JPMorgan European Discovery Trust plc (LON:JEDT) has announced its final results for the year ended 31st March 2022.
I am pleased to present the Company’s results for the year ended 31st March 2022.
It has been a challenging year as the world slowly came out of the pandemic only to be faced with increasingly embedded inflation and rising interest rates. The Company’s total return on net assets, over the year to 31st March 2022, was 0.3%, while the Company’s benchmark index, the MSCI Europe ex UK Small Cap Index, returned 3.8% over the same period. The total return to shareholders was -1.3%, reflecting a slight widening of the discount at which the Company’s shares trade from 12.9% to 14.5% over the year. The Company’s longer-term performance remains strong, with the 5 year and 10 year total return on net assets rising 45.3% and 253.2%, respectively, whilst the benchmark total return rose 51.7% and 219.5%. The basis for this under performance up to March 2022, is explained in the Investment Managers’ report on pages 8 to 14 of the Annual Report, which provides a detailed commentary on the portfolio positioning and the outlook for investing.
Gearing can be a differentiator for an investment trust and the Board believes that it can be beneficial to performance. The Board sets the overall strategic gearing policy and guidelines and reviews these at each Board meeting. Borrowings during the year consisted of a EUR 125m revolving credit facility, of which EUR 90m was drawn down at the year end. During the year gearing varied between 8.7 geared and 1.4 cash.
Revenue and Dividends
The Board’s dividend policy is to pay out the majority of the revenue available each year. This is set against the Company’s objective of maximising capital growth and the Investment Managers are therefore not constrained to deliver income in any one financial year.
Net revenue return was higher for the year at £11.1m (2020: £7.1m). An interim dividend of 1.2 pence per share was paid on 28th January 2022, the same as last year. After taking into account the income received and the level of the Company’s revenue reserves and subject to shareholder approval at the forthcoming Annual General Meeting, a final dividend of 5.5 pence per share will be paid on 29th July 2022 to shareholders on the register as at the close of business on 24th June 2022 (ex-dividend date 23rd June 2022).
Discounts and Share Repurchases
The discount of the Company’s share price to net asset value widened during the Company’s financial year, from nearly 12.9% as at the end of March 2021 to 14.5% as at 31st March 2022, with an average discount over the 12 months of 13.1%. As at 10th June 2022, the discount was 16.9%. The Board continues to monitor the level of the discount carefully and seeks to use its ability to repurchase shares to minimise the short-term volatility and the absolute level of the discount when appropriate. During the financial year, the Company repurchased 992,954 shares. Since the year end, it has repurchased additional shares of 995,000, for £4.2m.
During the year, the Management Engagement Committee undertook a formal review of the Manager, covering the investment management, company secretarial, administrative and marketing services provided to the Company. The review took into account the Manager’s investment performance record, management processes, investment style, resources and risk control mechanisms. The Board agreed with the Committee’s recommendation that the continued appointment of the Manager is in the interests of shareholders as a whole.
Environmental, Social and Governance (‘ESG’)
The Board has continued to engage with the Manager on the integration of ESG factors into its investment process. While the investment managers have always considered environmental, social and governance (‘ESG’) issues in their investment process, it is now rigorously integrated into their investment processes so that ESG issues are considered at every stage of the investment decision. The Board shares the Investment Managers’ view of the significance of ESG factors both when making long term investments and the requirement of sustained engagement with investee companies throughout the period of the investment. Further information on the Manager’s ESG process and engagement is set out in the ESG Report on pages 21 to 23 of the Annual Report with stock specific examples included in the Investment Managers’ Report on pages 8 to 14 of the Annual Report.
As highlighted in the half year report 2021, the Board progressed its succession plans during the year resulting in the decision to appoint Sarah Watters as an independent non-executive director with effect from 1st July 2021. As planned and announced previously, Stephen White retired from the Board on 31st October 2021, having served as a Director for more than nine years. Further, as announced on 8th September 2021, due to external time commitments, Tanya Cordrey also stepped down from the Board, on 26th November 2021.
During the year, the Board undertook a search exercise to identify a new Director. Following successful conclusion of the search exercise and as announced on 4th February 2022, Suzy Ross joined the Board with effect from 1st March 2022. Suzy is currently working as a member of the leadership team of Google Cloud where she is Director – Strategic Customer Partnerships. Her recent roles include Senior Retail Adviser to Accenture, Acting Chief Customer Officer at Jaeger and Global Chief Marketing Officer at SpaceNK.
In line with the Board’s succession planning, the intention had been for Ashok Gupta to stand down at this year’s AGM, having served on the Board for nine years. However, in light of some of the recent changes in the Board composition, the Board agreed that it would be appropriate for the Company to continue to benefit from Ashok’s extensive industry experience for a further few months. Therefore, subject to re-appointment by the shareholders at the upcoming AGM, he will continue as a director till the later part of the year.
Annual General Meeting
The Company’s Annual General Meeting will be held on Monday, 18th July 2022 at 12.30 p.m. at 60 Victoria Embankment, London EC4Y 0JP.
The Investment Managers will give a presentation to shareholders, reviewing the past year and commenting on the outlook for the current year. The meeting will be followed providing shareholders with the opportunity to meet the Directors and representatives of the Manager. We look forward to seeing as many shareholders as possible at the AGM.
For shareholders wishing to follow the AGM proceedings but choosing not to attend, we will be able to welcome you through conferencing software. Details on how to register, together with access details, will be available on the Company’s website: www.jpmorganeuropeandiscovery.co.uk, or by contacting the Company Secretary at firstname.lastname@example.org.
As is normal practice, all voting on the resolutions will be conducted by a poll. 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 exercise their votes in advance of the meeting by completing and submitting their form of proxy.
If you have any detailed or technical questions, it would be helpful if you could raise them in advance with the Company Secretary at 60 Victoria Embankment, London EC4Y 0JP or via the ‘Ask a Question’ link on the Company’s website. Shareholders who are unable to attend the AGM are encouraged to use their proxy votes.
Predicting the outlook in these uncertain times remains very challenging. The last few months have been difficult for global markets, with considerable uncertainty surrounding the implications of the re-emergence of inflation and the impact of Russia’s invasion of Ukraine. However, the Board remains confident in the robust investment process and careful approach to risk management followed by the Investment Managers and believes that investing in European smaller companies will continue to deliver attractive long-term returns for shareholders.
Marc van Gelder
INVESTMENT MANAGERS’ REPORT
Investment Scope and Process
The objective of the Company is to achieve capital growth from a portfolio of quoted smaller European companies, excluding the United Kingdom. The investment universe is defined at the time of purchase by the countries and market capitalisation range of the constituents of the benchmark, the MSCI Europe ex UK Small Cap Index. At the end of March 2022, the benchmark index consisted of 778 companies with a free float adjusted market capitalisation range of GBP 45m to GBP 7.1 billion. This universe of potential investments is screened using a proprietary multi-factor model; we then apply fundamental analysis to the results of the screening process.
The investment process is driven by bottom-up stock selection with a focus on identifying market leading growth companies with a catalyst for outperformance. Stock position sizing is determined by investment conviction and trading liquidity. Investments are sold when there is a fundamental deterioration in business prospects or the market capitalisation has significantly outgrown the benchmark index. The Board has set a liquidity range of between 20 per cent cash and 20 per cent gearing within which the Managers may operate. The policy is not to hedge the currency exposure of the portfolio’s assets.
The twelve-month period to 31st March 2022 saw a continued economic recovery from the global Covid-19 pandemic as the rapid response by governments and central banks succeeded in mitigating the detrimental impact to the economy.
However, the speed of the recovery resulted in extreme supply chain stress. This led to a substantial acceleration in inflation, which reached levels not seen in the past 30 years. This trend accelerated further following the Russian invasion of Ukraine in early 2022. Energy and other commodity prices increased rapidly due to the sanctions imposed on Russia and the disruption to Ukrainian exports. In March 2022, inflation reached 8.5% in the US and 7.4% in the Euro area. In the first quarter of 2022, central banks responded by turning more hawkish, resulting in an abrupt repricing of growth stocks. At the same time, continued supply chain disruptions and high inflation have had significantly detrimental impacts on measures of business optimism and consumer sentiment.
As a result of higher interest rates and increased economic uncertainty, the MSCI Europe ex UK Small Cap Index fell 7.9% in the first 3 months of 2022, although it was still up 3.8% over the twelve-month period to 31st March 2022.
Due to our overweight in growth stocks, over the financial year the net asset value of the Trust rose by 0.3 per cent, underperforming its benchmark by 3.5 per cent.
Top performers over the period include Italian luxury yacht manufacturer Sanlorenzo, which continued to see very strong demand; D’Ieteren, the Belgian holding company, which announced a minority stake deal with private equity funds for its main asset, Belron, at a much higher valuation than expected by the market; Alten, the French R&D consulting company, which is benefitting from the gradual recovery in the automotive and aerospace markets; Ipsos, the French market research company, which has seen increased demand for research and insights as companies and public entities need to adapt to a post-Covid world; and Reply, the Italian IT consulting company, as demand for digital solutions including cybersecurity and cloud infrastructure has only been accelerated by the Covid crisis.
Stock detractors from performance included the Swiss software reseller, SoftwareOne, as their margins went under pressure following accelerated recruitment to build its services team; Aramis Group, the French used cars online platform, which suffered from shortages in the supply of cars and increased competition; and Tecan, the Swiss medical lab automation company, as investors took profit after a period where the company benefitted from strong Covid tailwinds. Our underweight to Rheinmetall, the German defence company, also detracted after Germany announced a substantial increase in their military budget.
YEAR ENDED 31ST MARCH 2022
|Contributions to total returns|
|Investment Managers’ added contribution||-2.7|
|Management fee/other expenses||-0.8|
|Return on net assetsA||0.3|
|Return to shareholdersA||-1.3|
All figures are on a total return basis.
Performance attribution analyses how the Company achieved its recorded performance relative to its benchmark.
A Alternative Performance Measure (‘APM’)
Industrials remained the main sector overweight during the period. In particular we increased our exposure to capital goods as we believe investments into energy efficiency and electrification have structurally accelerated. We therefore own companies that are enabling this transition such as the high voltage cable manufacturers Nexans, NKT and Prysmian. We also added to companies that are enabling buildings to be more energy efficient such as Belimo, which manufactures devices for HVAC in non-residential buildings; Signify, the Dutch manufacturer of energy-efficient lighting solutions; and Aalberts, the Dutch manufacturer of piping systems for buildings.
We reduced our overweight to Consumer Discretionary to a slight underweight over the period. We sold our positions in leisure companies Dometic, the Swedish manufacturer of accessories for recreational vehicles; Trigano, the French manufacturer of motorhomes and caravans; and Technogym, the Italian manufacturer of high-end fitness equipment. These companies have benefitted from exceptionally high demand over the last two years, which could become a headwind going forward as consumer confidence weakens.
We significantly reduced our underweight to Financials by increasing our exposure to the Insurance sector. The companies we have invested in are attractively valued, positively exposed to rising interest rates and have defensive business models.
During the period France grew to be the Trust’s largest country overweight. We added Rexel, a distributor of electrical products, which benefits from increased investment in building renovation and energy efficiency.
Belgium became the fourth largest country overweight through the addition of reopening beneficiaries such as Kinepolis, which operates cinemas in Europe and North America. We also added to high quality logistics real estate such as Warehouses de Pauw and VGP.
Germany became the largest underweight. We had a position in Hella, a German manufacturer of electronics for automotive, which was taken over by Faurecia. We also reduced our position in Eckert & Ziegler, the manufacturer of generators to produce nuclear isotopes for medical use, as we felt the stock’s stretched valuation could become a headwind to future performance.
Sweden became the fourth largest underweight, having been the third largest overweigh at the start of the period, as we took profits in high-growth companies, such as IVF equipment supplier Vitrolife and accounting software developer Lime. We also sold Dometic, the manufacturer of accessories for recreational vehicles, which benefitted from exceptional demand during the Covid-related travel bans.
By the end of the financial year, we were 0.04 per cent geared.
We started the year believing like many market participants and policymakers that inflation would prove to be transient. The sad events in the Ukraine and more recently the lockdowns in China make it highly unlikely that rises in prices will be temporary. The positive aspect of equities unlike bonds is that there are companies and sectors that can still perform in inflationary environments and those are the companies which we have been increasingly investing in. Companies with high barriers to entry should be able to pass on inflation. Certain areas of insurance are positively correlated with rising bond yields. Prime property companies in areas where there is limited capacity such as logistics should also have pricing power. So, in the short term, we have adapted the portfolio to be better insulated from inflation.
It is difficult to predict when the current inflationary spiral will end. Historically, European smaller companies have been one of the best asset classes in the world, and we do not see the fundamentals that brought this about, changing. Innovation has powered smaller companies and will continue to do so long into the future. As always it is our job to find these opportunities.
Full Investment Management Report can be found in the Annual Report on pages 8 to 14.
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 Board has drawn up a risk matrix, which identifies the key risks to the Company, as well as emerging risks. 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 risks fall broadly under the following categories:
• Underperformance and Inappropriate Strategy
An inappropriate investment strategy, or poor implementation of the strategy, for example excessive concentration of investments, asset allocation, the level of gearing or the degree of portfolio risk, may lead to underperformance against the Company’s benchmark index and peer companies.
The Board manages these risks by diversification of investments and through its investment restrictions and guidelines which are monitored and reported on by the Manager. JPMF provides the Directors with timely and accurate management information. The Board monitors the implementation and results of the investment process with the Investment Managers, who attend all Board meetings, and reviews data which show statistical measures of the Company’s risk profile. The Board sets strategic guidelines for gearing as well as investments; decisions on levels of gearing are delegated to the investment managers, whose decisions are subject to challenge by the Board. The Board holds a separate meeting devoted to strategy each year.
• Loss of Manager:
Investment performance could be adversely affected by the loss of one or more of the investment management team.
To reduce the likelihood of such an event, the Manager ensures appropriate succession planning and adopts a team-based approach as well as efforts to retain key personnel.
• Market and Currency:
Market risk arises from uncertainty about the future prices of the Company’s investments which may reflect underlying uncertainties arising from economic, social, fiscal, climate, inflationary and regulatory changes. It represents the potential loss that the Company might suffer through holding investments in the face of negative market movements. Investing in smaller companies is inherently riskier and more volatile, partly due to the potential lack of liquidity in some shares.
The majority of the Company’s assets, liabilities and income are denominated in Euros rather than in the Company’s functional currency of sterling (in which it reports). As a result, movements in the Euro:Sterling exchange rate may affect the sterling value of those items. Therefore, there is an inherent risk from these exchange rate movements.
The Board manages these risks by diversification of investments and monitoring of the implementation and results of the investment process with the investment manager. The Board includes an assessment of these risk factors at Board meetings and has placed investment restrictions and guidelines to limit these risks.
The Company borrows in Euros in order to hedge the currency risk in respect of the geared portion of the portfolio. The Company does not hedge the foreign currency exposure of the remainder of the portfolio.
• Discount Control Risk:
Investment trust shares often trade at discounts to their underlying NAVs, although they can also trade at a premium. Discounts and premiums can fluctuate considerably leading to volatile returns for shareholders.
The Board continues to monitor the level of the discount carefully and seeks to use its ability to repurchase shares to minimise the short-term volatility and the absolute level of the discount, when appropriate.
• Accounting, Legal and Regulatory Market and Currency:
In order to qualify as an investment trust, the Company must comply with Section 1158 of the Corporation Tax Act 2010 (‘Section 1158’). Details of the Company’s approval are given under ‘Business of the Company’ on page 24 of the Annual Report. Were the Company to breach Section 1158, it may lose investment trust status and, as a consequence, gains within the Company’s portfolio would be subject to capital gains tax. In addition, changes to relevant regulations and legislation, such as financial or tax legislation, may have a negative impact on the Company.
The Section 1158 qualification criteria are continually monitored by JPMF and the results reported to the Board each month. The Board relies on the support of the services of its Company Secretary, the Manager and its professional advisers to ensure compliance with the Companies Act, the FCA Listing Rules, the Market Abuse Regulations (‘MAR’), Disclosure Guidance and Transparency Rules (‘DTRs’), the Alternative Investment Fund Managers Directive (‘AIFMD’) and all other relevant legislation. The Manager takes specialist advice, where necessary, to review the impact of new legislation on the Company.
Disruption to, or failure of, the Manager’s accounting, dealing or payments systems or the Depositary or Custodian’s records may prevent accurate reporting and monitoring of the Company’s financial position. The risk of fraud or other control failures or weaknesses within the Manager or other service providers could result in losses to the Company.
The Audit Committee receives independently audited reports on the Managers and other service providers’ internal controls, as well as a report from the Manager’s Compliance function. The Company’s management agreement obliges the Manager to report on the detection of fraud relating to the Company’s investments and the Company is afforded protection through its various contracts with suppliers, of which one of the key protections is the Depositary’s indemnification for loss or misappropriation of the Company’s assets held in custody. Details of how the Board monitors the services provided by JPMF and its associates and the key elements designed to provide effective risk management and internal control are included within the Risk Management and Internal Control section of the Corporate Governance Statement on page 41 of the Annual Report.
• Cyber Crime:
The threat of cyber-attack, in all its guises, is regarded as at least as important as more traditional physical threats to business continuity and security.
The Board has received the cyber security policies for its key third party service providers and JPMF has provided assurance to the Directors that the Company benefits directly or indirectly from all elements of JPMorgan’s Cyber Security programme. The information technology controls around the physical security of JPMorgan’s data centres, security of its networks and security of its trading applications are tested and reported on every six months against the AAF Standard.
• Corporate Governance and Shareholder Relations:
The Board considers failure to communicate effectively with investors and inappropriate sales and marketing strategy to be a risk to the Company.
The Board relies on the Manager to arrange regular meetings with major institutional holders and effective communication. Marketing Strategy and practices are regularly reviewed by the Board. Details of the Company’s compliance with corporate governance best practice, including information on relations with shareholders, are set out in the Corporate Governance Statement on pages 38 and 39.
• Pandemic Risk:
The global reach and disruption to markets caused by Covid-19 highlighted the speed and extent of economic damage that can arise from a pandemic, both on global stock markets and more widely. It also introduced risks, particularly in terms of controls, resulting from changes to works practices (including working from home). There is an ongoing risk that new Covid strains may not respond to current vaccines.
The Board regularly reviews the mitigation measures and business continuity plans which JPMorgan Asset Management and other key service providers have in place to maintain operational resilience. It is satisfied that these are appropriate even in during the worst extremes of the Covid-19 pandemic.
• Climate Change:
Climate change has become a critical issue confronting portfolio companies and their investors. Climate change can have a significant impact on the business models, sustainability and even viability of individual companies, sectors and asset classes.
The Board receives ESG reports from the Manager on the portfolio and the way ESG considerations are integrated into the investment decisions making so as to mitigate risk at the level of stock selection and portfolio construction. At the level of the Company, as extreme weather events become more common, the resiliency, business continuity planning and location strategies of the Company’s service providers will come under greater scrutiny.
There is an increasing risk to market stability and investment opportunities from geo-political conflicts, such as between Russian and Ukraine, and China and Taiwan.
The Company discusses global developments with the Manager and will continue to monitor these issues.
• Global recession:
Government/Central Banks fiscal or monetary responses to the debt burden from Covid-19 stimulus packages. This with inflation, recession, potential stagflation and the consequences of the war in Ukraine, could lead to material adverse movements in asset prices.
The Manager’s market strategists are available to the Board and can discuss market trends. 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.
TRANSACTIONS WITH THE MANAGER AND RELATED PARTIES
Details of the management contract are set out in the Directors’ Report on page 36 of the Annual Report. The management fee payable to the Manager for the year was £7,867,000 (2021: £6,092,000) of which £nil (2021: £nil) was outstanding at the year end.
During the year £nil (2021: £nil), including VAT, was payable to JPMAM for the marketing and administration of savings scheme products, of which £nil (2021: £nil) was outstanding at the year end.
Included in administration expenses in note 6 on page 68 of the Annual Report are safe custody fees payable to JPMorgan Chase amounting to £122,000 (2021: £98,000) excluding VAT of which £20,000 (2021: £37,000) was outstanding at the year end.
The Manager may carry out some of its dealing transactions through group subsidiaries. These transactions are carried out at arm’s length. The commission payable to JPMorgan Securities Limited for the year was £nil (2021: £nil) of which £nil (2021: £nil) was outstanding at the year end.
The Company also holds cash in JPMorgan Euro Liquidity Fund, which is managed by JPMF. At the year end, this was valued at £74.9 million (2021: £1.1 million). Interest amounting to £nil were payable (2021: £nil) during the year of which £nil (2021: £nil) was outstanding at the year end.
Securities lending income amounting to £136,000 (2021: £469,000) were receivable by the Company during the year. JPMAM commissions in respect of such transactions amounted to £15,000 (2021: £52,000).
Handling charges on dealing transactions amounting to £33,000 (2021: £47,000) were payable to JPMorgan Chase during the year of which £6,000 (2021: £15,000) was outstanding at the year end.
At the year end, a bank balance of £430,000 (2021: £268,000) was held with JPMorgan Chase Bank N.A. A net amount of interest of £2,000 (2021: £2,000) was receivable by the Company during the year from JPMorgan Chase of which £1,000 (2021: £nil) was outstanding at the year end.
Full details of Directors’ remuneration and shareholdings can be found on page 48 of the Annual Report.
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and Accounts in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law the Directors must not approve the financial statements unless they are satisfied that, taken as a whole, the Annual Report and Accounts are fair, balanced and understandable, provide the information necessary for shareholders to assess the Company’s 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 total return or loss of the Company for that period. In order to provide these confirmations, and in preparing these financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and accounting estimates that are reasonable and prudent;
• state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
• prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Company will continue in business and the Directors confirm that they have done so.
The Directors are responsible for keeping proper accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The financial statements are published on the www.jpmeuropeandiscovery.co.uk website, which is maintained by the Company’s Manager. The maintenance and integrity of the website maintained by the Manager is, so far as it relates to the Company, the responsibility of the Manager. The work carried out by the Auditors does not involve consideration of the maintenance and integrity of this website and, accordingly, the Auditors accept no responsibility for any changes that have occurred to the financial statements since they were initially presented on the website. The financial statements are prepared in accordance with UK legislation, which may differ from legislation in other jurisdictions.
Under applicable law and regulations, the Directors are also responsible for preparing a Directors’ Report, Strategic Report, Statement of Corporate Governance and Directors’ Remuneration Report that comply with that law and those regulations.
Each Director, whose names and functions are listed on page [•] confirm that, to the best of their knowledge:
• the financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), give a true and fair view of the assets, liabilities, financial position and return 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 risks and uncertainties that it faces.
The Board confirms that it is satisfied that the Annual Report and Financial Statements taken as a whole are fair, balanced and understandable and provide the information necessary for shareholders to assess the strategy and business model of the Company.
For and on behalf of the Board
Marc Van Gelder
JPMorgan European Discovery Trust plc (LON:JEDT) is an investment trust company. The Investment Trust JEDT objective is to achieve capital growth from a portfolio of quoted smaller companies in Europe, excluding the United Kingdom.