000 (2022: £1,615,000). Further information on dividends is given in note 10 in the Annual Report.
All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the year.
The 'Total' column of this statement is the profit and loss account of the Company and the 'Revenue' and 'Capital' columns represent supplementary information prepared under guidance issued by the Association of Investment Companies.
Net return/(loss) after taxation represents the profit/(loss) for the year and also Total Comprehensive Income.
STATEMENT OF CHANGES IN EQUITY
For the year ended 31st December 2023
Called up |
| Capital |
|
|
| |
share | Share | redemption | Capital | Revenue |
| |
capital | premium | reserve | reserves1 | reserve1 | Total | |
£'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
At 31st December 2021 | 1,636 | 45,367 | 1,851 | 250,536 | 2,393 | 301,783 |
Issue of new Ordinary shares | 2 | 329 | - | - | - | 331 |
Shares reissued from Treasury | - | 62 | - | 522 | - | 584 |
Repurchase of shares into Treasury | - | - | - | (2,941) | - | (2,941) |
Block listing fees | - | - | - | (48) | - | (48) |
Net (loss)/return for the year | - | - | - | (26,798) | 1,772 | (25,026) |
Dividends paid in the year | - | - | - | - | (1,626) | (1,626) |
At 31st December 2022 | 1,638 | 45,758 | 1,851 | 221,271 | 2,539 | 273,057 |
Repurchase of shares into Treasury | - | - | - | (3,502) | - | (3,502) |
Net return | - | - | - | 9,218 | 2,567 | 11,785 |
Dividend paid in the year | - | - | - | - | (1,615) | (1,615) |
At 31st December 2023 | 1,638 | 45,758 | 1,851 | 226,987 | 3,491 | 279,725 |
1 Part of these reserves form the distributable reserves of the Company and may be used to fund distributions to shareholders.
STATEMENT OF FINANCIAL POSITION
As at 31st December 2023
2023 | 2022 | |
£'000 | £'000 | |
Fixed assets |
|
|
Investments held at fair value through profit or loss | 283,986 | 291,723 |
Current assets |
|
|
Debtors | 308 | 405 |
Cash and cash equivalents | 19,237 | 6,652 |
| 19,545 | 7,057 |
Current liabilities | ||
Creditors: amounts falling due within one year | (23,806) | (25,723) |
Net current liabilities | (4,261) | (18,666) |
Total assets less current liabilities | 279,725 | 273,057 |
Net assets | 279,725 | 273,057 |
Capital and reserves |
|
|
Called up share capital | 1,638 | 1,638 |
Share premium | 45,758 | 45,758 |
Capital redemption reserve | 1,851 | 1,851 |
Capital reserves | 226,987 | 221,271 |
Revenue reserve | 3,491 | 2,539 |
Total shareholders' funds | 279,725 | 273,057 |
Net asset value per share (note 4) | 438.6p | 421.7p |
STATEMENT OF CASH FLOWS
For the year ended 31st December 2023
2023 | 20221 | |
£'000 | £'000 | |
Cash flows from operating activities |
|
|
Net return/(loss) before finance costs and taxation | 13,937 | (23,886) |
Adjustment for: | ||
£Net (gains)/losses on investments held at fair value through profit or loss | (10,889) | 22,082 |
£Net foreign currency (gains)/losses | (825) | 2,513 |
£Dividend income | (4,246) | (3,218) |
£Interest income | (500) | (118) |
Realised gains on foreign exchange transactions | (1) | - |
Realised exchange losses on liquidity fund | (344) | - |
Decrease/(increase) in accrued income and other debtors | 10 | (20) |
Increase in accrued expenses | 77 | 18 |
Net cash outflow from operations before dividends and interest | (2,781) | (2,629) |
Dividends received | 3,469 | 2,726 |
Interest received | 447 | 93 |
Overseas withholding tax recovered | 116 | 42 |
Net cash inflow from operating activities | 1,251 | 232 |
Purchases of investments | (70,750) | (76,428) |
Sales of investments | 89,062 | 83,743 |
Net cash inflow from investing activities | 18,312 | 7,315 |
Equity dividends paid | (1,615) | (1,626) |
Shares issued | - | 331 |
Shares reissued from Treasury | - | 584 |
Repurchase of shares into Treasury | (3,502) | (2,941) |
Block listing fees | - | (48) |
Loan interest paid | (1,625) | (530) |
Net cash outflow from financing activities | (6,742) | (4,230) |
Increase in cash and cash equivalents | 12,821 | 3,317 |
Cash and cash equivalents at start of year | 6,652 | 3,057 |
Exchange movements | (236) | 278 |
Cash and cash equivalents at end of year | 19,237 | 6,652 |
Cash and cash equivalents consist of: |
|
|
Cash and short term deposits | 42 | 3 |
Cash held in JPMorgan US Dollar Liquidity Fund | 19,195 | 6,649 |
Total | 19,237 | 6,652 |
1 The presentation of the Cash Flow Statement, as permitted under FRS 102, has been changed so as to present the reconciliation of 'net return/(loss)
before finance costs and taxation' to 'net cash inflow from operating activities' on the face of the Cash Flow Statement. Previously, this was shown by
way of note. Interest paid has also been reclassified to financing activities as this relates to the bank loans. Previously this was shown under operating activities. Other than changes in presentation of certain cash flow items, there is no change to the cash flows as presented in previous periods.
Analysis of change in net debt
As at |
| Other non-cash | As at | |
31st December 2022 | Cash flows | charges | 31st December 2023 | |
£'000 | £'000 | £'000 | £'000 | |
Cash and cash equivalents |
|
|
|
|
Cash | 3 | 39 | - | 42 |
Cash held in JPMorgan US Dollar Liquidity Fund | 6,649 | 12,546 | - | 19,195 |
6,652 | 12,585 | - | 19,237 | |
Borrowings |
|
|
|
|
Debt due within one year | (24,940) | - | 1,407 | (23,533) |
(24,940) | - | 1,407 | (23,533) | |
Net debt | (18,288) | 12,585 | 1,407 | (4,296) |
NOTES TO THE FINANCIAL STATEMENTS
1. Accounting policies
(a) General information and 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 'the Financial Reporting Standard applicable in the UK and Republic of Ireland' (FRS 102) and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' (the 'SORP') issued by the Association of Investment Companies in July 2022.
All of the Company's operations are of a continuing nature.
The Directors believe that having considered the Company's investment objective, risk management policies, capital management policies and procedures, the nature of the portfolio and expenditure projections, the Company has adequate resources, an appropriate financial structure and suitable management arrangements in place to continue in operational existence for a period of at least 12 months from the date of approval of these financial statements. In particular, the Board has considered the ongoing impact of the war between Ukraine and Russia and more recently the conflict in the Middle East, and the tensions between the USA and China and believes that this will have a limited financial impact on the Company's operational resources and existence. For these reasons, the Directors consider it appropriate to adopt the going concern basis of accounting in preparing the Company's financial statements. They have not identified any material uncertainties to the Company's ability to continue as a going concern.
The policies applied in these financial statements are consistent with those applied in the preceding year.
2. Return/(loss) per share
2023 | 2022 | |
£'000 | £'000 | |
Revenue return | 2,567 | 1,772 |
Capital return/(loss | 9,218 | (26,798) |
Total return/(loss) | 11,785 | (25,026) |
Weighted average number of shares, excluding Treasury shares, in issue during | ||
the year | 64,460,117 | 65,029,256 |
Revenue return per share | 3.98p | 2.72p |
Capital return/(loss) per share | 14.30p | (41.21)p |
Total return/(loss) per share | 18.28p | (38.49)p |
3. Dividends
(a) Dividends paid and declared
2023 | 2022 | |
£'000 | £'000 | |
Dividends paid |
|
|
2022 final dividend of 2.5p (2021: 2.5p) paid to shareholders in May 2023 | 1,615 | 1,626 |
Total dividends paid in the year | 1,615 | 1,626 |
All dividends paid and declared in the period have been funded from the Revenue Reserve.
The dividend proposed in respect of the year ended 31st December 2022 amounted to £1,616,000. However, the amount paid amounted to £1,615,000 due to shares repurchased after the balance sheet date but prior to the record date.
The final dividend has been declared in respect of the year ended 31st December 2023. In accordance with the accounting policy of the Company, this dividend will be reflected in the accounts for the year ending 31st December 2024.
(b) Dividends for the purposes of Section 1158 of the Corporation Tax Act 2010 ('Section 1158')
The requirements of Section 1158 are considered on the basis of dividends declared in respect of the financial year, shown below. The revenue available for distribution by way of dividend for the year is £2,567,000 (2022: £1,772,000).
2023 | 2022 | |
£'000 | £'000 | |
2023 final dividend of 3.0p (2022: 2.5p) paid to shareholders in May 2024 | 1,913 | 1,616 |
4. Net asset value per share
| 2023 | 2022 |
Net assets (£'000) | 279,725 | 273,057 |
Number of shares in issue | 63,770,149 | 64,745,622 |
Net asset value per share | 438.6p | 421.7p |
5. Status of results announcement
2022 Financial Information
The figures and financial information for 2022 are extracted from the published Annual Report and Financial Statements for the year ended 31st December 2022 and do not constitute the statutory accounts for the year. The Annual Report and Financial Statements have 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.
2023 Financial Information
The figures and financial information for 2023 are extracted from the Annual Report and Financial Statements for the year ended 31st December 2023 and do not constitute the statutory accounts for that year. The Annual Report and Financial Statements include the Report of the Independent Auditors which is unqualified and does not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. The Annual Report and Financial Statements will be delivered to the Register of Companies in due course.
Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.
For further information, please contact:
Lucy Dina
For and on behalf of JPMorgan Funds Limited,
Company Secretary
020 7742 4000
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.
JPMORGAN FUNDS LIMITED
ENDS
A copy of the annual report will be submitted to the FCA's National Storage Mechanism and will shortly be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism
The Annual Report will shortly be available on the Company's website at www.jpmussmallercompanies.co.uk where up-to-date information on the Company, including daily NAV and share prices, factsheets and portfolio information can also be found.