Annual Report JPMorgan European Smaller Companies Trust plc. Annual Report & Accounts for the year ended 31st March 2014

Transcription

1 European Smaller 4pp cover_european Smaller Cover 23/05/ :30 Page Annual Report JPMorgan European Smaller Companies Trust plc Annual Report & Accounts for the year ended 31st March 2014

2 Features Contents 1 Financial Results Strategic Report 2 Chairman s Statement 5 Investment Managers Report 9 Summary of Results 10 Performance 11 Ten Year Financial Record 12 Ten Largest Investments 13 Portfolio Analyses 14 Investment Activity 15 List of Investments 17 Business Review Governance 22 Board of Directors 24 Directors Report 27 Corporate Governance 33 Directors Remuneration Report 36 Statement of Directors Responsibilities 37 Independent Auditors Report Financial Statements 40 Income Statement 41 Reconciliation of Movements in Shareholders Funds 42 Balance Sheet 43 Cash Flow Statement 44 Notes to the Accounts Shareholder Information 63 Shareholder Analysis 64 Notice of Annual General Meeting 67 Glossary of Terms and Definitions 69 Information about the Company Objective Capital growth from smaller European companies (excluding the United Kingdom). Investment Policies To invest in a diversified portfolio of smaller companies in Europe, excluding the United Kingdom. To manage liquidity and borrowings to increase potential returns to shareholders. The Board s current gearing policy is to be between 20% net cash and 20% geared. To emphasise capital growth rather than income. Therefore shareholders should expect the dividend to vary from year to year. To invest no more than 15% of gross assets in other UK listed investment companies (including investment trusts). Risk It should be noted that the Company invests in the shares of smaller companies, which tend to be more volatile than those of larger companies. The Company also employs gearing to generate greater returns. The Company s shares should therefore be regarded as carrying greater than average risk. Further details on investment policies and risk management are given in the Business Review section of the Strategic Report on pages 17 and 18. Benchmark Euromoney Smaller European Companies (ex UK) Total Return Index in sterling terms, formerly known as the HSBC Smaller European Companies (ex UK) Total Return Index in sterling terms. Capital Structure At 31st March 2014, the Company s issued share capital comprised 32,029,577 ordinary shares of 25p each. There were no shares held in Treasury. Management Company The Company employs JPMorgan Asset Management (UK) Limited ( JPMAM or the Manager ) to manage its assets. AIC The Company is a member of the Association of Investment Companies. Website The Company s website, which can be found at includes useful information about the Company, such as daily prices, factsheets and current and historic half year and annual reports. FCA Regulation of Non-Mainstream Pooled Investments The Company currently conducts its affairs so that the shares issued by JPMorgan European Smaller Companies Trust plc can be recommended by Independent Financial Advisers to ordinary retail investors in accordance with the FCA s rules in relation to non-mainstream investment products and intends to continue to do so for the foreseeable future. The shares are excluded from the FCA s restrictions which apply to non-mainstream investment products because they are shares in an investment trust.

3 Financial Results Total returns (includes dividends reinvested) +43.6% Return to shareholders 1 (2013: +20.6%) +40.6% Return on net assets 2 (2013: +16.7%) +32.8% Benchmark return 3 (2013: +14.7%) 14.5p Dividend (2013: 16.0p) Performance (%) for periods ended 31st March Year Performance 3 Year Performance 5 Year Performance 10 Year Performance JPMorgan European Smaller Companies return to shareholders 1 JPMorgan European Smaller Companies return on net assets 2 Benchmark return 3 A glossary of terms and definitions is provided on page Source: Morningstar. 2 Source: J.P. Morgan. 3 Source: Euromoney. The Company s benchmark is the Euromoney Smaller European Companies (ex UK) Index in sterling terms. JPMorgan European Smaller Companies Trust plc. Annual Report & Accounts

4 Strategic Report Chairman s Statement I am pleased to present the Company s results for the year ended 31st March Performance During the year ended 31st March 2014, the Company outperformed its benchmark index. The Company s total return on net assets (i.e. with net dividends reinvested) was +40.6%, which compares with a return of +32.8% on the same basis from the Company s benchmark, the Euromoney Smaller European Companies (ex UK) Total Return Index in sterling terms. Shareholders will note that the comparative benchmark has undergone a name change in recent months from the HSBC Smaller European Companies (ex UK) Index. This is a change of name only and not a change of benchmark. The performance for the year continues the Company s long term outperformance of the index with the three, five and ten years also generating a higher return than the index. The performance analysis on page 5 shows that the Investment Managers excess returns came through both positive stock selection and asset allocation, as well as the judicious use of gearing. A review of the market and more details on performance are given in the Investment Managers Report on pages 5 to 8. The discount of the Company s share price to net asset value narrowed over the year from 13.0% to 11.3% at the year end, resulting in a total return to shareholders of +43.6%. Regulatory Changes Pursuant to recent regulatory changes, this Chairman s Statement now forms part of the new Strategic Report. Shareholders will also note other changes to the format of the Annual Report which have been implemented as a result of these new regulatory requirements. Alternative Investment Fund Managers Directive ( AIFMD ) As reported in my half year statement, pursuant to the forthcoming implementation of the AIFMD, the Company is required to appoint an Alternative Investment Fund Manager ( AIFM ). As JPMorgan Asset Management (UK) Limited ( JPMAM ) is regulated under the Markets in Financial Instruments Directive (or MiFID ), it cannot act in the capacity of AIFM to the Company. Therefore, another JPMorgan company, JPMorgan Funds Limited, will be appointed as the Company s AIFM. From a portfolio management perspective, I am pleased to report that there will be no change, because JPMorgan Funds Limited will delegate the portfolio management to JPMAM, with Jim Campbell and Francesco Conte remaining the Investment Managers to the portfolio. The Company has decided to appoint Bank of New York Mellon as its Depositary (an appointment also required under the AIFMD) and Custody services will continue to be provided by JPMorgan. Revenue and Dividends The Company s objective is to provide shareholders with capital growth, resulting in a variable level of income received by the Company each year. Net revenue return for the year amounted to 5.0 million (2013: 6.1 million). The Board s policy is to pay out the vast majority of the revenue available each year. An interim dividend of 6.0 pence 2 JPMorgan European Smaller Companies Trust plc. Annual Report & Accounts 2014

5 per share was paid on 15th January Subject to shareholder approval at the forthcoming Annual General Meeting, a final dividend of 8.5 pence per share will be paid on 15th July 2014 to shareholders on the register at the close of business on 6th June 2014 (ex dividend date 4th June 2014). Gearing The Company entered into a three year fixed rate loan for 50 million in January 2014, replacing a maturing revolving credit facility. Total gearing available remains 100 million and the Investment Managers actively manage the gearing level of the Company within a framework set by the Board that is currently between 20% net cash and 20% geared. Gearing contributed +3.6% to performance during the year under review. Share Repurchases The Board continues to monitor the level of the discount carefully and seeks to use its ability to repurchase shares for cancellation to minimise short term volatility in the level of the discount. In accordance with this policy 1,970,000 shares were repurchased for cancellation during the year (excluding the shares repurchased as a result of the tender offer). Tender Offer As reported in my half year statement, 1,782,346 shares were successfully tendered and repurchased by the Company for cancellation in July The tender offer met its principal objective of providing a liquidity event to shareholders seeking a full or partial exit from the Company, whilst enhancing the net asset value for ongoing shareholders. Corporate Governance At the Board s strategy review meeting held during the year, the focus points were shareholder views about the Company, sales and marketing, the AIFMD and risk appetite. The Manager continues its work on increasing awareness of the Company and a number of presentations were given during the year by the Investment Managers and the Manager s sales team. The Nomination and Remuneration Committee evaluated the operations of the Board, individual Directors and the Chairman during the year. In line with corporate governance best practice, all Directors seek annual reappointment. The recruitment process will be commenced again during the coming year to replace Anthony Davidson who will retire from the Board following the 2015 Annual General Meeting. During the year, a Management Engagement Committee was constituted and it 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. I am pleased to report that the Board agreed with the Committee s recommendation that the continued appointment of the Manager is very much in the interests of shareholders as a whole. JPMorgan European Smaller Companies Trust plc. Annual Report & Accounts

6 Strategic Report continued Chairman s Statement continued Proposed Sub-Division of the Company s Share Capital The Board is proposing to implement a sub-division of the Company s share capital. The Company s share price was 1,200.0 pence per share at the year end and a stock split would assist with the practicalities of investors choosing to invest through platforms, regular savings schemes or by way of dividend reinvestment as they would be left with a smaller potential cash balance following any investment. This may increase the attractiveness of the Company s shares to potential investors and may also increase the liquidity in the market for the Company s shares. In the five years to 31st March 2014, the Company s share price has increased from pence per share to 1,200.0 pence per share. Therefore the Directors believe it is appropriate to recommend a five for one share split, which will increase the number of ordinary shares in issue by a factor of five. Shareholders should note that the proposed sub-division of the Company s share capital will not affect the overall value of their holdings in the Company because although the share price will effectively be divided by five, they will have five times the number of shares previously held. Based on the average price per share for the year ending 31st March 2014 of 1,015.0 pence per share, and following a sub-division, each ordinary shareholder would receive five new shares for every one ordinary share previously held and the five new shares would trade at pence per share. This information is provided for illustrative purpose only. The market price of the shares both before and after the completion of the proposed sub-division, will vary depending on market conditions at the relevant time. The proposed sub-division of the Company s share capital is subject to shareholder approval at the Annual General Meeting. Annual General Meeting The Company s Annual General Meeting will be held at the Manager s new offices at 60 Victoria Embankment, London EC4Y 0JP, on Tuesday, 8th July 2014 at 12 noon. The Investment Managers will make a presentation covering the past year and their outlook for the current year. Shareholders are invited to join the Investment Managers and the Board for lunch following the Annual General Meeting, when there will be opportunities for informal questions. Outlook The Investment Managers still find many positive investment opportunities for the Company. The European small cap index consists of more than 1,000 stocks and other stocks closely aligned with it. However, the average stock in this sector is covered by only four analysts compared with seventeen for large cap stocks. This under-researched sector therefore presents good opportunities for investors. Carolan Dobson Chairman 23rd May JPMorgan European Smaller Companies Trust plc. Annual Report & Accounts 2014

7 Investment Managers Report Investment Scope and Process Jim Campbell The objective of the Company is to achieve capital growth from a portfolio of quoted smaller companies in Europe, 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 index, the Euromoney (formerly known as HSBC) Smaller European Companies (ex UK) Index. At the end of March 2014 the index consisted of 1,000 companies with a market value of between 81 million and 4.5 billion across fifteen countries. This universe of potential investments is screened using a proprietary multi-factor model to the results of which we apply fundamental analysis. The investment process is driven by bottom-up stock selection with a focus on identifying market leading growth companies with a catalyst for outperformance. Position sizing is determined by investment conviction and trading liquidity in a stock. Investments are sold when there is a fundamental negative change in business prospects, long term price momentum has broken down or the market capitalisation has outgrown significantly the benchmark index. The policy is not to hedge the currency exposure of the portfolio s assets. The Board has established a liquidity range of between 20% cash and 20% gearing within which the Investment Managers may operate. Francesco Conte Performance attribution for the year ended 31st March 2014 % % Contributions to total returns Benchmark total return Asset allocation +1.9 Stock selection +2.4 Gearing/cash effect +3.6 Currency effect +0.4 Investment managers contribution +8.3 Portfolio total return Management fee/other expenses 1.3 Share repurchases +0.3 Tender offer +0.5 Other effects 0.5 Return on net assets Effect of decrease in discount +3.0 Return to shareholders Market Review The easing of tensions in the Eurozone, aggressively expansionary monetary policies by central banks, a less bad than expected economic outlook and attractive valuations combined to make the financial year extremely strong for equities. In the twelve months to 31st March 2014 the large company MSCI Europe (ex UK) Index rose by 33.5% in sterling. Smaller companies performed equally well and the benchmark Euromoney Smaller European Companies (ex UK) Index increased by 32.8%. Portfolio Performance We are pleased to report that, on a total return basis, the net asset value of the Company rose by 40.6% over the year, outperforming the benchmark index by 7.8% thanks to positive stock selection and successful management of the portfolio s gearing. Top stock contributors included the Spanish wind turbine manufacturer Gamesa and Dutch postal operator PostNL on restructuring, Italian online luxury goods retailer Yoox on continued strong growth and Greek Stock Exchange Hellenic Exchanges on substantial improvement in the Greek economy. Stocks which failed to deliver expected returns included Spanish media group Atresmedia, Norwegian salmon producer Marine Harvest and Italian cement group Buzzi Unicem. We were geared in low double digit figures for much of the period, reflecting our ability to find attractively valued investment opportunities. We ended the year at 12.6% gearing. Source: Xamin/Datastream/JPMAM/Morningstar. All figures are on a total return basis. Performance attribution analyses how the Company achieved its recorded performance relative to its benchmark index. A glossary of terms and definitions is provided on page 67. JPMorgan European Smaller Companies Trust plc. Annual Report & Accounts

8 Strategic Report continued Investment Managers Report continued 12 Month Gearing v Benchmark Level Gearing Level (%) Index Level (%) Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar JPMorgan European Smaller Companies Trust plc cash/gearing level Benchmark Source: JPMorgan Asset Management, Euromoney. Top 10 Sector Active Positions Portfolio Positioning March 2013 March 2014 Software & Computer Services Chemicals Automobiles & Parts Industrial Engineering Nonlife Insurance Electricity Food Producers General Industrials Equity Investment Instruments Real Estate Investment & Services Industrial Engineering Automobiles & Parts Software & Computer Services Support Services Electronic & Electrical Equipment Industrial Transportation Gas, Water & Multiutilities Oil Equipment, Services & Distribution Real Estate Investment & Services Pharmaceuticals & Biotechnology -8%-6%-4% -2% 0% 2% 4% 6% 8% 10% Source: JPMorgan Asset Management, Factset, Euromoney. -8%-6%-4% -2% 0% 2% 4% 6% 8% 10% At the sector level we have further increased overweight positions in economically sensitive sectors and reduced holdings in defensive sectors, such as pharmaceuticals, which benefit less from an economic upturn. New holdings which are benefiting from an economic upturn include French construction equipment producer Haulotte and camper van manufacturer Trigano on signs of long awaited upturns in their 6 JPMorgan European Smaller Companies Trust plc. Annual Report & Accounts 2014

9 industries. We are also scouting the market for companies whose growth rates are accelerating as their industries are undergoing change. Two such notable investments are the French videogame publisher Ubisoft, as it should benefit from a new console cycle and a very strong games line-up and Saft, the world leader in the low growth nickel batteries market which is vastly increasing its growth opportunities by entry into the lithium-ion battery market. We are maintaining positions in secular growth businesses such as Italian online retailer of luxury goods Yoox and French food and pharmaceutical testing company Eurofins Scientific. Valuation In terms of valuation, smaller companies in Europe now trade on a price/book multiple comparable to large companies. As shown below, this is towards the top end of the range in which they have traded over the last twenty years. Nevertheless, as also can be seen below, smaller companies are trading in line with their long term average on an absolute basis. So whilst the asset class is not as cheap as it has been, it is not yet expensive, especially when we consider that we are on the cusp of an earnings recovery; European earnings are on average about 30% below the 2007 peak so the scope for an earnings recovery is substantial. European Smaller Company Valuations Relative Valuations Price/Book Absolute Valuations Price/Book 5% Expensive 2.5 0% 5% 10% 15% 20% Avg. +1 Stdev 2.0 Avg. +1 stdev 25% % 1 Stdev Cheap 35% 40% Apr-95 Jun-98 Aug-01 Oct-04 Dec-07 Feb-11 Mar Apr-95 Small Cap/Large Cap 1 stdev Jun-98 Aug-01 Oct-04 Dec-07 Feb-11 Mar-14 Source: European Quantitative Research, Citigroup Investment Research. Data as at 31st March Cumulative Returns 20 years in sterling terms Euromoney Smaller European Companies Net Index MSCI Europe Net Index JPMorgan European Smaller Companies Trust plc. Annual Report & Accounts

10 Strategic Report continued Investment Managers Report continued Calendar Years Small Companies vs. Large Companies % 6% 10% 2% 16% 16% 10% 3% 1% 6% 22% 12% 11% 13% 9% 8% YTD Source: Thomson Datastream. Data to 31st March All indices expressed in EUR and include net reinvested dividends. Indices do not include fees or operating expenses and are not available for actual investment. Past performance is not an indication of future performance. 27% 14% 11% 6% 12% 5% Outlook If last year was all about economies getting less bad, our impression from conversations with corporate management is that economies began to stabilise late in the year and are now showing signs of improvement. The periphery of Europe has undergone dramatic economic change and most of these countries now, if not already, are very close to achieving primary and current account surpluses. This change has come about at significant social cost but with surprisingly little unrest. Thankfully the hard work appears to be paying off as these economies are finally showing signs of improvement based on fundamental and structural change that should enable them to grow in a sustainable manner. The United States, after a weather related economic pause in the first quarter of 2014, appears to have accelerated its growth trajectory and emerging markets, having endured a bout of current account deficit fears, appear to be stabilising. Despite so much good news, markets currently are being held back by fears over civil unrest in Ukraine, concerns around the end of loose monetary policies, generally lacklustre earnings and fear of an electorate backlash at the upcoming European elections. We believe that central banks will maintain loose monetary policies for some time to come; European Central Bank President Draghi and Federal Reserve Bank Chair Yellen have repeatedly confirmed that they wish to remain accommodating as both deem unemployment levels to be unacceptably high. The current pause in the markets can be viewed as a phase of consolidation, rather than a top, following the rapid rise of the last twelve months. Despite these uncertainties, we continue to identify attractively valued investment opportunities. The companies we talk to are generally finding life easier than they have at any time since the peak of 2007 and, whilst today their businesses are some way off those peaks, the hardship of the intervening years has made management and balance sheets much stronger. If we combine the economic upturn with a resurgence in corporate activity, such as the proposed mega-cap mergers of Lafarge and Holcim in cement, Pfizer and AstraZeneca in pharmaceuticals and GE and Siemens with Alstom in the engineering sector, we can look to the future with continued optimism Jim Campbell Francesco Conte Investment Managers 23rd May JPMorgan European Smaller Companies Trust plc. Annual Report & Accounts 2014

11 Summary of Results Total returns for the year ended 31st March Return to shareholders % +20.6% Return on net assets % +16.7% Benchmark return % +14.7% % change Net asset value, share price, discount and market data at 31st March Shareholders funds ( 000) 433, , Net asset value per share 1,353.4p 975.7p Share price 1,200.0p 849.0p Share price discount to net asset value per share 11.3% 13.0% Shares in issue 32,029,577 35,781,923 Euromoney Smaller European Companies (ex UK) Index in sterling terms (capital only) Revenue for the year ended 31st March Gross revenue return ( 000) 8,016 8, Net revenue available for shareholders ( 000) 5,047 6, Revenue return per share 14.94p 16.47p 9.3 Dividend per share 14.5p 16.0p 9.4 Gearing at 31st March % 12.9% Ongoing Charges % 1.26% A glossary of terms and definitions is provided on page Source: Morningstar. 2 Source: J.P. Morgan. 3 Source: Euromoney. The Company s benchmark is the Euromoney Smaller European Companies (ex UK) Total Return Index in sterling terms. 4 Source: Euromoney. 5 Gearing represents the excess amount above shareholders funds of total assets expressed as a percentage of the shareholders funds. Total assets include total investments and net current assets/liabilities less cash/cash equivalents and excluding bank loans of less than one year. If the amount calculated is negative, this is shown as a net cash position. 6 Management fee and all other operating expenses, excluding finance costs, expressed as a percentage of the average of the daily net assets during the year. Ongoing charges are calculated in accordance with guidance issued by the Association of Investment Companies in May JPMorgan European Smaller Companies Trust plc. Annual Report & Accounts

12 Strategic Report continued Performance Ten Year Performance Figures have been rebased to 100 at 31st March Source: Morningstar/HSBC. JPMorgan European Smaller Companies share price total return. JPMorgan European Smaller Companies net asset value total return. Benchmark. Performance Relative to Benchmark Figures have been rebased to 100 at 31st March Source: Morningstar. JPMorgan European Smaller Companies share price total return. JPMorgan European Smaller Companies net asset value total return. Benchmark. 10 JPMorgan European Smaller Companies Trust plc. Annual Report & Accounts 2014

13 Ten Year Financial Record At 31st March Total assets less current liabilities ( m) Net asset value per share (p) , ,353.4 Share price (p) ,200.0 Share price discount (%) Gearing/(net cash) (%) (3.8) (1.6) (1.9) Ongoing Charges (%) Year ended 31st March Gross revenue return ( 000) 3,446 4,218 4,898 7,767 6,149 10,067 8,431 9,241 10,215 8,481 8,016 Net revenue/(loss) available for Shareholders ( 000) ,279 (376) 7,363 2,167 2,369 7,055 6,134 5,047 Return/(loss) per share (p) (0.75) Total dividend(s) per share (p) Rebased to 100 at 31st March 2004 Share price total return Net asset value total return Benchmark A glossary of terms and definitions is provided on page From 2006 onwards discount figures have been sourced from Bloomberg and are calculated using the net asset value at the year end, excluding the current year revenue account balance. Prior years have not been restated. 2 Gearing represents the excess amount above shareholders funds of total assets expressed as a percentage of the shareholders funds. Total assets include total investments and net current assets/liabilities less cash/cash equivalents and excluding bank loans of less than one year. If the amount calculated is negative, this is shown as a net cash position. 3 Management fee and all other operating expenses, excluding finance costs, expressed as a percentage of the average of the daily net assets during the year ( : Total Expense Ratio: Management fee and all other expenses, excluding finance costs, expressed as a percentage of the average of the month end net assets during the year; 2008 and prior years: the average of the opening and closing net assets). Ongoing charges are calculated in accordance with guidance issued by the Association of Investment Companies in May Source: Morningstar. 5 Source: Euromoney. The Company s benchmark is the Euromoney Smaller European Companies (ex UK) Total Return Index in sterling terms. JPMorgan European Smaller Companies Trust plc. Annual Report & Accounts

14 Strategic Report continued Ten Largest Investments 1 at 31st March Valuation Valuation Company Business 000 % % 2 Freenet Telecoms service provider 13, , Aareal Bank 4 Institutional broker 11, Drillisch 3 Telecoms service provider 11, , Geox 4 Footwear retailer 10, Sogefi 4 Automobile parts manufacturer 10, Haulotte Group 4 Material handling manufacturer 10, Ubisoft Computer software 10, , Banco 4 Banking 10, Saft Groupe 4 Equipment manufacturer 9, Trigano 4 Recreational vehicle manufacturer 9, Total 5 106, Excluding the holding in the JPMorgan Euro Liquidity Fund, which is held as an alternative to cash. 2 Based on total assets less current liabilities of 474.8m (2013: 366.0m). 3 Not included in the ten largest investments at 31st March Not held in the portfolio at 31st March At 31st March 2013, the value of the ten largest investments amounted to 95.2m, representing 26.0% of total assets less current liabilities. 12 JPMorgan European Smaller Companies Trust plc. Annual Report & Accounts 2014

15 Portfolio Analyses 31st March st March 2013 Portfolio Benchmark Portfolio Benchmark Geographical Analysis % % % % Italy France Germany Netherlands Switzerland Spain Sweden Greece Portugal Belgium Denmark Finland Austria Ireland Norway United States Luxembourg 0.1 Russia 0.2 Total equities Liquidity fund Net current liabilities (4.7) (11.5) Total Based on total assets less current liabilities of 474.8m (2013: 366.0m). 1 European companies listed in the United States. 31st March st March 2013 Portfolio Benchmark Portfolio Benchmark Sector Analysis % % % % Industrials Consumer Discretionary Information Technology Financials Materials Telecommunication Services Consumer Staples Health Care Energy Utilities Total equities Liquidity fund Net current liabilities (4.7) (11.5) Total Based on total assets less current liabilities of 474.8m (2013: 366.0m). JPMorgan European Smaller Companies Trust plc. Annual Report & Accounts

16 Strategic Report continued Investment Activity during the year ended 31st March 2014 Value at Changes Value at 31st March 2013 Purchases Sales in value 31st March % % Italy 57, ,567 (105,435) 29,868 93, France 64, ,362 (110,295) 19,989 70, Germany 54, ,944 (246,425) 11,798 70, Netherlands 53, ,239 (127,007) 21,052 46, Switzerland 46, ,894 (89,172) 10,013 44, Spain 1, ,367 (59,990) 10,926 35, Sweden 33, ,305 (151,879) 4,677 28, Greece 3, ,634 (32,848) 12,784 21, Portugal 25,276 (8,943) 1,612 17, Belgium 3, ,353 (4,629) 2,579 15, Denmark 31, ,953 (129,983) 3,459 13, Finland 19, ,142 (45,988) (1,606) 13, Austria 3, ,172 (16,031) 2,159 10, Ireland 11, ,933 (25,406) 935 4, Norway 9, ,799 (77,441) (2,592) Total portfolio 394, ,196,940 (1,231,472) 127, , Liquidity fund 13, ,888 (233,285) (511) 10, Net current liabilities (42,114) (11.5) 19,596 (22,518) (4.7) Total assets less current liabilities 366, ,426,828 (1,464,757) 146, , JPMorgan European Smaller Companies Trust plc. Annual Report & Accounts 2014

17 List of Investments at 31st March 2014 Valuation Company 000 Italy Geox 10,791 Sogefi 10,456 Brembo 8,188 Banca Generali 8,051 Interpump 7,517 Yoox 7,491 Buzzi Unicem 6,709 Gruppo Editoriale L'Espresso 6,629 Marr 5,670 Datalogic 5,373 Azimut 5,275 SIAS 5,142 Reply 3,666 Danieli 2,340 IMA 291 Credito Emiliano 251 Total 93,840 France Haulotte Group 10,450 Ubisoft 10,443 Saft Groupe 9,669 Trigano 9,268 Altran Technologies 9,032 Eurofins Scientific 7,731 Alten 7,623 Faiveley Transport 4,572 Sopra 1,891 Total 70,679 Valuation Company 000 Germany Freenet 13,110 Aareal Bank 11,219 Drillisch 11,170 SAF Holland 6,469 Bechtle 5,748 CTS Eventim 5,650 Jungheinrich 5,612 Rheinmetall 5,121 Amadeus Fire 2,746 Wirecard 2,100 Norma Group 1,498 Total 70,443 Netherlands Aalberts Industries 8,042 BAM Groep 7,881 USG People 7,779 Arcadis 7,700 TKH 7,546 Koninklijke Ten Cate 7,155 Total 46,103 Switzerland Bucher Industries 8,271 Fischer (Georg) 7,992 Temenos 7,822 Komax 7,089 Burckhardt Compression 5,299 Autoneum 4,900 Bossard 1,582 Gurit 1,131 Ascom 852 EFG International 25 Total 44,963 JPMorgan European Smaller Companies Trust plc. Annual Report & Accounts

18 Strategic Report continued List of Investments continued Valuation Company 000 Spain Grupo Catalana Occidente 8,633 Sacyr 8,404 Gamesa 7,565 Atresmedia 5,980 Bolsas Y Mercados Espanoles 5,080 Total 35,662 Sweden Hexpol 5,200 Fastighets Balder 4,737 Indutrade 4,262 Bilia 4,068 Lindab International 3,844 JM 2,885 Betsson 2,750 Peab 1,051 Haldex 118 Total 28,915 Greece Jumbo 5,958 Titan Cement 5,685 Folli Follie 5,427 Fourlis 2,794 Ellaktor 1,583 Total 21,447 Portugal Banco 10,150 Sonae 7,795 Total 17,945 Valuation Company 000 Belgium CFE 8,654 Arseus 6,900 Total 15,554 Denmark Royal Unibrew 7,726 Rockwool International 5,974 Total 13,700 Austria Austriamicrosystems 5,461 Wienerberger 4,747 Total 10,208 Finland Huhtamaki 7,142 Sanitec Corporation 6,019 Total 13,161 Ireland Kingspan 4,724 Total 4,724 Liquidity Fund JPM Euro Liquidity Fund 10,003 Total 10,003 Total Investments 497,347 Total investments comprise 487,344,000 in equity shares and 10,003,000 in a liquidity fund. 16 JPMorgan European Smaller Companies Trust plc. Annual Report & Accounts 2014

19 The aim of the Strategic Report is to provide shareholders with the ability to assess how the Directors have performed their duty to promote the success of the Company during the year under review. To assist shareholders with this assessment, the Strategic Report sets out the structure and objective of the Company, its investment policies and risk management, investment limits and restrictions, performance and key performance indicators, share capital, principal risks and how the Company seeks to manage those risks, the Company s environmental, social and ethical policy and finally its future developments. Business Review Business of the Company JPMorgan European Smaller Companies Trust plc is an investment trust company that has a premium listing on the London Stock Exchange. Its objective is to achieve capital growth from smaller European companies (excluding the United Kingdom). In seeking to achieve this objective, the Company employs JPMorgan Asset Management (UK) Limited ( JPMAM or the Manager ) to actively manage the Company s assets. The Board has determined an investment policy and related guidelines and limits as described below. The Company is subject to UK and European legislation and regulations including UK company law, Financial Reporting Standards, the UK Listing, Prospectus, Disclosure and Transparency Rules, taxation law and the Company s own Articles of Association. The Company is an investment company within the meaning of Section 833 of the Companies Act 2006 and has been approved by HM Revenue & Customs as an investment trust (for the purposes of Sections 1158 and 1159 of the Corporation Tax Act 2010) for the year ended 31st March 2013 and future years. The Directors have no reason to believe that approval will not continue to be obtained. The Company is not a close company for taxation purposes. Investment Policies and Risk Management In order to achieve its investment objective and to seek to manage risk, the Company invests in a diversified portfolio of smaller companies in Europe, 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 index which, at the end of March 2014, consisted of 1,000 companies with a market value of between 81 million and 4.5 billion across fifteen countries. The Company manages liquidity and borrowings to increase potential sterling returns to shareholders. 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 normally hedge the foreign currency exposure of the remainder of the portfolio. The investment policy emphasises capital growth rather than income and shareholders should therefore expect dividends to vary from year to year. The Board has set no minimum or maximum limits on the number of investments in the portfolio but, in the year under review, the number of investments ranged between approximately 77 to 93. To gain the appropriate exposure, the Investment Managers are permitted to invest in pooled funds. JPMAM is responsible for management of the Company s assets. On a day-to-day basis the assets are managed by two investment managers based in London, supported by a 39-strong European equity team. It should be noted that the Company invests in the shares of smaller companies which tend to be more volatile than those of larger companies and the Company s shares should therefore be regarded as carrying greater than average risk. Investment Restrictions and Guidelines The Board seeks to manage the Company s risk by imposing various investment limits and restrictions: The Company must demonstrate that it has policies in place to spread its investment risk. The Company will not invest more than 12.5% of its total assets in any one individual stock at the time of acquisition. (Prior to 1st April 2012, as an investment trust, the Company was not permitted to invest more than 15% of its assets in any one investment at the time of acquisition. This limit no longer applies.) The Company does not normally invest in unquoted investments and to do so requires prior Board approval. No more than 25% of the Company s assets may be invested in the aggregate of: (i) securities not listed on a recognised exchange; and (ii) holdings in which the Company has 20% or more of the issued equities. It is unlikely that the Company would invest in companies that fall into either of these categories and did not do so in the year under review. In accordance with the Listing Rules of the UK Listing Authority, the Company will not invest more than 15% of its JPMorgan European Smaller Companies Trust plc. Annual Report & Accounts

20 Strategic Report continued Business Review continued gross assets in other UK listed investment companies and will not invest more than 10% of its gross assets in companies that themselves may invest more than 15% of gross assets in UK listed investment companies. The Board has set a normal gearing range of 20% net cash to 20% geared. The Company does not normally enter into derivative transactions and to do so requires prior Board approval. These limits and restrictions may be varied by the Board at any time at its discretion. Compliance with the Board s investment restrictions and guidelines is monitored continuously by the Manager and is reported to the Board on a monthly basis. discount to net asset value per share and ongoing charges. Unless there is a particular reason for the Board to change the KPIs (which would require an explanation to shareholders), consistency is maintained to provide continuity. Further details of the principal KPIs are given below: Performance against the benchmark index This is the most important KPI by which performance is judged. Information on the Company s performance is given in the Chairman s Statement and the Investment Managers Report. Performance Relative to Benchmark Index Figures have been rebased to 100 at 31st March Performance In the year to 31st March 2014, the Company produced a total return to shareholders of +43.6% and a total return on net assets of +40.6%. This compares with the return on the Company s benchmark index of +32.8%. As at 31st March 2014 the value of the Company s investment portfolio was million. The Investment Managers Report on pages5to8includes a review of developments during the year as well as information on investment activity within the Company s portfolio. Total Return, Revenue and Dividends Gross return for the year amounted to million (2013: 48.1 million) and net total return after deducting the management fee, other administrative expenses, finance costs and taxation amounted to million (2013: 43.0 million). Net revenue return on ordinary activities after taxation for the year amounted to 5.0 million (2013: 6.1 million). An interim dividend of 6.0p per share (2013: 6.0p) was paid during the year, costing 1.9 million. The Directors have proposed a final dividend of 8.5p (2013: 10.0p) per share. This dividend will cost 2,723,000 and the revenue reserve would have amounted to 2,683,000 had the dividend been accounted for in the year. Key Performance Indicators ( KPIs ) At each Board meeting the Directors consider a number of performance measures to assess the Company s success in achieving its objectives. The principal KPIs are performance against the benchmark index, performance against the Company s peers, performance attribution, share price Source: Morningstar/Euromoney. JPMorgan European Smaller Companies share price total return. JPMorgan European Smaller Companies net asset value total return. The benchmark is represented by the grey horizontal line. Ten Year Performance Figures have been rebased to 100 at 31st March Source: Morningstar/Euromoney. JPMorgan European Smaller Companies share price total return. JPMorgan European Smaller Companies net asset value total return. Benchmark JPMorgan European Smaller Companies Trust plc. Annual Report & Accounts 2014

21 Performance against the Company s peers The principal objective is to achieve capital growth relative to the benchmark. However, the Board also monitors the performance relative to a broad range of competitor funds. Performance attribution The purpose of performance attribution analysis is to assess how the Company achieved its performance relative to its benchmark index, i.e. to understand the impact on the Company s relative performance of the various components such as asset allocation and stock selection. Details of the attribution analysis for the year ended 31st March 2014 are given in the Investment Managers Report on page5. Share price discount to net asset value ( NAV ) per share The Board has for several years operated a share repurchase programme which seeks to address imbalances in supply and demand for the Company s shares within the market and thereby seek to manage the volatility and absolute level of the discount to NAV per share at which the Company s shares trade. In the year to 31st March 2014, the discount ranged between 3.7% and 17.8%, (using month end data, with debt at par value). More information on the Board s share repurchase policy is given in the Chairman s Statement. Discount Source: Datastream (month end data). JPMorgan European Smaller Companies discount (with debt at par value) Ongoing Charges The ongoing charges represent the Company s management fee and all other operating expenses, excluding finance costs, expressed as a percentage of the average of the daily net assets during the year. The ongoing charges for the year ended 31st March 2014 were 1.31% (2013: 1.26%). The Board reviews each year an analysis which shows a comparison of the Company s ongoing charges and its main expenses with those of its peers. Share Capital The Company has authority both to issue new shares for cash at a premium to net asset value and to repurchase shares in the market (for cancellation or to be held in Treasury) at a discount to net asset value. During the year the Company repurchased a total of 3,752,346 ordinary shares of 25 pence each for cancellation, representing 10.5% of the issued share capital at the beginning of the year, for a total consideration of 39.9 million. This figure includes 1,782,346 ordinary shares of 25 pence each repurchased and cancelled as a result of a tender offer in July Since the year end, the Company has not repurchased any further ordinary shares of 25 pence each for cancellation. The Company currently cancels all shares repurchased. None are held in Treasury. The Company did not issue any new shares during the year and, at the time of writing, has not done so since the Company s year end. The Company does not have authority to reissue shares from Treasury at a discount to net asset value and will not seek such authority at the forthcoming Annual General Meeting. It will however, seek to renew its authority to reissue shares from Treasury at a premium to net asset value. Resolutions to renew the authority to issue new shares and to repurchase shares will be put to shareholders at the forthcoming Annual General Meeting. The full text of those resolutions are set out in the Notice of Meeting on pages 64 and 65. Principal Risks With the assistance of the Manager, the Board has drawn up a risk matrix, which identifies the key risks to the Company. These key risks fall broadly under the following categories: Investment and Strategy: An inappropriate investment strategy, for example asset allocation or the level of gearing, may lead to underperformance against the Company s benchmark index and peer companies, resulting in the Company s shares trading on a wider discount. The Board manages these risks by diversification of investments through its investment restrictions and guidelines which are monitored and reported on by the JPMorgan European Smaller Companies Trust plc. Annual Report & Accounts

22 Strategic Report continued Business Review continued Manager. JPMAM provides the Directors with timely and accurate management 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 Investment Managers, who attend all Board meetings, and reviews data which show statistical measures of the Company s risk profile. The Investment Managers employ the Company s gearing within a strategic range set by the Board. The Board holds a separate meeting devoted to strategy each year. Market: Market risk arises from uncertainty about the future prices of the Company s investments. It represents the potential loss that the Company might suffer through holding investments in the face of negative market movements. 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 JPMAM. The Board monitors the implementation and results of the investment process with the Manager. Accounting, Legal and Regulatory: 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 above. Were the Company to breach Section 1158, it might lose investment trust status and, as a consequence, gains within the Company s portfolio could be subject to Capital Gains Tax. The Section 1158 qualification criteria are continually monitored by JPMAM and the results reported to the Board each month. The Company must also comply with the provisions of the Companies Act and, since its shares are listed on the London Stock Exchange, the UKLA Listing Rules and Disclosure and Transparency Rules ( DTRs ). A breach of the Companies Act could result in the Company and/or the Directors being fined or the subject of criminal proceedings. Breach of the UKLA Listing Rules or DTRs could result in the Company s shares being suspended from listing which in turn would breach Section The Board relies on the services of its Company Secretary, JPMAM and its professional advisers to ensure compliance with the Companies Act, the UKLA Listing Rules and DTRs. Corporate Governance and Shareholder Relations: Details of the Company s compliance with Corporate Governance best practice, including information on relations with shareholders, are set out in the Corporate Governance report on pages 27 to 32. Operational: Loss of key staff by JPMAM, such as the Investment Managers, could affect the performance of the Company. Disruption to, or failure of, JPMAM s accounting, dealing or payments systems or the Custodian s records could prevent accurate reporting and monitoring of the Company s financial position. Details of how the Board monitors the services provided by JPMAM and its associates and the key elements designed to provide effective internal controls are included within the Risk Management and Internal Controls section of the Corporate Governance report on pages 30 and 31. Going concern: Pursuant to the Sharman Report, Boards are now advised to consider going concern as a potential risk, whether or not there is an apparent issue arising in relation thereto. Going concern is considered rigorously on an ongoing basis and the Board s statement on going concern is detailed on page 24. Financial: The financial risks arising from the Company s financial instruments include market price risk, interest rate risk, liquidity risk and credit risk. Further details are disclosed in note 21 on pages 55 to 61. Board Diversity When recruiting a new Director, the Board s policy is to appoint individuals on merit. Diversity is important in bringing an appropriate range of skills and experience to the Board and the Board is diverse on a number of bases, namely gender, race and nationality. Employees, Social, Community and Human Rights Issues The Company has a management contract with JPMAM. It has no employees and all of its Directors are non-executive. The day to day activities are carried out by third parties. There are therefore no disclosures to be made in respect of employees. The Board notes the JPMAM policy statements in respect of Social, Community and Environmental and Human Rights issues, as highlighted in italics: 20 JPMorgan European Smaller Companies Trust plc. Annual Report & Accounts 2014

23 Social, Community, Environmental and Human Rights JPMAM believes that companies should act in a socially responsible manner. Although our priority at all times is the best economic interests of our clients, we recognise that, increasingly, non-financial issues such as social and environmental factors have the potential to impact the share price, as well as the reputation of companies. Specialists within JPMAM s environmental, social and governance ( ESG ) team are tasked with assessing how companies deal with and report on social and environmental risks and issues specific to their industry. JPMAM is also a signatory to the United Nations Principles of Responsible Investment, which commits participants to six principles, with the aim of incorporating ESG criteria into their processes when making stock selection decisions and promoting ESG disclosure. Our detailed approach to how we implement the principles is available on request. Greenhouse Gas Emissions The Company is managed by JPMAM. It has no employees and all of its Directors are non-executive, the day to day activities being carried out by third parties. There are therefore no disclosures to be made in respect of employees. The Company itself has no premises, consumes no electricity, gas or diesel fuel and consequently does not have a measurable carbon footprint. The Company s manager, JPMAM, is a signatory to the Carbon Disclosure Project and JPMorgan Chase is a signatory to the Equator Principles on managing social and environmental risk in project finance. Future Developments Clearly, the future development of the Company is much dependent upon the success of the Company s investment strategy in the light of economic and equity market developments and the continued support of its shareholders. The Investment Managers discuss the outlook in their report on page8. For and on behalf of the Board Carolan Dobson, Chairman 23rd May 2014 JPMorgan European Smaller Companies Trust plc. Annual Report & Accounts

24 Governance Board of Directors Carolan Dobson (Chairman) A Director since September Appointed Chairman in Last reappointed to the Board: 2013 Other directorships: Chairman of Aberdeen Smaller Companies High Income Trust plc, Non-Executive Director of Brunner Investment Trust plc and Schroder UK Growth Fund Limited. Chairman, Trustee and/or Adviser of a number of pension funds and member of the Competition and Markets Authority. She is also a Trustee of NEST, the UK Government s auto-enrolment pension scheme and Chairman of the ISG. She has a wealth of investment experience, having been Head of UK Equities at Abbey Asset Managers, Head of Investment Trusts at Murray Johnstone and fund manager of Murray Income plc. Connections with Manager: None Shared Directorships with any other Trust Directors: None Shareholding in Company: 2,000 shares Anthony Davidson (Chairman of the Audit Committee) A Director since May Last reappointed to the Board: 2013 Other directorships: Chairman of Shires Income PLC. Director of a number of life companies within the Phoenix Group, namely Phoenix Life Assurance Limited, National Provident Life Limited and Phoenix Life Limited. Formerly Chief Executive of Provincial Insurance plc. Connections with Manager: Formerly Chairman of JPMorgan Fleming Worldwide Income Investment Trust plc. Shared Directorships with other Directors: None Shareholding in Company: 3,146 shares Federico Marescotti A Director since December Last reappointed to the Board: 2013 Other directorships: Executive Chairman of Vela Capital, Italy. A Director of Dunedin Enterprise Investment Trust plc. A Director of the Illy Group of companies, Italy, and an Adviser to ADCO International GMBH, Germany. Connections with Manager: None Shared Directorships with other Directors: None Shareholding in Company: 1,251 shares 22 JPMorgan European Smaller Companies Trust plc. Annual Report & Accounts 2014

25 Stephen White A Director since 1st April Last reappointed to the Board: 2013 Other directorships: Head of European and US equities at British Steel Pension Fund, responsible for the day to day management of the Fund s Europe ex-uk and US equity portfolios. Director of New India Investment Trust plc and formerly a director of Global Special Opportunities Trust Plc, Head of European Equities at F&C Asset Management and Manager of Foreign & Colonial Eurotrust PLC and Deputy Manager of the Foreign & Colonial Investment Trust Plc. Connections with Manager: None Shared Directorships with other Directors: None Shareholding in Company: 5,000 shares Ashok Gupta A Director since 1st January Last reappointed to the Board: 2013 Other directorships: Director of Automobile Association Insurance Services Limited, New Ireland Assurance plc, Old Mutual Wealth Management and evalue. A member of the FRC Actuarial Council. Formerly advisor to the Group Chief Executive Officer at Old Mutual plc and formerly Director of The Pensions Regulator, J Rothschilds Assurance and the Pearl Group. Connections with the Manager: None Shared Directorships with other Directors: None Shareholding in Company: 1,500 shares All Directors are members of the Audit, Management Engagement and Nomination and Remuneration Committees and are considered by the Board to be independent of the Manager. JPMorgan European Smaller Companies Trust plc. Annual Report & Accounts