Annual Report JPMorgan European Smaller Companies Trust plc · 1 Financial Results 2 Chairman’s...

JPMorgan European Smaller Companies Trust plcAnnual Report & Accounts for the year ended 31st March 2012

Annual Report2012

European Smaller cover_European Smaller Cover 11/06/2012 10:23 Page 2

Features

Contents

About the Company

1 Financial Results2 Chairman’s Statement

Investment Review

5 Investment Managers’ Report10 Summary of Results11 Performance12 Ten Year Financial Record13 Ten Largest Investments14 Portfolio Analyses 15 Investment Activity 16 List of Investments

Directors’ Report

18 Board of Directors20 Directors’ Report20 Business Review25 Corporate Governance30 Directors’ Remuneration Report

Accounts

31 Statement of Directors’Responsibilities

32 Independent Auditors’ Report33 Income Statement34 Reconciliation of Movements inShareholders’ Funds

35 Balance Sheet36 Cash Flow Statement37 Notes to the Accounts

Shareholder Information

56 Shareholder Analysis57 Notice of Annual General Meeting60 Glossary of Terms and Definitions61 Information about the Company

Objective

Capital growth from smaller European companies (excluding the UK).

Investment Policies

– To invest in a diversified portfolio of smaller companies in Europe, excluding the UK.

– To manage liquidity and borrowings to increase potential returns to shareholders.The Board’s current policy is to be between 80% and 120% invested.

– To emphasise capital growth rather than income. Therefore shareholders shouldexpect 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 smaller companies which tend to bemore volatile than larger companies and the Company’s shares should therefore beregarded as carrying greater than average risk.

Benchmark

HSBC Smaller European Companies (ex UK) Total Return Index in sterling terms.

Capital Structure

At 31st March 2012, the Company’s issued share capital comprised 40,083,803ordinary 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.


JPMorgan European Smaller Companies Trust plc. Annual Report & Accounts 2012 1

Financial ResultsTotal returns (includes dividends reinvested)

Performancefor periods ended 31st March 2012

–21.3%Return to shareholders1

(2011: +27.1%)

17.0pDividend

(2011: 4.0p)

–21.3%Return on net assets2

(2011: +21.7%)

–19.6%Benchmark return3

(2011: +14.2%)

A glossary of terms and definitions is provided on page 60.

1Source: Morningstar.2Source: J.P. Morgan.3Source: HSBC. The Company’s benchmark is the HSBC Smaller European Companies (ex UK) Total Return Index in sterling terms.

JPMorgan European Smaller Companies – return to shareholders1

JPMorgan European Smaller Companies – return on net assets1

Benchmark return1

%

–21.3 –21.3 –19.6

59.951.5

60.8

–8.6 –1.3 –9.7

233.0217.9

147.8

–50

0

50

100

150

200

250

10 Year Performance5 Year Performance3 Year Performance1 Year Performance

European Smaller_pp01_19_European Smaller_pp01_19 11/06/2012 10:12 Page 1

JPMorgan European Smaller Companies Trust plc. Annual Report & Accounts 20122

Chairman’s Statement

Performance

The year to 31st March 2012 witnessed a return to market volatility and negativereturns. The Company’s total return on net assets (i.e. with net income reinvested)was –21.3%, which compares with a return of –19.6% on the same basis from theCompany’s benchmark, the HSBC Smaller European Companies (ex UK) Total ReturnIndex in sterling terms. Whilst this is disappointing, the long-term performancerecord remains good; as you will note from the charts on page 1, the Company hasoutperformed the benchmark significantly over ten years.

A review of the market and more details on performance are given in the InvestmentManagers’ Report on the following pages and the Company’s total return for the yearcan be analysed by looking at the performance attribution analysis set out in thetable on page 6. This shows that our Investment Managers have steered us throughdifficult markets and used the available gearing effectively to produce a creditablereturn. The strengthening of sterling against the Euro over the year had a negativeimpact.

The discount of the Company’s share price to net asset value widened very marginallyover the year from 15.2% to 15.5% at year end, resulting in a total return toshareholders of –21.3%.

Revenue and Dividends

Historically, the Company has allocated expenses wholly to the revenue account, withthe exception of expenses incidental to the purchases and sales of investments. TheBoard reviewed this policy during the year in the light of its long term expected splitof returns. As a result we have decided, with effect from 1st April 2011, to capitalise70% of management fees and finance costs. A consequence of this change is thatearnings per share for the year have increased sharply. Net revenue return for theyear amounted to £7.1 million (2011: £2.4 million), thus increasing the positive balanceon the Company’s Revenue Reserve.

The Board’s policy is to pay out the vast majority of the revenue available each year.An interim dividend of 6.0p per share was paid on 16th January 2012. Subject toshareholder approval at the forthcoming Annual General Meeting, a dividend of11.0 pence per share will be paid on 31st August 2012 to shareholders on the registerat the close of business on 3rd August 2012. I would remind shareholders that theCompany’s objective is to achieve capital growth rather than income and hence thelevel of dividends is likely to vary from year to year.

Share Buybacks

Europe has remained firmly out of favour with investors and consistent with mostother investment trust companies in the European sector, the discount to net assetvalue at which the Company’s shares trade has remained wide over the year,averaging 13.9%. The Board has continued to use its share buyback authority toattempt to manage the volatility and absolute level of the discount. A total of1,269,000 shares were bought back during the year through ongoing buybacks.In addition, a total of 2,155,936 shares were cancelled as a result of the tender offermade in July 2011.



Reverse Tender Offer

The Board is concerned by the relatively wide level of discount of the Company’sshare price to NAV, which has persisted due to poor investor sentiment towardsEuropean stock markets, despite the excellent long term relative and absolute NAVperformance. Whilst the large majority of shareholders continue to be supportive ofthe Company and the Board’s pro-active efforts in utilising existing share buybackpowers, the Board is aware that at least one large long-term holder continues to seeka partial exit for its holding at a price which is reasonably close to NAV.

The Board has considered the position of the Company carefully, including theimportance of its size and the liquidity of its shares. Taking into account all relevantconsiderations, as announced on 9th May 2012, the Board has decided to implementa Reverse Tender Offer for up to 10% of the Company’s shares, with the objective ofproviding liquidity to the market whilst also providing an NAV uplift to the ongoingshareholders.

Under the Tender Offer, shareholders and J.P. Morgan savings product participantswill have a free choice to tender none, any or all of their shares at a single discountlevel or at different discount levels within the discount range, being from 3.0% to15.0% inclusive. Each discount level will represent a discount to the Tender NAV pershare on the calculation date at which tenders may be accepted. Discount levels mustbe within the discount range in increments of 2.0% only. After the closing date forshareholders, the Company will aggregate all of the shares tendered at the widestdiscount level with the total number of shares tendered within each decreasingdiscount level until the aggregate number of shares tendered in the discount levelsup to and including that discount level equals or exceeds the Tender limit (being 10%of the shares in issue on the record date).

The Reverse Tender Offer will require approval by Shareholders and a resolution willtherefore be put to shareholders at a General Meeting to be held immediately afterthe Annual General Meeting on 18th July 2012, which will also be the Record Date forthe Reverse Tender Offer. Full details are set out in the circular which accompaniesthis annual report.

The Board

Elisabeth Airey stood down from the Board at the conclusion of the 2011 AGM andI succeeded her as Chairman. I would like to record my thanks for her considerablecontribution to the Company. During the year the Board engaged the services of anindependent search consultant to recruit a new Director and on 1st April 2012,Stephen White was appointed. Stephen brings considerable investment experienceto the Board. He is currently Head of European and US equities at British SteelPension Fund, responsible for the day to day management of the Fund’s Europeex–UK and US equity portfolios. He was formerly Head of European Equities atF&C Asset Management and Manger of Foreign & Colonial Eurotrust PLC and DeputyManager of the Foreign & Colonial Investment Trust Plc.



Chairman’s Statement continued

Board Evaluation

The Nomination Committee carried out its annual evaluation of the Board, itsCommittees, the individual Directors and the Chairman earlier this year. The Boardtakes this review seriously and views it as an effective means of evaluating thecontinuing efficacy of the Board.

The Company’s Articles of Association require that all Directors who held office at thetime of the two preceding AGMs and did not retire by rotation at either of them mustretire at the next AGM. However, following the introduction of the UK CorporateGovernance Code, it is now considered best practice for all directors to stand forannual reappointment. Your Board has decided to adopt best practice and thereforeall Directors will seek reappointment on an annual basis from now on.

Manager Evaluation

During the year the Board carried out a formal review of the Manager, JPMorganAsset Management (UK) Limited (‘JPMAM’). This covered the investmentmanagement, company secretarial, administrative and marketing services providedto the Company by JPMAM and took into account their investment performancerecord, management processes, investment style, resources and risk controlmechanisms. The Board is satisfied with the performance of the Manager andconcluded that its continued appointment on the existing terms is very much in theinterests of shareholders as a whole.

Annual General Meeting

Your Directors and I very much look forward to welcoming you to the Company’sAGM which will be held at The Armourers’ Hall, 81 Coleman Street, London EC2R 5BJon Wednesday, 18th July 2012 at 12.00 noon. The Investment Managers will make apresentation reviewing the past year and commenting on the outlook for the currentyear. The meeting will be followed by a General Meeting to approve the ReverseTender Offer and, as usual, by a buffet lunch, providing shareholders the opportunityto meet the Directors and the Investment Managers.

Please submit in writing, or via the Company’s website, any detailed questions thatyou wish to raise at the AGM and/or General Meeting to the Company Secretary atFinsbury Dials, 20 Finsbury Street, London EC2Y 9AQ. Shareholders who are unableto attend the AGM and/or General Meeting are encouraged to use their proxy votes.All shareholders are now able to cast their proxy votes electronically, whether theirshares are held through CREST or in certificated form, and full details are set out inthe form of proxy.

Outlook

Investors continue to shun European equities and with the political and economicuncertainty set to continue within the Eurozone for the foreseeable future this isunlikely to change in the short term. However, there are some signs of recovery inother countries, most notably the USA, and well managed European exporters shouldbenefit from this. Whilst volatile equity markets create uncertainty, they also createopportunities and your Board remains confident that our Investment Managers’experience and stock picking skills will enable them to add value for shareholders.

Paul ManducaChairman 12th June 2012



Investment Managers’ Report

Investment Process

The objective of the Company is to achieve capital growth from a portfolio of quotedsmaller companies in Europe, excluding the United Kingdom. The investmentuniverse is defined at the time of purchase by the countries and market capitalisationrange of the constituents of the benchmark index, the HSBC Smaller EuropeanCompanies (ex UK) Index. At the end of March 2012 the index consisted of 1,000companies with a market value of between £46 million and £2.3 billion across15 countries. This universe of potential investments is screened using a proprietarymulti-factor model to the results of which we apply fundamental analysis. Theinvestment process is focussed on identifying market leading growth companieswhich offer the potential to outperform over the long term.

The portfolio is constructed within a framework where risk is managed in terms ofinvestment style factors relative to the benchmark index. Position sizing isdetermined by investment conviction and trading liquidity in a stock. Investments aresold when there is a fundamental negative change in business prospects, long termprice momentum has broken down or the market capitalisation has outgrownsignificantly the benchmark index. The policy is not to hedge the currency exposureof the portfolio’s assets. The Board has established a liquidity range of 20% cash to20% gearing within which the Managers may operate.

Market Review

Renewed concerns over the resolution of the sovereign debt crises in the UnitedStates and Europe led to a sharp sell-off in equities during the first half of theCompany’s year to 30th September 2011. The US suffered the first ever downgrade byStandard & Poor’s of its AAA credit rating whilst Europe continued to wrestle with apalatable outcome to Greece’s looming debt default. However, better than expectedeconomic growth in the United States and the impact of the European Central BankLong Term Refinancing Operations (LTRO) provided the stimulus for a positive start to2012 for European equities. In the twelve months to March 2012 the large companyMSCI Europe (ex UK) Index declined by 10.5% in sterling. Diminished appetite for riskled to a year of underperformance by smaller companies and the HSBC SmallerEuropean Companies (ex UK) Index fell by 19.6%.

Portfolio Performance

The net asset value of the Company declined by 21.3% over the year, trailing thenegative return of both the benchmark smaller company HSBC Index and the largecompany MSCI Index. Following a positive performance at the interim stage, theportfolio’s defensive positioning and a cash position of 7% led to underperformanceof a sharply rebounding market in the first quarter of 2012. For the year as a whole,

Jim Campbell

Francesco Conte



Investment Managers’ Reportcontinued

returns were impaired by premature investment in such recovery situations asfinancials Aareal Bank in Germany and Bankinter in Spain and jewellery producerPandora in Denmark. On the other hand, the top contributors included Dutch postaloperator Postnl, whose 30% holding in TNT Express was subject to a bid at a 50%premium, Irish bookmaker Paddy Power, which again enjoyed strong growth in itsonline business and fashion businesses Salvatore Ferragamo in Italy and Hugo Bossin Germany, which each benefitted from sustained momentum in luxury goods sales.

Current Themes

There are currently three core themes underlying the portfolio’s holdings, reflectingthe success of Europe’s businesses in spite of the well documented malaise whichfrequently surrounds them. In the category of dynamic growth are internet andconsumer goods stocks such as Irish bookmaker Paddy Power, which derives themajority of its earnings from online betting, and German women’s clothing producerGerry Weber, which has combined a rapid growth in sales with steady improvementin margins. Defensive growth includes holdings in such food, healthcare andtelecoms companies as Danish food ingredients producer Christian Hansen, Spanishsausage casings producer Viscofan, Swedish radiation therapy equipmentmanufacturer Elekta, Danish hearing aid producer GN Store Nord, each of which isamongst the world leaders in its industry and German telecom service providerFreenet and Spanish broadband operator Jazztel. The cyclical growth categoryincludes industrial and oil & gas positions such as Swedish sealants supplierTrelleborg, Norwegian seismic services supplier TGS Nopec and German industriallubricants producer Fuchs Petrolub.

Performance attribution for theyear ended 31st March 2012

% %

Contributions to total returns

Benchmark total return –19.6

Asset allocation 2.0Stock selection –2.7Gearing/cash effect 0.3Currency effect –0.6

Investment managers’contribution –1.0

Portfolio total return –20.6

Management fee/otherexpenses –1.3

Share buy backs 0.6

Other effects –0.7

Return on net assets –21.3

Effect of increase in discount —

Return to shareholders –21.3

Source: Xamin/Datastream/JPMAM/Morningstar.

All figures are on a total return basis.

Performance attribution analyses howthe Company achieved its recordedperformance relative to its benchmarkindex.

A glossary of terms and definitions isprovided on page 60.



–8% –4% 0% 4% 8%

Real Estate Investment &Services

Pharmaceutical & Biotechnology

Food Producers

Oil & Gas Producers

Media

Automobiles & Parts

Personal Goods

Life Insurance

Financial Services

Industrial Engineering

–8% -4% 0% 4% 8%

Financial Services

Real Estate Investment &Services

Electronic & Electrical Equipment

Pharmaceutical & Biotechnology

Travel & Leisure

Nonlife Insurance

Support Services

Life Insurance

Software & Computer Services

Oil Equipment, Services &Distribution

Top 10 Sector Active Positions

March 2011 March 2012

Portfolio Positioning

With sizeable holdings in seismic service suppliers CGG Veritas in France and TGSNopec, oil services represented the portfolio’s largest active sector position relativeto the benchmark index at the end of March 2012. This is followed by software andservices with holdings in IT services supplier Atos and research and developmentconsultancy Altran Technologies, both in France. The overweight position in supportservices comprises such companies as French call centre operator Teleperformanceand German event ticketing supplier CTS Eventim. Real estate and financial servicesare the portfolio’s two most underweight sectors relative to the benchmark.

Source: JPMorgan Asset Management, Factset, HSBC.


Investment Cycle

Over time there is a strong correlation between the trend in consensus earningsrevisions for European smaller companies and the performance of the benchmarkHSBC Index. As illustrated below, it is clear that revisions to earnings forecasts, shownon the left hand scale, are typically negative as analysts start the year overlyoptimistic then have to downgrade as the year unfolds. Nevertheless, for the index tomake progress, as indicated on the right hand scale, it is normally sufficient that therate of downgrade should be less than around 8%. Following a sharp decline inearnings revisions over the last twelve months, to the extent that the position inMarch 2012 was actually worse than in March 2009, there has been a significantdeceleration in the pace of downgrades. This follows a positive first quarter corporatereporting season.

Correlation Between Earnings Revisions* and Index Performance

Source: Citigroup/Datastream, data as at 30th April 2012 .

*Analysts’ upgrades less downgrades as a % of total number of estimates.

Europe Smaller Cap Valuations

In terms of valuation, smaller companies in Europe now trade on a comparableprice/book multiple to large companies. As shown below, this is towards the top endof the range in which they have traded over the last twenty years. Nevertheless, asalso can be seen below, smaller companies are cheap on an absolute basis, currentlybeing valued towards the bottom end of the historic range of 1.5 – 2.5x book value.

–20%

–15%

–10%

–5%

0%

5%

10%

European Small-Cap Revisions (LHS)

–60%

–40%

–20%

0%

20%

40%

60%

80%

100%

YOY Change in HSBC Small Cap Index (RHS)

Apr-12

Apr-11

Apr-10

Apr-09

Apr-08

Apr-07

Apr-06

Apr-05

Apr-04

Apr-03

Apr-02

Apr-01

Apr-00

Apr-99

Apr-98

Apr-97

Apr-96

Apr-95

Apr-94

Apr-93

Apr-92

Apr-91

Apr-90

Jan-9

0


Investment Managers’ Reportcontinued

+1 Stdev

–1 Stdev

Average

Cheap

Expensive

–40%

–35%

–30%

–25%

–20%

–15%

–10%

–5%

0%

5%

Small Cap/Large Cap

Apr-12Jul-08Dec-03Jun-99Dec-94

+1 Stdev

–1 Stdev

Average

0.5

1.0

1.5

2.0

2.5

3.0

Apr-12Jun-08Dec-03Jun-99Apr-94

Relative Valuations – Price/Book Absolute Valuations – Price/Book

Source: European Quantitative Research, Citigroup Investment Research. Data as at 30th April 2012.



Outlook

With a rapidly diminishing appetite for the fiscal austerity regarded as necessary tobalance Europe’s books, the immediate outlook for European equities remains highlyuncertain. Economic growth in the Eurozone is stagnating, unemployment is risingand there is a clear shift to the political left as manifested in the recent Frenchpresidential and German regional elections. Concern remains that regular bouts ofliquidity injections from the ECB have merely delayed the demise of the Eurozone inits current form. The most imminent fracture may be a critical default by Greeceleading to its exit from monetary union and the re-introduction of a sharply devalueddrachma with a view to kick-starting the economy. The further write-down in thevalue of sovereign debt in not only Greece but other fiscally stretched Europeaneconomies could be expected to lead to another sell-off in financial stocks and thebroader market amid concern for the need for further re-financing.

Of course, life after default in Europe is not without precedent in recent years. Sincebeing bailed out by the International Monetary Fund at the end of 2008, Iceland hasgenerated some of the best returns for equity investors with a 70% rise in the OMXIceland All-Share Index in the three years to the end of March 2012. The alternativemodel of resolving a large fiscal deficit – namely, wide ranging reductions in tax rates,most recently adopted extremely successfully by Sweden from 2006 – is sadly absentfrom political discussion in the Eurozone.

More encouragingly, economic growth in the United States is improving and, for themoment, is being sustained in Asia. Following a positive first quarter reportingseason, as shown earlier, the pace of downgrades to forecasts of European corporateearnings has now slowed dramatically. Equity valuations remain inexpensive globallyand especially in Europe. To outperform in such an environment the focus of theportfolio is on investing in high quality companies which can thrive in spite of difficultand erratic circumstances.

Jim CampbellFrancesco ConteInvestment Managers 12th June 2012



2012 2011

Total returns for the year ended 31st MarchReturn to shareholders1 –21.3% +27.1%Return on net assets2 –21.3% +21.7%Benchmark return3 –19.6% +14.2%

% change

Net asset value, share price, discount andmarket data at 31st MarchShareholders’ funds (£’000) 342,299 477,428 –28.3Net asset value per share 854.0p 1097.3p –22.2Share price 722.0p 930.0p –22.4Share price discount to net asset value per share 15.5% 15.2%Shares in issue 40,083,803 43,508,739HSBC Smaller European Companies (ex UK) Index in sterling terms (capital only)4 272.5 345.5 –21.1

Revenue for the year ended 31st MarchGross revenue return (£’000) 10,215 9,241 +10.5Net revenue available for shareholders (£’000) 7,055 2,369 +197.8Revenue return per share 17.12p 5.33p +221.2Dividend per share 17.0p 4.0p +325.0

Actual Gearing Factor5 104.9% 116.7%

Total Expense Ratio6 1.27% 1.21%


1Source: Morningstar.2Source: J.P. Morgan.3Source: HSBC. The Company’s benchmark is the HSBC Smaller European Companies (ex UK) Total Return Index in sterling terms.4Source: HSBC.5Actual gearing represents investments, excluding holdings in liquidity funds, expressed as a percentage of shareholders’ funds.6Management fee and all other operating expenses, excluding finance costs, expressed as a percentage of the average of themonth end net assets during the year.

Summary of Results



Performance

Performance Relative to BenchmarkFigures have been rebased to 100 at 31st March 2002

Source: Morningstar/HSBC.

JPMorgan European Smaller Companies – share price total return.

JPMorgan European Smaller Companies – net asset value total return.

Benchmark.

Ten Year PerformanceFigures have been rebased to 100 at 31st March 2002




Benchmark.

0

100

200

300

400

500

20122011201020092008200720062005200420032002

80

90

100

110

120

130

140

150

20122011201020092008200720062005200420032002



At 31st March 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Total assets less current liabilities (£’m) 181.9 116.0 162.6 225.9 373.0 450.2 394.0 270.1 415.9 477.4 342.3

Net asset value per share (p) 272.4 196.9 298.2 421.8 709.0 876.8 807.8 573.6 907.6 1097.3 854.0

Share price (p) 221.0 144.5 246.0 369.8 636.0 805.0 680.0 460.0 735.0 930.0 722.0

Discount (%) 18.9 26.6 17.5 12.3 10.3 8.2 15.8 19.8 18.7 15.2 15.5

Actual gearing (%) 110.7 104.9 107.8 104.9 103.8 96.2 98.4 98.1 100.2 116.7 104.9

Year ended 31st March

Gross revenue return (£’000) 2,779 3,572 3,446 4,218 4,898 7,767 6,149 10,067 8,431 9,241 10,215

Net revenue available forShareholders (£’000) (1,762) 274 869 91 216 1,279 (376) 7,363 2,167 2,369 7,055

(Loss)/return per share (p) (2.94) 0.48 1.59 0.17 0.41 2.49 (0.75) 15.38 4.63 5.33 17.12

Dividend per share (p) — — — — — — — — 3.0 4.0 17.0

Total expense ratio%1 1.35 1.39 1.46 1.20 1.25 1.21 1.33 1.27 1.21 1.21 1.27

Rebased to 100 at 31st March 2002

Share price total return2 100.0 65.4 111.3 167.3 287.9 364.4 307.8 208.3 332.8 423.0 333.0

Net asset value total return2 100.0 72.3 109.5 154.8 260.9 322.1 295.1 209.8 331.0 403.8 317.9

Benchmark3 100.0 74.1 117.3 153.8 230.8 274.5 251.3 154.1 270.0 308.2 247.8


1Management fee and all other operating expenses, excluding finance costs, expressed as a percentage of the average of themonth end net assets during the year (2009 and prioryears: the average of the opening and closing net assets).2Source: Morningstar.3Source: HSBC. The Company’s benchmark is the HSBC Smaller European Companies (ex UK) Total Return Index in sterling terms.

Ten Year Financial Record



2012 2011Valuation Valuation

Company Business £’000 %2 £’000 %2

CGGVeritas Geophysical services 13,639 4.0 10,484 2.2

Mediolanum3 Financial services 12,363 3.6 7,940 1.7

Helvetia3 Life insurance 11,974 3.5 5,776 1.2

Buzzi Unicem3 Cement producer 11,303 3.3 7,923 1.7

TGS Nopec Geophysical4 Oil and gas services 10,637 3.1 — —

Fischer (Georg)3 Piping systems manufacturer 10,515 3.1 7,998 1.7

Nutreco4 Producer of animal feeds 10,381 3.0 — —

Clariant4 Speciality chemicals 10,234 3.0 — —

Aalberts Industries3 Industrial services 10,017 2.9 9,260 1.9

Azimut3 Yacht builder 9,897 2.9 4,399 0.9

Total5 110,960 32.4

1Excluding the holding in the JPMorgan Euro Liquidity Fund, which is held as an alternative to cash.2Based on total assets less current liabilities of £342.3m (2011: £477.4m).3Not included in the ten largest investments at 31st March 2011.4Not held in the portfolio at 31st March 2011.5At 31st March 2011, the value of the ten largest investments amounted to £112.4m, representing 23.5% of total assets less current liabilities.

Ten Largest Investments1At 31st March



31st March 2012 31st March 2011Portfolio Benchmark Portfolio Benchmark

Geographical Analysis % % % %

France 20.3 13.0 12.1 12.5Italy 14.4 10.1 16.8 10.8Germany 13.6 14.2 9.0 14.4Switzerland 12.8 11.5 18.0 11.2Netherlands 10.9 4.8 15.4 4.1Denmark 7.7 3.8 5.4 3.2Sweden 6.7 9.5 7.0 9.1Norway 6.1 6.4 2.1 6.9Spain 5.3 6.1 9.1 7.6Finland 2.9 6.1 9.0 5.9Belgium 2.3 4.6 4.2 3.8Ireland 1.8 2.1 1.8 2.2Austria 0.2 3.0 2.7 3.2Greece — 2.4 3.7 3.5Portugal — 1.7 0.4 1.3Russia — 0.4 — —United Kingdom — 0.2 — —Bermuda — 0.1 — —Luxembourg — — — 0.3

Total equities 105.0 100.0 116.7 100.0Liquidity fund 4.4 — 0.4 —Net current liabilities (9.4) — (17.1) —

Total 100.0 100.0 100.0 100.0

Based on total assets less current liabilities of £342.3m (2011: £477.4m).

31st March 2012 31st March 2011Portfolio Benchmark Portfolio Benchmark

Sector Analysis % % % %

Industrials 27.6 24.0 41.6 23.8Financials 16.1 20.5 25.3 21.0Energy 15.2 5.6 2.2 5.8Materials 13.5 8.3 12.0 8.4Consumer Discretionary 11.0 16.2 19.2 15.4Information Technology 7.8 8.0 11.4 8.4Health Care 5.9 8.2 2.9 8.2Consumer Staples 4.9 5.9 1.9 5.8Telecommunication Services 3.0 1.3 0.2 0.5Utilities — 2.0 — 2.7

Total equities 105.0 100.0 116.7 100.0Liquidity fund 4.4 — 0.4 —Net current liabilities (9.4) — (17.1) —

Total 100.0 100.0 100.0 100.0

Based on total assets less current liabilities of £342.3m (2011: £477.4m).

Portfolio Analyses



Value at Changes Value at 31st March 2011 Purchases Sales in value 31st March 2012

£’000 % £’000 £’000 £’000 £’000 %

France 58,021 12.1 200,238 (175,956) (12,755) 69,548 20.3

Italy 80,189 16.8 170,927 (183,229) (18,692) 49,195 14.4

Germany 43,203 9.0 373,107 (354,200) (15,592) 46,518 13.6

Switzerland 85,944 18.0 114,351 (148,448) (8,042) 43,805 12.8

Netherlands 73,458 15.4 132,084 (155,482) (12,781) 37,279 10.9

Denmark 25,675 5.4 125,736 (121,626) (3,362) 26,423 7.7

Sweden 33,424 7.0 136,106 (141,726) (4,803) 23,001 6.7

Norway 9,872 2.1 96,637 (84,944) (815) 20,750 6.1

Spain 43,344 9.1 144,669 (161,232) (8,667) 18,114 5.3

Finland 43,191 9.0 76,791 (103,665) (6,403) 9,914 2.9

Belgium 20,006 4.2 20,244 (24,749) (7,564) 7,937 2.3

Ireland 8,538 1.8 18,567 (22,484) 1,547 6,168 1.8

Austria 12,701 2.7 37,762 (49,118) (859) 486 0.2

Greece 17,634 3.7 336 (13,150) (4,819) — 0.0

Portugal 1,847 0.4 261 (2,112) 3 — 0.0

Total portfolio 557,047 116.7 1,647,816 (1,742,121) (103,604) 359,138 105.0

Liquidity fund 2,010 0.4 344,281 (331,175) (113) 15,003 4.4

Net current liabilities (81,629) (17.1) — — — (31,842) (9.4)

Total net assets 477,428 100.0 1,992,097 (2,073,296) (103,717) 342,299 100.0

Investment Activityduring the year ended 31st March 2012



List of Investmentsat 31st March 2012

ValuationCompany £’000

FranceCGGVeritas 13,639Atos Origin 7,983Maurel et Prom 7,560Faurecia 7,465Eiffage 7,389Altran Technologies 6,409Havas 5,229Teleperformance 4,815BOURBON 4,056Gameloft 1,628Eurofins 1,580Alten 847Steria 780Lectra 165Assystems 3

Total 69,548

ItalyMediolanum 12,363Buzzi Unicem 11,303Azimut 9,897Banco Popolare Societa Cooperativa 7,587Banca Popolare di Milano 3,087Amplifon 1,340IMA 1,223Marcolin 1,031Brembo 791Beni Stabili 573

Total 49,195


GermanyFuchs Petrolub1 8,281MTU Aero Engines 8,133Freenet 8,132Rheinmetall 4,660Leoni 4,354Wirecard 4,099Gerry Weber International 1,176Duerr 1,091ElringKlinger 837Drillisch 755Draegerwerk 741Bechtle 732Bertrandt 716Schuler 708Carl Zeiss Meditec 609Delticom 572CTS Eventim 561NORMA 361

Total 46,518

SwitzerlandHelvetia 11,974Fischer (Georg) 10,515Clariant 10,234Panalpina Welttransport 5,054Swiss Life 3,749Vetropack 1,569Gategroup 710

Total 43,805

NetherlandsNutreco 10,381Aalberts Industries 10,017SBM Offshore 9,428Bam 3,919Unit 4 Agresso 1,300Koninklijke Ten Cate 1,172AMG Advanced Metallurgical 689USG People 373

Total 37,279




DenmarkGN Store Nord 7,875DSV 7,336Topdanmark 5,456Chr.Hansen 5,373Royal Unibrew 383

Total 26,423

SwedenElekta 8,150Trelleborg 7,359NCC 4,141Betsson 1,172Hexpol 775Bilia 754Wihlborgs Fastigheter 431Husqvarna 219

Total 23,001

NorwayTGS Nopec Geophysical 10,637Schibsted 6,019Dockwise 846Kvaerner 765Atea 728Opera Software 695Prosafe 536Electromagnetic Geoservices 524

Total 20,750

SpainObrascon Huarte Lain 6,851Viscofan 6,079Tecnicas Reunidas 3,980Jazztel 1,204

Total 18,114


FinlandYIT 4,026Outotec 3,990Huhtamaki 811Tieto 725Cramo 362

Total 9,914

BelgiumNyrstar 7,937

Total 7,937

IrelandPaddy Power 6,168

Total 6,168

AustriaAustriamicrosystems 486

Total 486

Liquidity FundJPM Euro Liquidity Fund 15,003

Total 15,003

Total Investments 374,141

1Preference shares.

Total investments comprise £350,857,000 in equity shares,£8,281,000 in preference shares and £15,003,000 in a liquidityfund.



Board of Directors

Federico Marescotti

A Director since December 2005.

Last reappointed to the Board: 2011Remuneration: £22,500Other directorships: Executive Chairman of Vela Capital, Italy. A Director of Ecofin Water& Power Opportunities plc and Dunedin Enterprise Investment Trust plc. Connections with Manager: None Shared Directorships with other Directors: NoneShareholding in Company: 1,222

Anthony Davidson (Chairman of the Audit Committee)

A Director since May 2005.

Last reappointed to the Board: 2011Remuneration: £25,000Other directorships: Chairman of Shires Income PLC. Director of Sun Life AssuranceCompany of Canada (UK) Limited, SLFC Assurance (UK) Limited and a number of lifecompanies within The Phoenix Group. Formerly Chief Executive of Provincial Insuranceplc. Connections with Manager: Formerly a director of JPMorgan Fleming Worldwide IncomeInvestment Trust plc. Shared Directorships with other Directors: NoneShareholding in Company: 5,063

Paul Manduca (Chairman)

A Director since December 2005. Appointed Chairman in 2011.

Last reappointed to the Board: 2009Remuneration: £34,000Other directorships: Chairman of AON (UK) Limited, Microlease plc and HendersonDiversified Income plc. Senior Independent Director and Chairman elect of thePrudential Group plc and a Director of Kazmunaigaz plc. Formerly the Chief ExecutiveOfficer of Deutsche Asset Management Europe Limited, Chairman of the Association ofInvestment Companies and a Director of Wm Morrison Supermarkets plc andDevelopment Securities plc. Connections with Manager: None Shared Directorships with any other Trust Directors: NoneShareholding in Company: 5,000



All Directors are members of the Audit and Nomination Committees and are consideredindependent of the Manager.

Stephen White

A Director since 1st April 2012.

Last reappointed to the Board: n/a Remuneration: £22,500 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 equityportfolios. Formerly a non-executive director of Global Special Opportunities Trust Plc,Head of European Equities at F&C Asset Management and Manager of Foreign & ColonialEurotrust PLC and Deputy Manager of the Foreign & Colonial Investment Trust Plc. Connections with Manager: NoneShared Directorships with other Directors: NoneShareholding in Company: nil

Michael Wrobel

A Director since April 2003.

Last reappointed to the Board: 2009 Remuneration: £22,500Other directorships: Group Advisor Pension Investments at Rio Tinto plc and Chairmanof The Diverse Income Trust plc. Formerly a Director of Gartmore InvestmentManagement plc and Head of Investment Trusts at F&C Management.Connections with Manager: None Shared Directorships with other Directors: NoneShareholding in Company: 6,000

Carolan DobsonA Director since September 2010.

Last reappointed to the Board: 2011Remuneration: £22,500Other directorships: Chairman of QinetiQ Pension Fund, a trustee of Avon Pension Fund,Chairman of Aberdeen Smaller Companies High Income Trust plc and member of theCompetition Commission and Chairman of the Finance and Regulation Group. She has awealth of investment experience, having been Head of UK Equities at Abbey AssetManagers, Head of Investment Trusts at Murray Johnstone and fund manager of MurrayIncome plc.Connections with Manager: None Shared Directorships with any other Trust Directors: NoneShareholding in Company: 1,075



The Directors present their report and audited financialstatements for the year ended 31st March 2012.

Business ReviewBusiness of the CompanyThe Company carries on business as an investment trust andwas approved by HM Revenue and Customs as an investmenttrust in accordance with Section 1158 of the Corporation TaxAct 2010 (‘Section 1158’) for the year ended 31st March 2011.In the opinion of the Directors, the Company has subsequentlyconducted its affairs so that it should continue to qualify as aninvestment trust under HM Revenue and Customs’ qualifyingrules.

Approval for the year ended 31st March 2011 is subject toreview should there be any subsequent enquiry underCorporation Tax Self Assessment.

The Company is an investment company within the meaning ofSection 833 of the Companies Act 2006. The Company is not aclose company for taxation purposes.

A review of the Company’s activities and prospects is given inthe Chairman’s Statement on pages 2 to 4, and in theInvestment Managers’ Report on pages 5 to 9.

ObjectiveThe Company’s objective is to achieve capital growth fromsmaller European companies (excluding the UK).

Investment Policies and Risk ManagementIn order to achieve the investment objective and to seek tomanage risk, the Company invests in a diversified portfolio ofsmaller companies in Europe, excluding the UK. Theinvestment universe is defined at the time of purchase by thecountries and market capitalisation range of the constituents ofthe benchmark index which, at the end of March 2012 consistedof 1,000 companies with a market value of between £46millionand £2.3 billion across 15 countries.

The Company manages liquidity and borrowings to increasepotential sterling returns to shareholders. The Companyborrows in Euros in order to hedge the currency risk in respectof the geared portion of the portfolio.

The investment policy emphasises capital growth rather thanincome and shareholders should therefore expect dividends tovary from year to year.

The Board has set no minimum or maximum limits on thenumber of investments in the portfolio but in the year underreview, the number of investments ranged between

approximately 80 to 110. To gain the appropriate exposure,the Investment Managers are permitted to invest in pooledfunds. JPMAM is responsible for management of theCompany’s assets. On a day-to-day basis the assets aremanaged by two investment managers based in London,supported by a 40 strong European equity team.

It should be noted that the Company invests in smallercompanies which tend to be more volatile than largercompanies and the Company’s shares should therefore beregarded as carrying greater than average risk.

Investment Restrictions and GuidelinesThe Board seeks to manage the Company’s risk by imposingvarious investment limits and restrictions:

• As an investment trust, the Company cannot invest morethan 15% of its assets in any one investment, at the time ofacquisition. With effect from 1st April 2012, this limit nolonger applies and instead, the Company must demonstratethat it has policies in place to spread its investment risk. TheCompany will not invest more than 12.5% of its total assetsin any one individual stock at the time of acquisition.

• The Company does not normally invest in unquotedinvestments and to do so requires prior Board approval.

• No more than 25% of the Company’s assets may beinvested in the aggregate of: (i) securities not listed on arecognised exchange; and (ii) holdings in which theCompany has 20% or more of the issued equities. It isunlikely that the Company would invest in companies thatfall into either of these categories and did not do so in theyear under review.

• In accordance with the Listing Rules of the UK ListingAuthority, the Company will not invest more than 15% of itsgross assets in other UK listed investment companies andwill not invest more than 10% of its gross assets incompanies that themselves may invest more than 15% ofgross assets in UK listed investment companies.

• The Board has set a normal gearing range of 80-120%invested.

• The Company does not normally enter into derivativetransactions and to do so requires prior Board approval.

These limits and restrictions may be varied by the Board at anytime at its discretion.

Compliance with the Board’s investment restrictions andguidelines is monitored continuously by the Manager and isreported to the Board on a monthly basis.

Directors’ Report



PerformanceIn the year to 31st March 2012, the Company produced atotal return to shareholders of –21.3% and a total return onnet assets of –21.3%. This compares with the return on theCompany’s benchmark index of –19.6%. As at 31st March2012 the value of the Company’s investment portfolio was£374.1 million. The Investment Managers’ Report onpages 5 to 9 includes a review of developments duringthe year as well as information on investment activitywithin the Company’s portfolio.

Total Return, Revenue and Dividends Gross total loss for the year amounted to £92.4 million(2011: £86.6 million positive return) and net total loss afterdeducting the management fee, other administrativeexpenses, finance costs and taxation amounted to£99.5 million (2011: £79.7 million return). Net revenue returnon ordinary activities after taxation for the year amounted to£7.1 million (2011: £2.4 million). An interim dividend of 6.0p(2011: nil) was paid during the year, costing £2,432,000. TheDirectors have declared a final dividend of 11.0p (2011: 4.0p)per share. This dividend will cost £4,409,000 and the revenuereserve would have amounted to £1,242,000 had thedividend been accounted for in the year.

Key Performance Indicators (‘KPIs’) The Board uses a number of financial KPIs to monitor andassess the performance of the Company. The principal KPIs are:

• Performance against the benchmark This is the most important KPI by which performance isjudged. Information on the Company’s performance isgiven in the Chairman’s Statement and the InvestmentManagers’ Report.

Performance Relative to Benchmark IndexFigures have been rebased to 100 at 31st March 2002




Benchmark.

Ten Year PerformanceFigures have been rebased to 100 at 31st March 2002

Source: Morningstar/ HSBC.



Benchmark.

• Performance against the Company’s peers The principal objective is to achieve capital growth relativeto the benchmark. However, the Board also monitors theperformance relative to a broad range of competitor funds.

• Performance attributionThe purpose of performance attribution analysis is toassess how the Company achieved its performance relativeto its benchmark index, i.e. to understand the impact on theCompany’s relative performance of the variouscomponents such as asset allocation and stock selection.Details of the attribution analysis for the year ended31st March 2012 are given in the Investment Managers’Report on page 6.

• Discount to net asset value (‘NAV’)The Board has for several years operated a sharerepurchase programme which seeks to address imbalancesin supply and demand for the Company’s shares within themarket and thereby seek to manage the volatility andabsolute level of the discount to NAV per share at which theCompany’s shares trade. In the year to 31st March 2012, thediscount ranged between 10.2% and 17.5%, with an averageof 13.9%. More information on the Board’s share buy backpolicy is given in the Chairman’s Statement.

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Directors’ Report continued

Discount Performance

Source: Datastream (month end data).

JPMorgan European Smaller Companies – discount.

• Total expense ratio (‘TER’)The TER represents the Company’s management fee andall other operating expenses excluding finance costs,expressed as a percentage of the average of the monthend net assets during the year. The TER for the year ended31st March 2012 was 1.27% (2011: 1.21%).

Share CapitalThe Company has authority both to issue new shares and torepurchase shares in the market (for cancellation or to be heldin Treasury).

During the year the Company repurchased a total of3,424,936 shares for cancellation, representing 7.9% of theissued share capital at the beginning of the year, for a totalconsideration of £31,523,000. This figure includes 2,155,936shares repurchased and cancelled as a result of a tender offerin July 2011. Since the year end, the Company has repurchaseda further 115,000 ordinary shares for cancellation for a totalconsideration of £708,000.

The Company did not issue any new shares during the year orsince the Company’s year end until the date of this report. TheCompany does not have authority to reissue shares fromTreasury at a discount to net asset value and will not seek suchauthority at the forthcoming Annual General Meeting.

Resolutions to renew the authority to issue new shares and torepurchase shares will be put to shareholders at theforthcoming Annual General Meeting. The full text of theseresolutions are set out in the Notice of Meeting onpages 57 to 58.

Principal RisksWith the assistance of the Manager, the Board has drawn up arisk matrix, which identifies the key risks to the Company.These key risks fall broadly under the following categories:

• Investment and Strategy: An inappropriate investmentstrategy, for example asset allocation or the level ofgearing, may lead to under-performance against theCompany’s benchmark Index and peer companies,resulting in the Company’s shares trading on a widerdiscount. The Board manages these risks by diversificationof investments through its investment restrictions andguidelines which are monitored and reported by theManager. JPMAM provides the Directors with timely andaccurate management information, including performancedata and attribution analyses, revenue estimates, liquidityreports and shareholder analyses. The Board monitors theimplementation and results of the investment process withthe Investment Managers, who attend all Board meetings,and review data which show statistical measures of theCompany’s risk profile. The Investment Managers employthe Company’s gearing, within a strategic range set by theBoard. The Board holds a separate meeting devoted tostrategy each year.

• Market: Market risk arises from uncertainty about thefuture prices of the Company’s investments. It representsthe potential loss that the Company might suffer throughholding investments in the face of negative marketmovements. The Boardmonitors asset allocation, stockselection and levels of gearing on a regular basis and hasset investment restrictions and guidelines, which aremonitored and reported on by JPMAM. The Board monitorsthe implementation and results of the investment processwith the Manager.

• Accounting, Legal and Regulatory: In order to qualify asan investment trust, the Company must comply withSection 1158 of the Corporation Tax Act 2010(‘Section 1158’). Details of the Company’s approval are givenunder ‘Business of the Company’ above. Were the Companyto breach Section 1158, it might lose investment trust statusand, as a consequence, gains within the Company’sportfolio could be subject to Capital Gains Tax. TheSection 1158 qualification criteria are continually monitoredby JPMAM and the results reported to the Board each

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month. The Company must also comply with the provisionsof the Companies Act and, since its shares are listed on theLondon Stock Exchange, the UKLA Listing Rules andDisclosure and Transparency Rules (‘DTRs’). A breach of theCompanies Act could result in the Company and/or theDirectors being fined or the subject of criminalproceedings. Breach of the UKLA Listing Rules or DTRscould result in the Company’s shares being suspended fromlisting which in turn would breach Section 1158. The Boardrelies on the services of its Company Secretary, JPMAM toensure compliance with the Companies Act and the UKLAListing Rules and DTRs.

• Corporate Governance and Shareholder Relations: Detailsof the Company’s compliance with Corporate Governancebest practice, including information on relations withshareholders, are set out in the Corporate Governancereport on pages 25 to 29.

• Operational: Loss of key staff by JPMAM, such as theInvestment Managers, could affect the performance of theCompany. Disruption to, or failure of, JPMAM’s accounting,dealing or payments systems or the custodian’s recordscould prevent accurate reporting and monitoring of theCompany’s financial position. Details of how the Boardmonitors the services provided by JPMAM and itsassociates and the key elements designed to provideeffective internal control are included with the RiskManagement and Internal Control section of the CorporateGovernance report on pages 28 to 29.

• Financial: The financial risks faced by the Company includemarket price risk, interest rate risk, liquidity risk and creditrisk. Further details are disclosed in note 20 on pages 48to 54.

Future Developments Clearly, the future development of the Company is muchdependent upon the success of the Company’s investmentstrategy in the light of economic and equity marketdevelopments. The Investment Managers discuss the outlookin their report on page 9.

Management of the Company

The Manager and Company Secretary is JPMorgan AssetManagement (UK) Limited (‘JPMAM’). JPMAM is employedunder a contract which can be terminated on six months’notice, without penalty. If the Company wishes to terminate thecontract on shorter notice, the balance of remuneration ispayable by way of compensation.

JPMAM is a wholly-owned subsidiary of JPMorgan Chase Bankwhich, through other subsidiaries, also provides banking,dealing and custodian services to the Company.

The Board has evaluated the performance of the Manager andconfirms that it is satisfied that the continuing appointment ofthe Manager is in the interests of shareholders as a whole. Inarriving at this view, the Board considered the investmentstrategy and process of the Manager, noting performanceagainst the benchmark over the long term and the quality ofthe support that the Company receives from JPMAM.

Management Fee

The management fee is charged at the rate of 1.3% of the valueof the Company’s market capitalisation and is calculated andpaid monthly in arrears. An adjustment is made to excludefrom the calculation investments in funds on which JPMAMcharges a management fee.

Going Concern

The Directors believe that having considered the Company’sinvestment objective (see page 20), risk management policies(see pages 48 to 54), capital management policies andprocedures (see page 55), the nature of the portfolio andexpenditure projections, the Company has adequate resources,an appropriate financial structure and suitable managementarrangements in place to continue in operational existence forthe foreseeable future. For these reasons, they consider thatthere is reasonable evidence to continue to adopt the goingconcern basis in preparing the accounts.

Payment Policy

It is the Company’s policy to obtain the best terms for allbusiness and therefore there are no standard payment terms.




In general, the Company agrees with its suppliers the terms onwhich business will take place and it is the Company’s policy toabide by those terms. As at 31st March 2012, the Company hadno outstanding trade creditors (2011: none).

Directors

The Directors of the Company who held office at the end of theyear, together with their beneficial interests in the Company’sshares are shown below.

31st March 1st April2012 2011

Anthony Davidson 5,063 5,011Carolan Dobson 1,075 —Paul Manduca 5,000 5,000Federico Marescotti 1,222 1,222Michael Wrobel 6,000 6,000

There have been no changes in these holdings reported sincethe year end.

Stephen White was appointed a Director on 1st April 2012 andwill stand for reappointment at the forthcoming AnnualGeneral Meeting. Michael Wrobel will retire from the Board atthe conclusion of the Annual General Meeting.

In accordance with corporate governance best practice, allDirectors, except Michael Wrobel, will retire at the forthcomingAnnual General Meeting and will stand for reappointment. TheNomination Committee, having considered their qualifications,performance and contribution to the Board and its committees,confirms that each Director continues to be effective anddemonstrates commitment to the role and the Boardrecommends to shareholders that they be reappointed.

Director Indemnification and Insurance

As permitted by the Company’s Articles of Association, theDirectors have the benefit of an indemnity which is a qualifyingthird party indemnity, as defined by Section 234 of theCompanies Act 2006. The indemnities were in place during theyear and as at the date of this report.

An insurance policy is maintained by the Company whichinsures the Directors of the Company against certain liabilitiesarising in the conduct of their duties. There is no cover againstfraudulent or dishonest actions.

Disclosure of information to Auditors

In the case of each of the persons who are Directors of theCompany at the time when this report was approved:

(a) so far as each of the Directors is aware, there is no relevantaudit information (as defined in the Companies Act) ofwhich the Company’s auditors are unaware, and

(b) each of the Directors has taken all the steps that he/sheought to have taken as a Director in order to make himself/herself aware of any relevant audit information (as defined)and to establish that the Company’s Auditors are aware ofthat information.

The above confirmation is given and should be interpreted inaccordance with the provision of Section 418 of the CompaniesAct 2006.

Environmental Matters, Social and Community Issues

Information on environmental matters, social and communityissues is set out on page 29. The Company has no employees.

Independent Auditors

PricewaterhouseCoopers LLP have expressed their willingnessto continue in office as Auditors and a resolution to re-appointthem and authorise the Directors to determine theirremuneration for the ensuing year, will be proposed at theAnnual General Meeting.

Annual General Meeting

NOTE: THIS SECTION IS IMPORTANT AND REQUIRES YOURIMMEDIATE ATTENTION. If you are in any doubt as to the actionyou should take, you should seek your own personal financialadvice from your stockbroker, bank manager, solicitor or otherfinancial advisor authorised under the Financial Services andMarkets Act 2000.

Resolutions relating to the following items of special businesswill be proposed at the forthcoming Annual General Meeting:

(i) Authority to issue new shares for cash and disapply pre-emptionrights (resolutions 10 and 11)

The Directors will seek renewal of the authority at the AGM toissue up to 1,998,440 new shares for cash up to an aggregatenominal amount of £499,610, such amount being equivalent toapproximately 5% of the present issued share capital. The fulltext of the resolutions is set out in the Notice of Meeting onpage 57.



It is advantageous for the Company to be able to issue newshares to investors purchasing shares through the JPMAMsavings products and also to other investors when theDirectors consider that it is in the best interests of shareholdersto do so. Any such issues would only be made at prices greaterthan the NAV, thereby increasing the assets underlying eachshare and spreading the Company’s administrative expenses,other than the management fee which is charged on the valueof the Company’s market capitalisation, over a greater numberof shares. The issue proceeds would be available forinvestment in line with the Company’s investment policies.

(ii) Authority to repurchase the Company’s shares (resolution 12) The authority to repurchase up to 14.99% of the Company’sissued share capital, renewed by shareholders at the 2011Annual General Meeting, will expire on 7th January 2013 unlessrenewed at the forthcoming Annual General Meeting. TheDirectors consider that the renewal of the authority is in theinterests of shareholders as a whole as the repurchase ofshares at a discount to NAV enhances the NAV of the remainingshares. The Board will therefore seek shareholder approval atthe Annual General Meeting to renew this authority, which willlast until 17th January 2014 or until the whole of the 14.99% hasbeen acquired, whichever is the earlier. The full text of theresolution is set out in the Notice of Meeting on pages 57 to 58.Repurchases will be made at the discretion of the Board, andwill only be made in the market at prices below the prevailingNAV per share, thereby enhancing the NAV of the remainingshares, as and when market conditions are appropriate.

Recommendation

The Board considers that resolutions 10 to 12 are likely topromote the success of the Company and are in the bestinterests of the Company and its shareholders as a whole. TheDirectors unanimously recommend that you vote in favour ofthe resolutions as they intend to do, where voting rights areexercisable, in respect of their own beneficial holdings whichamount in aggregate to 18,360 shares representingapproximately 0.05% of the existing issued share capital of theCompany.

Corporate GovernanceCompliance The Company is committed to high standards of corporategovernance. This statement, together with the Statement ofDirectors’ Responsibilities on page 31, indicates how theCompany has applied the principles of good governance ofthe Financial Reporting Council UK Corporate Governance

Code (the ‘UK Corporate Governance Code’) and theAssociation of Investment Companies’ (‘AIC’) Code of CorporateGovernance (the ‘AIC Code’), which complements theUK Corporate Governance Code and provides a framework ofbest practice for investment trusts.

The Board is responsible for ensuring the appropriate level ofcorporate governance and considers that the Company hascomplied with the best practice provisions of the UK CorporateGovernance Code, insofar as they are relevant to theCompany’s business, and the AIC Code throughout the yearunder review.

Role of the Board A management agreement between the Company and JPMAMsets out the matters over which the Manager has authority. Thisincludes management of the Company’s assets and theprovision of accounting, company secretarial, administrationand some marketing services. All other matters are reservedfor the approval of the Board. A formal schedule of mattersreserved for Board decision has been approved. This includesdetermination and monitoring of the Company’s investmentobjectives and policy and its future strategic direction, gearingpolicy, management of the capital structure, appointment andremoval of third party service providers, review of keyinvestment and financial data and the Company’s corporategovernance and risk control arrangements.

The Board has in place procedures to deal with potentialconflicts of interest and, following the introduction of TheBribery Act 2010, has adopted appropriate proceduresdesigned to prevent bribery. It confirms that the procedureshave operated effectively during the year under review.

The Board meets at least five times during the year andadditional meetings are arranged as necessary. Full and timelyinformation is provided to the Board to enable it to functioneffectively and to allow Directors to discharge theirresponsibilities.

There is an agreed procedure for Directors to take independentprofessional advice, if necessary, and at the Company’sexpense. This is in addition to the access that every Directorhas to the advice and services of the Company Secretary,JPMAM, which is responsible to the Board for ensuring thatBoard procedures are followed and that applicable rules andregulations are complied with.

Board Composition The Board, chaired by Paul Manduca, consists of sixnon-executive Directors, all of whom are regarded by the




Board as independent, including the Chairman. The Directorshave a breadth of investment, knowledge, business andfinancial skills and experience relevant to the Company’sbusiness and brief biographical details of each Director are setout on pages 18 and 19.

A review of Board composition and balance is included as partof the annual performance evaluation of the Board, details ofwhich may be found below. The Board has considered whethera senior independent director should be appointed and hasconcluded that, as the Board comprises entirely ofnon-executive directors, this is unnecessary at present.However, the Chairman of the Audit Committee leads theevaluation of the Chairman and is available to shareholders ifthey have concerns that cannot be resolved through discussionwith the Chairman.

Tenure Directors are initially appointed until the following AnnualGeneral Meeting when, under the Company’s Articles ofAssociation, it is required that they be reappointed byshareholders. Thereafter, a Director’s appointment will run fora maximum term of three years. Subject to the performanceevaluation carried out each year, the Board will agree whetherit is appropriate for the Director to seek an additional term.The Board does not believe that length of service in itselfnecessarily disqualifies a Director from seeking reappointmentbut, when making a recommendation, the Board will take intoaccount the requirements of the UK Corporate GovernanceCode, including the need to refresh the Board and itsCommittees. The Board has adopted corporate governancebest practice and all Directors must stand for annualreappointment.

The terms and conditions of Directors’ appointments are setout in formal letters of appointment, copies of which areavailable for inspection on request at the Company’s registeredoffice and at the Annual General Meeting.

Induction and TrainingOn appointment, the Manager and Company Secretary provideall Directors with induction training. Thereafter, regularbriefings are provided on changes in law and regulatoryrequirements that affect the Company and the Directors.Directors are encouraged to attend industry and otherseminars covering issues and developments relevant toinvestment trust companies. Regular reviews of the Directors’training needs are carried out by the Chairman by means of theevaluation process described below.

Meetings and Committees The Board delegates certain responsibilities and functions tocommittees. Details of membership of committees are shownwith the Directors’ profiles on pages 18 and 19. Directors whoare not members of Committees may attend at the invitation ofthe Chairman.

The table below details the number of Board and Committeemeetings attended by each Director. During the year therewere five Board meetings, two Audit Committee meetings andthree Nomination Committee meetings.

Audit NominationBoard Committee Committee

Meetings Meetings MeetingsDirector Attended Attended Attended

Anthony Davidson 5 2 3Carolan Dobson 5 2 3Paul Manduca 5 2 3Federico Marescotti 4 1 2Michael Wrobel 4 2 2

Board CommitteesNomination Committee The Nomination Committee, chaired by Paul Manduca, consistsof all of the Directors and meets at least annually to ensure thatthe Board has an appropriate balance of skills and experienceto carry out its fiduciary duties and to select and proposesuitable candidates for appointment when necessary. Theappointment process takes account of the benefits of diversity,including gender. An external agency was engaged inconnection with Stephen White’s appointment.

The Committee conducts an annual performance evaluation ofthe Board, its committees and individual Directors to ensurethat all Directors have devoted sufficient time and contributedadequately to the work of the Board and its Committees. Theevaluation of the Board considers the balance of experience,skills, independence, corporate knowledge, its diversity,including gender, and how it works together. Questionnaires,drawn up by the Board, with the assistance of JPMAM and afirm of independent consultants, are completed by eachDirector. The responses are collated and then discussed by theCommittee. The evaluation of individual Directors is led by theChairman who also meets with each Director. The AuditCommittee Chairman leads the evaluation of the Chairman’sperformance.



The Committee also reviews Directors’ fees and makesrecommendations to the Board as and when required.

Audit Committee The Audit Committee, chaired by Anthony Davidson, consistsof all the Directors and meets at least twice each year. Themembers of the Audit Committee consider that they have therequisite skills and experience to fulfil the responsibilities ofthe Committee.

The Committee reviews the actions and judgements of theManager in relation to the half year and annual accounts andthe Company’s compliance with the UK Corporate GovernanceCode. It reviews the terms of the management agreement andexamines the effectiveness of the Company’s internal controlsystems, receives information from the Managers’ Compliancedepartment and reviews the scope and results of the externalaudit, its cost effectiveness, the balance of audit and non-auditservices and the independence and objectivity of the externalauditors; in the Directors’ opinion the auditors are consideredindependent. Representatives of the Company’s auditorsattend the Audit Committee meeting at which the draft AnnualReport and Accounts are considered. Having reviewed theperformance of the external auditors, the Committeeconsidered it appropriate to recommend their reappointment.The Board supported this recommendation and a resolutionwill be put to the forthcoming Annual General Meeting.

The Directors’ statement on the Company’s system of RiskManagement and Internal Control is set out on pages 28 to 29.

Both the Nomination Committee and the Audit Committee havewritten terms of reference which define clearly their respectiveresponsibilities, copies of which are available on the Company’swebsite, on request at the Company’s registered office and atthe Company’s Annual General Meeting.

Relations with Shareholders The Board regularly monitors the shareholder profile of theCompany. It aims to provide shareholders with a fullunderstanding of the Company’s activities and performanceand reports formally to shareholders quarterly each year byway of the annual report and accounts, the half year financial

report and two interim management statements. This issupplemented by the daily publication, through the LondonStock Exchange, of the net asset value of the Company’s shares.

All shareholders are encouraged to attend the Company’sAnnual General Meeting at which the Directors andrepresentatives of the Manager are available in person to meetshareholders and answer their questions. In addition, apresentation is given by the Investment Managers who reviewthe Company’s performance. During the year the Company’sbrokers, the investment managers and JPMAM hold regulardiscussions with larger shareholders. The Directors are madefully aware of their views. The Chairman and Directors makethemselves available as and when required to addressshareholder queries. The Directors may be contacted throughthe Company Secretary whose details are shown on page 61.

The Company’s Annual Report and Accounts is published intime to give shareholders at least 20 working days’ notice ofthe Annual General Meeting. Shareholders wishing to raisequestions in advance of the meeting are encouraged to submitquestions via the Company’s website or write to the CompanySecretary at the address shown on page 61.

Details of the proxy voting position on each resolution will bepublished on the Company’s website shortly after the AnnualGeneral Meeting.

Section 992 Companies Act 2006

The following disclosures are made in accordance withSection 992 Companies Act 2006.

Capital StructureThe Company’s capital structure is summarised on the insidefront cover of this report.

Voting Rights in the Company’s sharesAs at 11th June 2012 (being the latest business day prior to thepublication of this Notice), the Company’s issued share capitalconsists of 39,968,803 ordinary shares, carrying one vote each.Therefore the total voting rights in the Company are39,968,803.




Notifiable Interests in the Company’s Voting RightsAt the end of the financial year, the following had declared anotifiable interest in the Company’s voting rights:

Number of Shareholders voting rights %

Chase Nominees Limited1 4,434,095 11.1Lazard Asset Management LLC 3,896,140 9.7National Grid UK Pension Scheme 2,852,879 7.11607 Capital Partners, LLC 2,061,369 5.2Legal & General Investment Management 1,877,614 4.7East Riding of Yorkshire Council 1,600,000 4.0

1Held on behalf of JPMAM Investment Account, ISA and SIPP participants. Non-beneficial.

No changes to these holdings had been notified as at the dateof this report

The rules concerning the appointment and replacement ofDirectors, amendment of the Articles of Association andpowers to issue or buy back the Company’s shares arecontained in the Articles of Association of the Company and theCompanies Act 2006.

There are no restrictions concerning the transfer of securitiesin the Company; no special rights with regard to controlattached to securities; no agreements between holders ofsecurities regarding their transfer known to the Company;no agreements which the Company is party to that affect itscontrol following a takeover bid; and no agreements betweenthe Company and its Directors concerning compensation forloss of office.

Risk Management and Internal Control

The UK Corporate Governance Code requires the Directors, atleast annually, to review the effectiveness of the Company’ssystem of risk management and internal control and to reportto shareholders that they have done so. This encompasses areview of all controls, which the Board has identified asincluding business, financial, operational, compliance and riskmanagement.

The Directors are responsible for the Company’s system of riskmanagement and internal control, which is designed tosafeguard the Company’s assets, maintain proper accountingrecords and ensure that financial information used within thebusiness, or published, is reliable. However, such a system canonly be designed to manage rather than eliminate the risk offailure to achieve business objectives and therefore can only

provide reasonable, but not absolute, assurance against fraud,material misstatement or loss.

Since investment management, custody of assets and alladministrative services are provided to the Company byJPMAM and its associates, the Company’s system of riskmanagement and internal control mainly comprisesmonitoring the services provided by JPMAM and its associates,including the operating controls established by them, to ensurethey meet the Company’s business objectives. There is anongoing process for identifying, evaluating and managing thesignificant risks faced by the Company (see Principal Risks onpages 22 to 23). This process has been in place for the yearunder review and up to the date of the approval of the AnnualReport & Accounts and it accords with the Turnbull guidance.The Company does not have an internal audit function of itsown, but relies on the internal audit department of JPMAMwhich reports any material failings or weaknesses. The keyelements designed to provide effective internal control are asfollows:

Financial Reporting – Regular and comprehensive review bythe Board of key investment and financial data, includingmanagement accounts, revenue projections, analysis oftransactions and performance comparisons.

Management Agreement – Appointment of a manager andcustodian regulated by the Financial Services Authority (‘FSA’),whose responsibilities are clearly defined in a writtenagreement.

Management Systems – The Managers’ system of internalcontrol includes organisational agreements which clearlydefine the lines of responsibility, delegated authority, controlprocedures and systems. These are monitored by JPMAM’sCompliance Department which regularly monitors compliancewith FSA rules.

Investment Strategy – Authorisation and monitoring of theCompany’s investment strategy and exposure limits by theBoard.

The Board, either directly or through the Audit Committee,keeps under review the effectiveness of the Company’s systemof risk management and internal control by monitoring theoperation of the key operating controls of the Manager and itsassociates as follows:

• reviews the terms of the management agreement andreceives regular reports from JPMAM’s Compliancedepartment;



• reviews reports on the internal controls and the operationsof its custodian, JPMorgan Chase Bank, which is itselfindependently reviewed; and

• reviews every six months an independent report on the riskmanagement and internal controls and the operations ofJPMAM.

By means of the procedures set out above, the Board confirmsthat it has reviewed the effectiveness of the Company’s systemof risk management and internal control for the year ended31st March 2012 and to the date of approval of this AnnualReport and Accounts.

During the course of its review of the system of riskmanagement and internal control, the Board has not identifiedor been advised of any failings or weaknesses which it hasdetermined to be significant.

Corporate Governance and Voting Policy

The Company delegates responsibility for voting to JPMAM.The following is a summary of JPMAM’s policy statements oncorporate governance, voting policy and social andenvironmental issues, which has been reviewed and noted bythe Board.

Corporate Governance JPMAM believes that corporate governance is integral to our investmentprocess. As part of our commitment to delivering superior investmentperformance to our clients, we expect and encourage the companies inwhich we invest to demonstrate the highest standards of corporategovernance and best business practice. We examine the share structureand voting structure of the companies in which we invest, as well as theboard balance, oversight functions and remuneration policy. Theseanalyses then form the basis of our proxy voting and engagementactivity.

Proxy Voting JPMAM manages the voting rights of the shares entrusted to it as it wouldmanage any other asset. It is the policy of JPMAM to vote in a prudent anddiligent manner, based exclusively on our reasonable judgement of whatwill best serve the financial interests of our clients. So far as is practicable,we will vote at all of the meetings called by companies in which we areinvested.

Stewardship/EngagementJPMAM recognises its wider stewardship responsibilities to its clients as amajor asset owner. To this end, we support the introduction of the FRCStewardship Code, which sets out the responsibilities of institutionalshareholders in respect of investee companies. Under the Code,managers should:

– publicly disclose their policy on how they will discharge theirstewardship responsibilities to their clients;

– disclose their policy on managing conflicts of interest;

– monitor their investee companies;

– establish clear guidelines on how they escalate engagement;

– be willing to act collectively with other investors where appropriate;

– have a clear policy on proxy voting and disclose their voting record;and

– report to clients.

JPMAM endorses the Stewardship Code for its UK investments andsupports the principles as best practice elsewhere. We believe thatregular contact with the companies in which we invest is central to ourinvestment process and we also recognise the importance of being an‘active’ owner on behalf of our clients.

Social & EnvironmentalJPMAM believes that companies should act in a socially responsiblemanner. Although our priority at all times is the best economic interestsof our clients, we recognise that, increasingly, non-financial issues suchas social and environmental factors have the potential to impact theshare price, as well as the reputation of companies. Specialists withinJPMAM’s environmental, social and governance (‘ESG’) team are taskedwith assessing how companies deal with and report on social andenvironmental risks and issues specific to their industry.

JPMAM is also a signatory to the United Nations Principles of ResponsibleInvestment, which commits participants to six principles, with the aim ofincorporating ESG criteria into their processes when making stockselection decisions and promoting ESG disclosure. Our detailed approachto how we implement the principles is available on request. JPMAM is alsoa signatory to Carbon Disclosure Project. JPMorgan Chase is a signatoryto the Equator Principles on managing social and environmental risk inproject finance.

JPMAM’s Voting Policy and Corporate Governance Guidelines areavailable on request from the Company Secretary or can be downloadedfrom JPMAM’s website:http://www.jpmorganassetmanagement.co.uk/Institutional/CommentaryAndAnalysis/CorporateGovernance, which also sets out itsapproach to the seven principles of the FRC Stewardship Code, its policyrelating to conflicts of interest and its detailed voting record.

By order of the Board Jonathan Latter, for and on behalf of JPMorgan Asset Management (UK) Limited, Company Secretary 12th June 2012



The Board has prepared this report in accordance with therequirements of Section 421 of the Companies Act 2006.An ordinary resolution to approve this report will be put toshareholders at the forthcoming Annual General Meeting.

The law requires the Company’s auditors to audit certain of thedisclosures provided. Where disclosures have been auditedthey are indicated as such. The auditors’ opinion is included intheir report on page 32.

Directors’ Remuneration1

2012 2011Directors’ Name £ £

Elisabeth Airey2 8,990 31,000Anthony Davidson 25,000 24,000Carolan Dobson 22,500 12,542Paul Manduca3 31,125 21,500Federico Marescotti 22,500 21,500Michael Wrobel 22,500 21,500

Total 132,615 132,042

1Audited information.2Resigned as Chairman and as a Director on 8th July 2011.3Appointed Chairman on 8th July 2011.

In the year under review, Directors’ fees were paid at thefollowing rates; Chairman £34,000 per annum; Chairman of theAudit Committee £25,000 per annum; and other Directors£22,500 per annum. Fees were last increased with effect from1st April 2011. There has been no increase this year.

The Board’s policy for this and subsequent years is thatDirectors’ fees should properly reflect the time spent by theDirectors on the Company’s business and should be at a levelto ensure that candidates of a high calibre are recruited to theBoard. The Chairman of the Board and the Chairman of theAudit Committee are paid higher fees than the other Directors,reflecting the greater time commitment involved in fulfillingthose roles.

As all of the Directors are non-executive, the Board has notestablished a Remuneration Committee. Instead, theNomination Committee reviews Directors’ fees on a regularbasis and makes recommendations to the Board as and whenappropriate. Reviews are based on information provided by theManager, JPMAM, and industry research carried out by thirdparties on the level of fees paid to the directors of the

Company’s peers and within the investment trust industrygenerally. The Directors’ fees are not performance related. TheArticles stipulate that aggregate fees must not exceed £175,000per annum. Any increase in the maximum aggregate amountrequires both Board and shareholder approval.

The terms and conditions of Directors’ appointments are setout in formal letters of appointment. Details of the Board’spolicy on tenure are set out on page 26.

The Company does not operate any type of incentive orpension scheme and therefore no Directors receive bonuspayments or pension contributions from the Company. TheDirectors do not have service contracts and are not paidcompensation for loss of office. No other payments are madeto Directors, other than the reimbursement of reasonableout-of-pocket expenses incurred in connection with attendingthe Company’s business.

A graph showing the Company’s share price total returncompared with its benchmark, the HSBC Smaller EuropeanCompanies (ex UK) Total Return Index, is shown below.

Five year share price and benchmark totalreturn to 31st March 2012


Share price total return.

Benchmark total return.

By order of the Board Jonathan Latter, for and on behalf of JPMorgan Asset Management (UK) Limited, Company Secretary 12th June 2012

50

60

70

80

90

100

110

120

201220112010200920082007

Directors’ Remuneration Report



The Directors are responsible for preparing the annual reportand the accounts in accordance with applicable law andregulations.

Company law requires the Directors to prepare financialstatements for each financial year. Under that law, the Directorshave elected to prepare the financial statements in accordancewith United Kingdom Generally Accepted Accounting Practice(United Kingdom Accounting Standards and applicable law).Under Company law the Directors must not approve thefinancial statements unless they are satisfied that they give atrue and fair view of the state of affairs of the Company and ofthe profit or loss of the Company for that period. In preparingthese financial statements, the Directors are required to:

• select suitable accounting policies and then apply themconsistently;

• make judgements and estimates that are reasonable andprudent; and

• state whether applicable UK Accounting Standards havebeen followed, subject to any material departures disclosedand explained in the financial statements.

The Directors are responsible for keeping adequate accountingrecords that are sufficient to show and explain the Company’stransactions and disclose with reasonable accuracy at any timethe financial position of the Company and to enable them toensure that the financial statements comply with theCompanies Act 2006. They are also responsible forsafeguarding the assets of the Company and hence for takingreasonable steps for the prevention and detection of fraud andother irregularities.

The accounts are published on the www.jpmeuropeansmallercompanies.co.uk website, which is maintained by theCompany’s Manager, JPMorgan Asset Management (UK)

Limited (‘JPMAM’). The maintenance and integrity of thewebsite maintained by JPMAM is, so far as it relates to theCompany, the responsibility of JPMAM. The work carried outby the auditors does not involve consideration of themaintenance and integrity of this website and, accordingly, theauditors accept no responsibility for any changes that haveoccurred to the accounts since they were initially presentedon the website. The accounts are prepared in accordance withUK legislation, which may differ from legislation in otherjurisdictions.

Under applicable law and regulations the Directors are alsoresponsible for preparing a Directors’ Report, Directors’Remuneration Report and Statement of Corporate Governancethat comply with that law and those regulations.

Each of the Directors, whose names and functions are listed inthe Directors’ Report confirms that, to the best of his/herknowledge:

• the financial statements, which have been prepared inaccordance with United Kingdom Generally AcceptedAccounting Practice (United Kingdom AccountingStandards and applicable law), give a true and fair view ofthe assets, liabilities, financial position and net return orloss of the Company; and

• the Directors’ Report includes a fair review of thedevelopment and performance of the business and theposition of the Company, together with a description of theprincipal risks and uncertainties that it faces.

For and on behalf of the Board Paul ManducaChairman 12th June 2012

Statement of Directors’Responsibilities



To the members of JPMorgan European Smaller Companies Trust plc We have audited the financial statements of JPMorgan EuropeanSmaller Companies Trust plc for the year ended 31st March 2012which comprise the Income Statement, Reconciliation ofMovements in Shareholders’ Funds, Balance Sheet, Cash FlowStatement and the related notes. The financial reportingframework that has been applied in their preparation isapplicable law and United Kingdom Accounting Standards(United Kingdom Generally Accepted Accounting Practice).

Respective responsibilities of Directors and AuditorsAs explained more fully in the Statement of Directors’Responsibilities set out on page 31, the Directors are responsiblefor the preparation of the financial statements and for beingsatisfied that they give a true and fair view. Our responsibility isto audit and express an opinion on the financial statements inaccordance with applicable law and International Standards onAuditing (UK and Ireland). Those standards require us to complywith the Auditing Practices Board’s Ethical Standards forAuditors.

This report, including the opinion, has been prepared for and onlyfor the Company’s members as a body in accordance withChapter 3 of Part 16 of the Companies Act 2006 and for no otherpurpose. We do not, in giving this opinion, accept or assumeresponsibility for any other purpose or to any other person towhom this report is shown or into whose hands it may come savewhere expressly agreed by our prior consent in writing.

Scope of the audit of the financial statementsAn audit involves obtaining evidence about the amounts anddisclosures in the financial statements sufficient to givereasonable assurance that the financial statements are free frommaterial misstatement, whether caused by fraud or error. Thisincludes an assessment of: whether the accounting policies areappropriate to the Company’s circumstances and have beenconsistently applied and adequately disclosed; thereasonableness of significant accounting estimates made by theDirectors; and the overall presentation of the financialstatements. In addition, we read all the financial andnon-financial information in the Annual Report & Accounts toidentify material inconsistencies with the audited financialstatements. If we become aware of any apparent materialmisstatements or inconsistencies we consider the implicationsfor our report.

Opinion on financial statementsIn our opinion the financial statements:

• give a true and fair view of the state of the Company’s affairsas at 31st March 2012 and of its net loss and cash flows for theyear then ended;

• have been properly prepared in accordance with UnitedKingdom Generally Accepted Accounting Practice; and

• have been prepared in accordance with the requirements ofthe Companies Act 2006.

Opinion on other matters prescribed by the Companies Act 2006In our opinion:

• the part of the Directors’ Remuneration Report to be auditedhas been properly prepared in accordance with theCompanies Act 2006; and

• the information given in the Directors’ Report for thefinancial year for which the financial statements are preparedis consistent with the financial statements.

Matters on which we are required to report by exceptionWe have nothing to report in respect of the following:

Under the Companies Act 2006 we are required to report to youif, in our opinion:

• adequate accounting records have not been kept, or returnsadequate for our audit have not been received frombranches not visited by us; or

• the financial statements and the part of the Directors’Remuneration Report to be audited are not in agreementwith the accounting records and returns; or

• certain disclosures of directors’ remuneration specified bylaw are not made; or

• we have not received all the information and explanations werequire for our audit.

Under the Listing Rules we are required to review:

• the Directors’ statement, set out on page 23, in relation togoing concern;

• the parts of the Corporate Governance Statement relating tothe Company’s compliance with the nine provisions of the UKCorporate Governance Code specified for our review; and

• certain elements of the report to shareholders by the Boardon Directors’ remuneration.

Jeremy Jensen (Senior Statutory Auditor)for and on behalf of PricewaterhouseCoopers LLPChartered Accountants and Statutory AuditorsLondon

12th June 2012

Notes:

(a) The maintenance and integrity of JPMorgan European Smaller CompaniesTrust plc website (www.jpmeuropeansmallercompanies.co.uk) is theresponsibility of JPMAM; the work carried out by the Auditors does not involveconsideration of these matters and, accordingly, the Auditors accept noresponsibility for any changes that may have occurred to the accounts sincethey were initially presented on the website.

(b) Legislation in the United Kingdom governing the preparation anddissemination of financial statements may differ from legislation in otherjurisdictions.

Independent Auditors’ Report



Income Statementfor the year ended 31st March

2012 2011Revenue Capital Total Revenue Capital Total

Notes £’000 £’000 £’000 £’000 £’000 £’000

(Losses)/gains on investments held at fair value through profit or loss 2 — (104,011) (104,011) — 78,917 78,917

Net foreign currency gains/(losses) — 1,382 1,382 — (1,540) (1,540)Income from investments 3 10,040 — 10,040 8,963 — 8,963Other interest receivable and similar income 3 175 — 175 278 — 278

Gross return/(loss) 10,215 (102,629) (92,414) 9,241 77,377 86,618Management fee 4 (1,301) (3,035) (4,336) (4,298) — (4,298)Other administrative expenses 5 (620) — (620) (664) — (664)

Net return/(loss) on ordinary activities before finance costs and taxation 8,294 (105,664) (97,370) 4,279 77,377 81,656

Finance costs 6 (360) (841) (1,201) (1,304) — (1,304)

Net return/(loss) on ordinary activities before taxation 7,934 (106,505) (98,571) 2,975 77,377 80,352

Taxation 7 (879) — (879) (606) — (606)

Net return/(loss) on ordinary activities after taxation 7,055 (106,505) (99,450) 2,369 77,377 79,746

Return/(loss) per share 9 17.12p (258.41)p (241.29)p 5.33p 174.02p 179.35p

Details of the dividend declared are given in note 8 on page 42.

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired ordiscontinued in the year.

The ‘Total’ column of this statement is the profit and loss account of the Company and the ‘Revenue’ and ‘Capital’ columnsrepresent supplementary information prepared under guidance issued by the Association of Investment Companies. The Totalcolumn represents all the information that is required to be disclosed in a Statement of Total Recognised Gains and Losses(‘STRGL’). For this reason a STRGL has not been presented.

The notes on pages 37 to 55 form an integral part of these accounts.



Called up Capitalshare Share redemption Capital Revenue

capital premium reserve reserves reserve Total£’000 £’000 £’000 £’000 £’000 £’000

At 31st March 2010 11,771 1,312 3,865 397,184 1,750 415,882Repurchase and cancellation of the

Company’s own shares (407) — 407 (12,242) — (12,242)Purchase of shares into Treasury — — — (4,591) — (4,591)Cancellation of shares held in Treasury (487) — 487 — — —Net return on ordinary activities — — — 77,377 2,369 79,746Dividend appropriated in the year — — — — (1,367) (1,367)

At 31st March 2011 10,877 1,312 4,759 457,728 2,752 477,428Repurchase and cancellation of the

Company’s own shares (856) — 856 (31,523) — (31,523)Net (loss)/return on ordinary activities — — — (106,505) 7,055 (99,450)Dividends appropriated in the year — — — — (4,156) (4,156)

At 31st March 2012 10,021 1,312 5,615 319,700 5,651 342,299


Reconciliation of Movements inShareholders’ Fundsfor the year ended 31st March



2012 2011Notes £’000 £’000

Fixed assets Investments held at fair value through profit or loss 359,138 557,047Investment in liquidity fund held at fair value through profit or loss 15,003 2,010

Total investments 10 374,141 559,057

Current assets 11Debtors 15,077 5,164Cash and short term deposits 568 87Derivative financial instruments: forward currency contracts held

at fair value through profit or loss — 5

15,645 5,256

Creditors: amounts falling due within one year 12 (47,487) (86,885)

Net current liabilities (31,842) (81,629)

Total assets less current liabilities 342,299 477,428

Net assets 342,299 477,428

Capital and reserves Called up share capital 13 10,021 10,877Share premium 14 1,312 1,312Capital redemption reserve 14 5,615 4,759Capital reserves 14 319,700 457,728Revenue reserve 14 5,651 2,752

Total equity shareholders’ funds 342,299 477,428

Net asset value per share 15 854.0p 1097.3p

The accounts on pages 33 to 55 were approved and authorised for issue by the Directors on 12th June 2012 and were signed ontheir behalf by:

Paul ManducaDirector


Company registration number: 2431143.

Balance Sheetat 31st March



2012 2011Notes £’000 £’000

Net cash inflow from operating activities 16 3,807 2,063

Returns on investments and servicing of finance Interest paid (1,411) (1,049)

Net cash outflow from returns on investments and servicing of finance (1,411) (1,049)

TaxationOverseas tax recovered 203 513

Capital expenditure and financial investment Purchases of investments (2,001,039) (1,542,735)Sales of investments 2,062,677 1,504,214Other capital charges (253) (253)

Net cash inflow/(outflow) from capital expenditure and financial investment 61,385 (38,774)

Dividends paid (4,156) (1,367)

Net cash inflow/(outflow) before financing 59,828 (38,614)

Financing Net (repayment)/drawdown of loans (26,696) 56,100Repurchase and cancellation of the Company’s own shares (31,162) (12,242)Purchase of shares into Treasury — (5,631)

Net cash (outflow)/inflow from financing (57,858) 38,227

Increase/(decrease) in cash for the year 17 1,970 (387)


Cash Flow Statementfor the year ended 31st March



1. Accounting policies

(a) Basis of accountingThe accounts are prepared in accordance with the Companies Act 2006, United Kingdom Generally Accepted AccountingPractice (‘UK GAAP’) and with the Statement of Recommended Practice ‘Financial Statements of Investment Trust Companiesand Venture Capital Trusts’ (the ‘SORP’) issued by the AIC in January 2009. All of the Company’s operations are of a continuingnature.

The accounts have been prepared on a going concern basis under the historical cost convention, as modified by therevaluation of investments and derivative financial instruments at fair value through profit or loss.

The policies applied in these accounts are consistent with those applied in the preceding year.

(b) Change in accounting basisWith effect from 1st April 2011, the Company has allocated 70% of the management fee and finance costs to capital and theremaining 30% to revenue. It had previously allocated 100% of the management fee and finance costs to revenue. It is theBoard’s determination that the capital return should reflect the indirect costs of earning capital returns and the aboveallocation reflects their expected long term split of returns in the form of capital and income respectively. The effect of thischange is to increase the net revenue return after taxation by £3,876,000 and to reduce the capital return by the sameamount. The total net return on ordinary activities after taxation is unaffected by the change. The comparative figures havenot been restated.

(c) Valuation of investmentsThe Company’s business is investing in financial assets with a view to profiting from their total return in the form of incomeand capital growth. This portfolio of financial assets is managed and its performance evaluated on a fair value basis, inaccordance with a documented investment strategy and information is provided internally on that basis to the Company’sBoard of Directors. Accordingly, upon initial recognition, the investments are designated by the Company as ‘held at fair valuethrough profit or loss’. They are included initially at fair value which is taken to be their cost, excluding expenses incidental topurchase which are written off to capital at the time of acquisition. Subsequently the investments are valued at fair valuewhich are quoted bid market prices for investments traded in active markets.

All purchases and sales are accounted for on a trade date basis.

(d) Accounting for reservesGains and losses on sales of investments including the related foreign exchange gains and losses, realised gains and losses onforeign currency cash balances and loans, management fee and finance costs allocated to capital and any other capitalcharges, are included in the Income Statement and dealt with in capital reserves within ‘Gains and losses on sales ofinvestments’. Increases and decreases in the valuation of investments held at the year end, including the related foreignexchange gains and losses, are included in the Income Statement and dealt with in capital reserves within ‘Investment holdinggains and losses’. Unrealised gains and losses on foreign currency contracts or foreign currency loans are included in theIncome Statement and dealt with in capital reserves within ‘Investment holding gains and losses’.

(e) IncomeDividends receivable are included in revenue on an ex-dividend basis except where, in the opinion of the Board, the dividendis capital in nature, in which case it is included in capital.

Overseas dividends are included gross of any withholding tax.

Where the Company has elected to receive scrip dividends in the form of additional shares rather than in cash, the amount ofthe cash dividend foregone is recognised in revenue. Any excess in the value of the shares received over the amount of thecash dividend is recognised in capital.

Deposit interest receivable is taken to revenue on an accruals basis.

Stocklending income is taken to revenue on a receipts basis.

Notes to the Accountsfor the year ended 31st March 2012



Notes to the Accounts continued

1. Accounting policies continued

(f) ExpensesAll expenses are accounted for on an accruals basis. Expenses are allocated wholly to the revenue column of the IncomeStatement with the following exceptions:

– With effect from 1st April 2011 the management fee is allocated 30% to revenue and 70% to capital, in line with the Board’sexpected long term split of revenue and capital return from the Company’s investment portfolio.

– Expenses incidental to the purchase of an investment are included within the cost of the investment and those incidentalto the sale are deducted from the sale proceeds. These expenses are commonly referred to as transaction costs andcomprise brokerage commission and stamp duty. Details of transaction costs are given in note 10 on page 43.

(g) Finance costsFinance costs are accounted for on an accruals basis using the effective interest method and in accordance with the provisionsof FRS 25 ‘Financial Instruments: Presentation’ and FRS 26 ‘Financial Instruments: Measurement’.

With effect from 1st April 2011, finance costs are allocated 30% to revenue and 70% to capital, in line with the Board’sexpected long term split of revenue and capital return from the Company’s investment portfolio.

(h) Financial instrumentsCash and short term deposits may comprise cash and demand deposits which are readily convertible to a known amount ofcash and are subject to insignificant risk of changes in value.

Other debtors and creditors do not carry any interest, are short term in nature and are accordingly stated at nominal value asreduced by appropriate allowances for estimated irrecoverable amounts.

Derivative financial instruments, including short term forward currency contracts, are valued at fair value, which is the netunrealised gain or loss, and are included in current assets or current liabilities in the balance sheet in accordance with FRS 26:‘Financial Instruments: Measurement’.

Bank loans are classified as loans and receivables and are measured at amortised cost. They are recorded at the proceedsreceived net of direct issue costs and finance costs are accounted for on an accruals basis using the effective interest method.

(i) Foreign currencyIn accordance with FRS 23: ‘The effects of changes in Foreign Currency Exchange Rates’ the Company is required to nominatea functional currency, being the currency in which the Company predominantly operates. The Board, having regard to thecurrency of the Company’s share capital and the predominant currency in which its shareholders operate, has determined thatsterling is the functional currency. Sterling is also the currency in which the accounts are presented.

Transactions denominated in foreign currencies are converted at actual exchange rates as at the date of the transaction or,in the case of forward currency contracts, at contractual rates. Monetary assets and liabilities denominated in foreigncurrencies at the year end are translated at the rates of exchange prevailing at the year end, or at the related forwardcurrency contract rate.

Any gain or loss on monetary assets arising from a change in exchange rates subsequent to the date of a transaction isincluded as an exchange gain or loss in revenue or capital, depending on whether the gain or loss is of a revenue orcapital nature.



(j) TaxationCurrent tax is provided at the amount expected to be paid or recovered.

Deferred taxation is accounted for in accordance with FRS 19: ‘Deferred Tax’.

Deferred taxation is provided on all timing differences that have originated but not reversed by the balance sheet date.Deferred taxation liabilities are recognised for all taxable timing differences but deferred taxation assets are only recognisedto the extent that it is more likely than not that taxable profits will be available against which those timing differences can beutilised.

Deferred tax is measured at the tax rate which is expected to apply in the periods in which the timing differences are expectedto reverse, based on tax rates that have been enacted or substantively enacted at the balance sheet date and is measured onan undiscounted basis.

(k) Value Added Tax (‘VAT’)Irrecoverable VAT is included in the expense on which it has been suffered. VAT recoverable is calculated using the partialexemption method based on the proportion of zero rated supplies to total supplies.

(l) Repurchases of ordinary shares for cancellation The cost of repurchasing ordinary shares including the related stamp duty and transactions costs is charged to ‘Capitalreserves’ and dealt with in the Reconciliation of Movement in Shareholders’ Funds. Share repurchase transactions areaccounted for on a trade date basis. The nominal value of ordinary share capital repurchased and cancelled is transferred outof ‘Called up share capital’ and into ‘Capital redemption reserve’.

(m)Dividends payableIn accordance with FRS 21: ‘Events after the Balance Sheet Date’, dividends are included in the accounts in the year in whichthey are paid.

2012 2011£’000 £’000

2. (Losses)/gains on investments held at fair value through profit or loss (Losses)/gains on investments held at fair value through profit or loss based on historical cost (40,195) 66,654Amounts recognised as unrealised in the previous year (85,753) (58,749)

(Losses)/gains on sales of investments based on carrying value at previous balance sheet date (125,948) 7,905Net movement in investment holding gains 22,231 71,267Other capital charges (294) (255)

Total capital (losses)/gains on investments held at fair value through profit or loss (104,011) 78,917




2012 2011£’000 £’000

3. Income Income from investmentsDividends from investments listed overseas 8,763 8,518Scrip dividends 1,077 365Dividends from liquidity fund 200 80

10,040 8,963

Other interest receivable and similar incomeStocklending fees 143 248Deposit interest 32 30

175 278

Total income 10,215 9,241

2012 2011Revenue Capital Total Revenue Capital Total £’000 £’000 £’000 £’000 £’000 £’000

4. Management fee Management fee1 1,301 3,035 4,336 4,298 — 4,298

1Details of the management fee are given in the Directors’ Report on page 23.

2012 2011£’000 £’000

5. Other administrative expensesAdministration expenses 328 380Directors’ fees1 133 132Savings scheme costs2 137 130Auditors’ remuneration for audit services3 22 22

620 664

1Full disclosure is given in the Directors’ Remuneration Report on page 30. 2Paid to JPMAM for themarketing and administration of savings scheme products. 3Includes £3,000 (2011: £3,000) irrecoverable VAT.


6. Finance costs Interest payable on bank loans and overdrafts 360 841 1,201 1,304 — 1,304



7. Taxation (a) Analysis of tax charge for the year

2012 2011£’000 £’000

UK corporation tax at 26% (2011: 28%) — —Overseas withholding tax 879 606

Current tax charge for the year 879 606

(b) Factors affecting current tax charge for the yearThe tax assessed for the year is higher (2011: lower) than the Company’s applicable rate of corporation tax for the year of 26%(2011: 28%). The factors affecting the current tax charge for the year are as follows:


Net return/(loss) on ordinary activities before taxation 7,934 (106,505) (98,571) 2,975 77,377 80,352

Net return/(loss) on ordinary activities before taxation multiplied by the Company’s applicable rate of corporation tax of 26% (2011: 28%) 2,063 (27,691) (25,628) 833 21,666 22,499

Effects of:Non taxable capital losses/(gains) — 26,683 26,683 — (21,666) (21,666)Non taxable overseas dividends (2,455) — (2,455) (2,061) — (2,061)Income taxed in different periods — — — 1 — 1Overseas taxation 879 — 879 606 — 606Unrelieved expenses and charges 392 1,008 1,400 1,227 — 1,227

879 — 879 606 — 606

(c) Deferred taxationThe Company has an unrecognised deferred tax asset of £6,767,000 (2011: £6,180,000) based on a prospective corporation taxrate of 24% (2011: 27%). The reduction in the standard rate of corporation tax from 26% to 24% was substantively enacted on21st March 2012 and is effective from 1st April 2012. The deferred tax asset has arisen due to the cumulative excess of deductibleexpenses over taxable income. Given the composition of the Company’s portfolio, it is not likely that this asset will be utilised inthe foreseeable future and therefore no asset has been recognised in the accounts.

Given the Company’s status as an investment trust company, and the intention to continue meeting the conditions required toobtain approval, the Company has not provided deferred taxation on any capital gains or losses arising on the revaluation ordisposal of investments.




8. Dividends(a) Dividends paid and declared

2012 2011£’000 £’000

Dividends paid 2011 final dividend of 4.0p (2010: 3.0p) per share 1,724 1,367Interim dividend of 6.0p (2011: nil) per share 2,432 —

Total dividends paid in the year 4,156 1,367

Dividend declared Dividend declared of 11.0p (2011: 4.0p) per share 4,409 1,740

The dividend declared in respect of the year ended 31st March 2012 is subject to shareholder approval at the forthcomingAnnual General Meeting. In accordance with the accounting policy of the Company, this dividend will be reflected in theaccounts for the year ending 31st March 2013.

The dividend declared in respect of the year ended 31st March 2011 amounted to £1,740,000. However, the amount actuallypaid was £1,724,000 due to shares repurchased and cancelled after the balance sheet date but prior to the dividend recorddate.

(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, shownbelow. The revenue available for distribution by way of dividend for the year is £7,055,000 (2011: £2,369,000).

2012 2011£’000 £’000

Interim dividend of 6.0p (2011: nil) per share 2,432 —Final dividend of 11.0p (2011: 4.0p) per share 4,409 1,724

6,841 1,724

9. Return/(loss) per share

The revenue return per share is based on the revenue attributable to the ordinary shares of £7,055,000 (2011: £2,369,000) andon the weighted average number of shares in issue during the year of 41,215,645 (2011: 44,464,022 excluding shares held inTreasury).

The capital loss per share is based on the capital loss attributable to the ordinary shares of £106,505,000 (2011: £77,377,000return) and on the weighted average number of shares in issue during the year of 41,215,645 (2011: 44,464,022 excludingshares held in Treasury).

The total loss per share is based on the total loss attributable to the ordinary shares of £99,450,000 (2011: £79,746,000 return)and on the weighted average number of shares in issue during the year of 41,215,645 (2011: 44,464,022 excluding shares heldin Treasury).



2012 2011£’000 £’000

10. InvestmentsInvestments listed on a recognised stock exchange1 374,141 559,057

Opening book cost 479,463 362,536

Opening investment holding gains 79,594 67,076

Opening valuation 559,057 429,612

Movement in the year:Purchases at cost 1,992,097 1,544,781Sales – proceeds (2,073,296) (1,494,508)(Losses)/gains on sales of investments based on the carrying value at the previous balance sheet date (125,948) 7,905

Net movement in investment holding gains and losses 22,231 71,267

374,141 559,057

Closing book cost 358,069 479,463Closing investment holding gains 16,072 79,594

Total investments held at fair value 374,141 559,057

1Includes the investment in the JPM Euro Liquidity Fund.

Transaction costs on purchases during the year amounted to £2,124,000 (2011: £2,168,000) and on sales during the yearamounted to £1,757,000 (2011: £1,671,000). These costs comprise mainly brokerage commission.

During the year, prior year investment holding gains amounting to £85,753,000 have been transferred to gains on sales ofinvestments as disclosed in note 14.

2012 2011£’000 £’000

11. Current assetsDebtors Securities sold awaiting settlement 14,070 3,451Dividends and interest receivable 634 1,487Overseas tax recoverable 333 168Other debtors 40 58

15,077 5,164

The Directors consider that the carrying amount of debtors approximates to their fair value.




Cash and short term depositsCash and short term deposits comprises bank balances and cash held by the Company, including short term deposits. Thecarrying amount of these represents their fair value. Cash balances in excess of a predetermined amount are placed on shortterm deposit at market rates of interest.

2012 2011£’000 £’000

12. Creditors: amounts falling due within one year Bank loan 41,674 70,824Securities purchased awaiting settlement 5,211 15,230Repurchases of the Company’s own shares awaiting settlement 361 —Other creditors and accruals 241 410Bank overdraft — 421

47,487 86,885

The bank loan, which is unsecured, comprises a total of Euro 50 million drawn down on the Company’s facility withScotiabank. Further details of the Company’s loan facilities are given in note 20(a)(ii) on page 51.

The Directors consider that the carrying amount of creditors falling due within one year approximates to their fair value.

2012 2011£’000 £’000

13. Called up share capital Issued and fully paidOpening balance of 43,508,739 ordinary shares of 25p each (2011: 45,821,106 excluding shares held in Treasury) 10,877 11,455

Repurchase of 3,424,936 (2011: 1,628,000) shares for cancellation (856) (407)Repurchase of nil (2011: 684,367) shares into Treasury — (171)

Closing balance, represented by 40,083,803 (2011: 43,508,739) ordinary shares of 25p each 10,021 10,877

During the year, the Company made market purchases of 3,424,936 of its own shares, nominal value £856,234 for cancellation,representing 7.9% of the issued share capital at the beginning of the year. The consideration paid for these shares amountedto £31,523,000. The reason for these purchases was to seek to manage the volatility and absolute level of the share pricediscount to net asset value per share.

During the prior year, all 1,974,914 shares held in Treasury were cancelled. No shares were held in Treasury in the current year.

Further details of transactions in the Company’s shares are given in the Directors’ Report on page 22.



Capital reserves Gains and Investment

Capital losses on holdingShare redemption sales of gains and Revenue

premium reserve investments losses reserve£’000 £’000 £’000 £’000 £’000

14. Reserves Opening balance 1,312 4,759 380,170 77,558 2,752Net foreign currency losses on cash and short term deposits — — (1,072) — —Unrealised gains on foreign currency contracts now realised — — 4 (4) —Losses on sales of investments based on the carrying value at the previous balance sheet date — — (125,948) — —

Net movement in investment holding gains and losses — — — 22,231 —Transfer on disposal of investments — — 85,753 (85,753) —Repurchase and cancellation of the Company’s own shares — 856 (31,523) — —Unrealised foreign currency gains on loans — — — 93 —Realised foreign currency gains on repayment of loans — — 2,361 — —Transfer of foreign currency losses on repayment of loans — — (2,041) 2,041 —Management fee and finance costs allocated to capital — — (3,876) — —Other capital charges — — (294) — —Dividends appropriated in the year — — — — (4,156)Retained revenue for the year — — — — 7,055

Closing balance 1,312 5,615 303,534 16,166 5,651

15. Net asset value per share

The net asset value per share is based on the net assets attributable to the ordinary shareholders of £342,299,000 (2011:£477,428,000) and on the 40,083,803 (2011: 43,508,739) shares in issue at the year end.

2012 2011£’000 £’000

16. Reconciliation of total (loss)/return on ordinary activities before finance costs and taxation to net cash inflow from operating activities

Total (loss)/return on ordinary activities before finance costs and taxation (97,370) 81,656Less capital loss/(return) before finance costs and taxation 105,664 (77,377)Scrip dividends received as income (1,077) (365)Decrease/(increase) in accrued income 853 (653)Decrease/(increase) in other debtors 18 (5)Increase/(decrease) in accrued expenses 1 (15)Overseas withholding tax (1,247) (1,178)Management fee allocated to capital (3,035) —

Net cash inflow from operating activities 3,807 2,063




Exchange2011 Cash flow movements 2012

£’000 £’000 £’000 £’000

17. Analysis of changes in net debtCash and short term deposits and bank overdrafts (334) 1,970 (1,068) 568Bank loans falling due within one year (70,824) 26,696 2,454 (41,674)

Net debt (71,158) 28,666 1,386 (41,106)

18. Transactions with the Manager

Details of the management contract are set out in the Directors’ Report on page 23. The management fee payable to JPMorganAsset Management (UK) Limited (‘JPMAM’) for the year was £4,336,000 (2011: £4,298,000) of which £nil (2011: £nil) wasoutstanding at the year end.

During the year £116,000 (2011: £112,000), excluding VAT, was payable to JPMAM for the marketing and administration ofsavings scheme products, of which £nil (2011: £nil) was outstanding at the year end.

Included in administration expenses in note 5 on page 40 are safe custody fees amounting to £85,000 (2011: £105,000)excluding VAT of which £16,000 (2011: £21,000) was outstanding at the year end. These fees were paid to third partycustodians by JPMAM on behalf of the Company and reimbursed to JPMAM.

JPMAM may carry out some of its dealing transactions through group subsidiaries. These transactions are carried out at arm’slength. The commission payable to JPMorgan Securities for the year was £230,000 (2011: £68,000) of which £nil (2011: £nil)was outstanding at the year end.

During the year the Company made purchases and sales of units in the JPMorgan Euro Liquidity Fund, which is managed byJPMAM. At the year end, the Company’s investment in this fund amounted to £15.0 million (2011: £2.0 million) or 4.0%(2011: 0.4%) of the Company’s investments. Dividends amounting to £200,000 (2011: £80,000) were receivable from thisinvestment during the year of which £2,000 (2011: £nil) were outstanding at the year end.

Stock lending fees amounting to £143,000 (2011: £248,000) were receivable by the Company during the year. JPMAMcommissions in respect of such transactions amounted to £30,000 (2011: £53,000).

Handling charges on dealing transactions amounting to £294,000 (2011: £255,000) were payable to JPMorgan Chase duringthe year of which £84,000 (2011: £44,000) was outstanding at the year end.

At the year end, a bank balance of £568,000 (2011: £87,000) was held with JPMorgan Chase. A net amount of interest of£32,000 (2011: £30,000) was receivable by the Company during the year from JPMorgan Chase of which £nil (2011: £nil) wasoutstanding at the year end.



19. Disclosures regarding financial instruments measured at fair value

The Company’s financial instruments within the scope of FRS 29 that are held at fair value comprise its investment portfolioand derivative financial instruments. The Company’s liabilities are not held at fair value.

The investments are categorised into a hierarchy consisting of the following three levels:

Level 1 – valued using quoted prices in active markets.

Level 2 – valued by reference to valuation techniques using observable inputs other than quoted market prices includedwithin Level 1.

Level 3 – valued by reference to valuation techniques using inputs that are not based on observable market data.

Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fairvalue measurement of the relevant asset.

Details of the valuation techniques used by the Company are given in note 1(c) on page 37.

The following table sets out the fair value measurements using the FRS 29 hierarchy at 31st March:

2012Level 1 Level 2 Level 3 Total£’000 £’000 £’000 £’000

Financial instruments held at fair value through profit or lossEquity investments 359,138 — — 359,138Liquidity funds 15,003 — — 15,003

Total 374,141 — — 374,141

2011Level 1 Level 2 Level 3 Total£’000 £’000 £’000 £’000

Financial instruments held at fair value through profit or lossEquity investments 557,047 — — 557,047Liquidity funds 2,010 — — 2,010

Total 559,057 — — 559,057

There have been no transfers between Levels 1, 2 or 3 during the year (2011: nil).




20. Financial instruments’ exposure to risk and risk management policies

As an investment trust, the Company invests in equities and other securities for the long term in order to secure its investmentobjective stated on the ‘Features’ page. In pursuing this objective, the Company is exposed to a variety of risks that couldresult in a reduction in the Company’s net assets or a reduction in the profits available for dividends. These risks includemarket risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk. The Directors’ policyfor managing these risks is set out below. The Company Secretary, in close co-operation with the Board and the Manager,co-ordinates the Company’s risk management strategy.

The objectives, policies and processes for managing the risks and the methods used to measure the risks that are set outbelow, have not changed from those applying in the comparative year.

The Company’s financial instruments may comprise the following:

– investments in equity shares of European companies and a Euro liquidity fund which are both held in accordance withthe Company’s investment objective;

– short term debtors, creditors and cash arising directly from its operations;

– short term forward currency contracts for the purpose of settling short term liabilities; and

– loan facilities, the purpose of which are to finance the Company’s operations.

(a) Market risk The fair value or future cash flows of a financial instrument held by the Company may fluctuate because of changes in marketprices. This market risk comprises three elements – currency risk, interest rate risk and other price risk. Information to enablean evaluation of the nature and extent of these three elements of market price risk is given in parts (i) to (iii) of this note,together with sensitivity analyses where appropriate. The Board reviews and agrees policies for managing these risks andthese policies have remained unchanged from those applying in the comparative year. The Manager assesses the exposure tomarket risk when making each investment decision and monitors the overall level of market risk on the whole of theinvestment portfolio on an ongoing basis.

(i) Currency risk Certain of the Company’s assets, liabilities and income are denominated in currencies other than sterling which is theCompany’s functional currency and the currency in which it reports. As a result, movements in exchange rates may affectthe sterling value of those items.

Management of currency risk The Manager monitors the Company’s exposure to foreign currencies on a daily basis and reports to the Board, whichmeets on at least five occasions each year. The Manager measures the risk to the Company of the foreign currencyexposure by considering the effect on the Company’s net asset value and income of a movement in the rates of exchangeto which the Company’s assets, liabilities, income and expenses are exposed. Foreign currency borrowing may be used tolimit the Company’s exposure to anticipated changes in exchange rates which might otherwise adversely affect the sterlingvalue of the portfolio of investments. This borrowing is limited to currencies and amounts commensurate with the assetexposure to those currencies. Income denominated in foreign currencies is converted to sterling on receipt. The Companymay use short term forward currency contracts to manage working capital requirements.

Foreign currency exposure The fair values of the Company’s monetary items that have foreign currency exposure at 31st March are shown overleaf.Where the Company’s equity investments (which are not monetary items) are priced in a foreign currency, they have beenincluded separately in the analysis so as to show the overall level of exposure.



2012 Swiss Danish Swedish Norwegian

Euro francs krone krona krone Total £’000 £’000 £’000 £’000 £’000 £’000

Investments held at fair value through profit or loss that are monetary items 15,003 — — — — 15,003

Current assets 10,357 5,092 12 — 95 15,556Creditors (44,759) (835) (579) (633) (103) (46,909)

Foreign currency exposure on net monetary items (19,399) 4,257 (567) (633) (8) (16,350)

Investments held at fair value through profit or loss that are equities 245,519 44,291 26,423 23,001 19,904 359,138

Total net foreign currency exposure 226,120 48,548 25,856 22,368 19,896 342,788

2011Swiss Danish Swedish Norwegian

Euro francs krone krona krone Total £’000 £’000 £’000 £’000 £’000 £’000

Investments held at fair value through profit or loss that are monetary items 2,010 — — — — 2,010

Current assets 5,355 629 41 1,969 23 8,017Creditors (86,105) (698) (37)) (2,043) (12) (88,895)

Foreign currency exposure on net monetary items (78,740) (69) 4 (74) 11 (78,868)

Investments held at fair value through profit or loss that are equities 402,134 85,944 25,675 33,422 9,872 557,047

Total net foreign currency exposure 323,394 85,875 25,679 33,348 9,883 478,179

In the opinion of the Directors, the above year end amounts are broadly representative of the exposure to foreign currencyrisk during the year.

Foreign currency sensitivityThe following tables illustrate the sensitivity of return after taxation for the year and net assets with regard to theCompany’s monetary financial assets and financial liabilities and exchange rates. The sensitivity analysis is based on theCompany’s monetary currency financial instruments held at each balance sheet date and the income receivable in foreigncurrency and assumes a 10% (2011: 10%) appreciation or depreciation in sterling against the Euro, Swiss francs, Danishkrone, Swedish krona and Norwegian krone to which the Company is exposed, which is considered to be a reasonableillustration based on the volatility of exchange rates during the year.




20. Financial instruments’ exposure to risk and risk management policies continued

(a) Market risk continued(i) Currency risk continued

Foreign currency sensitivity continuedIf sterling had strengthened by 10% this would have had the following effect:

2012 2011£’000 £’000

Income statement return after taxationRevenue return 876 (896)Capital return (1,635) 7,887

Total return after taxation for the year (759) 6,991

Net assets (759) 6,991

Conversely, if sterling had weakened by 10% this would have had the following effect:

2012 2011£’000 £’000

Income statement return after taxationRevenue return (876) 896Capital return 1,635 (7,887)

Total return after taxation for the year 759 (6,991)

Net assets 759 (6,991)

In the opinion of the Directors, the above sensitivity analysis is broadly representative of the whole year.

(ii) Interest rate risk Interest rate movements may affect the level of income receivable on cash deposits and the interest payable on theCompany’s variable rate cash borrowings.

Management of interest rate risk The Company does not normally hold significant cash balances. Short term borrowings are used when required. TheCompany may finance part of its activities through borrowings at levels approved and monitored by the Board.

The possible effects on cash flows that could arise as a result of changes in interest rates are taken into account when theCompany borrows on the loan facilities. However, amounts drawn down on these facilities are for short term periods andtherefore there is limited exposure to interest rate risk.

Derivatives are not used to hedge against the exposure to interest rate risk.



Interest rate exposure The Company has no financial assets or liabilities carrying fixed rates of interest. The exposure of financial assets andliabilities to floating interest rates using the year end figures, giving cash flow interest rate risk when rates are re-set, isshown below.

2012 2011£’000 £’000

Amounts exposed to floating interest rates: Cash and short term deposits 568 87JPM Euro Liquidity Fund 15,003 2,010

Creditors: amounts falling due within one yearBank loans (41,674) (70,824)Bank overdraft — (421)

Total exposure (26,103) (69,148)

Interest receivable on cash balances or payable on overdrafts is at a margin below or above LIBOR respectively.

The target interest earned on the JPM Euro Liquidity Fund is the 7 day Euro London Interbank Bid Rate.

In January 2012, the Company arranged a Euro 50 million 1 year Floating Rate Loan Facility with Scotiabank. Under theterms of the amended agreement, the Company may draw down up to Euro 50 million, or its equivalent in anothercurrency, at an interest rate of LIBOR as offered in the market for the relevant currency and loan period, plus a marginof 0.9% per annum plus the Mandatory Cost Rate, which is the lender’s cost of complying with the regulatoryrequirements of the Bank of England or European Central Bank during the term of the advance. This facility isunsecured but is subject to restrictions which are customary for a credit facility of this nature. At the year end, theCompany had drawn down Euro 50 million on this facility at a weighted average interest rate of 1.624%.

In January 2012, the Company also arranged a Euro 50 million 3 year Floating Rate Loan Facility with Scotiabank.Under the terms of this agreement, the Company may draw down up to Euro 50 million, or its equivalent in anothercurrency, at an interest rate of LIBOR as offered in the market for the relevant currency and loan period, plus a marginof 1.5% per annum plus the Mandatory Cost Rate. This facility is unsecured but is subject to the customary creditrestrictions. The Company had not drawn on this facility at the year end.

At 31st March 2011, the Company had drawn down Euro 55 million on a 1 year facility with ING Bank at a weightedaverage interest rate of 2.31% and Euro 40 million on a 1 year facility with Scotiabank at a weighted average interestrate of 2.30%. Both of these facilities matured during the year under review.




(a) Market risk continued(ii) Interest rate risk continued

Interest rate sensitivity The following table illustrates the sensitivity of the return after taxation for the year and net assets to a 1% (2011: 1%)increase or decrease in interest rates in regards to the Company’s monetary financial assets and financial liabilities. This levelof change is considered to be a reasonable illustration based on observation of current market conditions. The sensitivityanalysis is based on the Company’s monetary financial instruments held at the balance sheet date, with all other variablesheld constant.

2012 20111% increase 1%decrease 1% increase 1% decrease

in rate in rate in rate in rate £’000 £’000 £’000 £’000

Income statement – return after taxationRevenue return 31 (31) (691) 691Capital return (292) 292 — —

Total return after taxation for the year (261) 261 (691) 691

Net assets (261) 261 (691) 691

In the opinion of the Directors, the above sensitivity analysis may not be representative of the Company’s future exposureto interest rate changes due to the fluctuation in the level of cash balances, investment in the JPM Euro Liquidity Fund, andamounts drawn down on the Company’s loan facilities.

(iii) Other price risk Other price risk includes changes in market prices, other than those arising from interest rate risk or currency risk, whichmay affect the value of equity investments.

Management ofmarket price risk The Board meets on at least five occasions each year to consider the asset allocation of the portfolio and the riskassociated with particular industry sectors. The investment management team has responsibility for monitoring theportfolio, which is selected in accordance with the Company’s investment objectives and seeks to ensure that individualstocks meet an acceptable risk/reward profile.

Market price risk exposure The Company’s exposure to changes in market prices at 31st March comprises its holdings in equity investments andpreference shares as follows:

2012 2011£’000 £’000

Equity investments and preference shares held at fair value through profit or loss 359,138 557,047

The above data is broadly representative of the exposure to market price risk during the year.




Concentration of exposure tomarket price risk An analysis of the Company’s investments is given on pages 13 to 17. This shows that all of the investments’ value is inEuropean companies and there is no concentration of exposure to any one country. It should also be noted that aninvestment may not be entirely exposed to the economic conditions in its country of domicile or of listing.

Market price risk sensitivity The following table illustrates the sensitivity of the return after taxation for the year and net assets to an increase ordecrease of 10% (2011: 10%) in the fair value of the Company’s equities. This level of change is considered to be areasonable illustration based on observation of current market conditions. The sensitivity analysis is based on theCompany’s equities and adjusting for change in the management fee, but with all other variables held constant.

2012 201110% increase 10% decrease 10% increase 10% decreasein fair value in fair value in fair value in fair value

£’000 £’000 £’000 £’000

Income statement – return after taxationRevenue return (140) 140 (724) 724Capital return 35,587 (35,587) 55,705 (55,705)

Total return after taxation for the year and net assets 35,447 (35,447) 54,981 (54,981)

(b) Liquidity risk This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities that aresettled by delivering cash or another financial asset.

Management of the risk Liquidity risk is not significant as the Company’s assets comprise readily realisable securities, the liquidity of which in normalmarkets is frequently tested by the Investment Managers and which can be sold to meet funding requirements if necessary.All of the Company’s assets are considered to be realisable within one month. Short term flexibility is achieved through the useof overdraft facilities. The Board’s policy is for the Company to remain fully invested in normal market conditions and thatshort term borrowings be used to manage short term liabilities and working capital requirements. Details of the current loanfacilities are given in part (a)(ii) to this note on page 51.

Contractual maturities of the financial liabilities at the year end, based on the earliest date on which payment can be requiredare as follows:

2012 2011More than More than

three threemonths but months but

Three not more Three not moremonths than one months than oneor less year Total or less year Total£’000 £’000 £’000 £’000 £’000 £’000

Creditors: amounts falling due within one yearBank loans, including interest 120 41,674 41,794 454 70,824 71,278Securities purchased awaiting settlement 5,211 — 5,211 15,230 — 15,230Repurchase of the Company’s own shares awaiting settlement 361 — 361 — — —Other creditors and accruals 174 — 174 133 — 133Bank overdraft — — — 421 — 421

5,866 41,674 47,540 16,238 70,824 87,062





(c) Credit risk Credit risk is the risk that the counterparty to a transaction fails to discharge its obligations under that transaction which couldresult in loss to the Company.

Management of credit risk Portfolio dealingThe Company invests in markets that operate Delivery Versus Payment (‘DVP’) settlement. The process of DVP mitigates therisk of losing the principal of a trade during the settlement process. The Manager continuously monitors dealing activity toensure best execution, a process that involves measuring various indicators including the quality of trade settlement andincidence of failed trades. Counterparty lists are maintained and adjusted accordingly.

CashCounterparties are subject to daily credit analysis by the Manager and trades can only be placed with counterparties that havea minimum rating of A1/P1 from Standard & Poor’s and Moody’s respectively.

Exposure to JPMorgan ChaseJPMorgan Chase is the custodian of the Company’s assets. The custody agreement grants a general lien over the securitiescredited to the securities account. The Company’s assets are segregated from JPMorgan Chases’s own trading assets and aretherefore protected from creditors in the event that JPMorgan Chase were to cease trading.

Credit risk exposure The amounts shown in the balance sheet under investment in liquidity fund, debtors and cash and short term depositsrepresent the maximum exposure to credit risk at the current and comparative year ends. The liquidity fund has an AAA(2011: AAA) credit rating.

Cash and short term deposits comprises balances held at banks that have a minimum credit rating of A1/P1 (2011: A1/P1) fromStandard & Poor’s and Moody’s respectively.

The aggregate value of securities on loan at 31st March 2012 amounted to £12.8 million and the maximum value of stock onloan during the year amounted to £47.3 million. Collateral is obtained by JPMorgan Asset Management and is called in on adaily basis to a value of 102% of the value of the securities on loan if that collateral is denominated in the same currency as thesecurities on loan and 105% if it is denominated in a different currency.

(d) Fair values of financial assets and financial liabilitiesAll financial assets and liabilities are either included in the balance sheet at fair value or the carrying amount in the balancesheet is a reasonable approximation of fair value.



21. Capital management policies and procedures

The Company’s capital management objectives are to ensure that it will continue as a going concern and to maximise theincome and capital return to its equity shareholders through an appropriate balance of equity capital and debt.

The Board’s policy is to limit gearing within the range 80% to 120%. Gearing for this purpose is defined as investments,excluding holdings in liquidity funds, expressed as a percentage of net assets. At 31st March 2012, gearing calculated on thisbasis was 104.9% (2011: 116.7%).

The Company’s debt and capital comprises the following:2012 2011£’000 £’000

DebtBank loans falling due within one year 41,674 70,824

EquityEquity share capital 10,021 10,877Reserves 332,278 466,551

Total equity 342,299 477,428

Total debt and equity 383,973 548,252

The Board, with the assistance of the Manager, monitors and reviews the broad structure of the Company’s capital on anongoing basis. This review includes:

– the planned level of gearing, which takes into account the Manager’s views on the market;

– the need to buy back equity shares, either for cancellation or to hold in Treasury, which takes into account the share pricediscount or premium;

– the opportunity for issues of new shares, including issues from Treasury; and

– the level of dividend distributions in excess of that which is required to be distributed.



Shareholder Analysisat 31st March 2012

Number of shares % Holding

Pension Funds 10,048,015 25.1Insurance Companies 2,838,877 7.1Mutual Funds 5,881,883 14.7JPMorgan Elect plc 507,142 1.3Other Institutions 4,348,597 10.8

Total Institutions 23,624,514 58.9

Retail investors holding shares directly or through nominee accounts1 11,950,981 29.8Individuals in the Investment Trust Investment Account/ISA/SIPP2 4,508,308 11.2

Total Retail Holdings 16,459,289 41.1

Total Shares in issue 40,083,803 100.0

1Includes shares below threshold of 10,000 shares.2Savings products managed by JPMorgan.

Source: Richard Davies Investor Relations.

Nominee accounts have been allocated to their appropriate category.


Notice is hereby given that the twenty-third Annual GeneralMeeting of JPMorgan European Smaller Companies Trust plcwill be held at The Armourers’ Hall, 81 Coleman Street, LondonEC2R 5BJ onWednesday 18th July 2012 at 12.00 noon for thefollowing purposes:

1. To receive the Directors’ Report, the Annual Accounts andthe Auditors’ Report for the year ended 31st March 2012.

2. To approve the Directors’ Remuneration Report for theyear ended 31st March 2012.

3. To declare a dividend of 11.00 pence per share.

4. To reappoint Anthony Davidson a Director of the Company.

5 To reappoint Carolan Dobson a Director of the Company.

6. To reappoint Paul Manduca a Director or the Company.

7. To reappoint Federico Marescotti a Director or theCompany.

8. To reappoint Stephen White a Director or the Company.

9. To reappoint PricewaterhouseCoopers LLP as Auditors tothe Company and to authorise the Directors to determinetheir remuneration.

Special Business

To consider the following resolutions:

Authority to allot new shares – Ordinary Resolution10. THAT the Directors of the Company be and they are herebygenerally and unconditionally authorised, (in substitution ofany authorities previously granted to the Directors),pursuant to and in accordance with Section 551 of theCompanies Act 2006 (the ‘Act’) to exercise all the powersfor the Company to allot shares in the Company and togrant rights to subscribe for, or to convert any security into,shares in the Company (‘Rights’) up to an aggregatenominal amount of £499,610, representing approximately5% of the Company’s issued ordinary share capital as at thedate of the passing of this resolution, provided that thisauthority shall expire at the conclusion of the AnnualGeneral Meeting of the Company to be held in 2013 unlessrenewed at a general meeting prior to such time, save thatthe Company may before such expiry make offers oragreements which would or might require shares to beallotted or Rights to be granted after such expiry and so

that the Directors of the Company may allot shares andgrant Rights in pursuance of such offers or agreements asif the authority conferred hereby had not expired.

Authority to disapply pre-emption rights on allotment of newshares – Special Resolution 11. THAT subject to the passing of Resolution 10 set out above,the Directors of the Company be and they are herebyempowered pursuant to Sections 570 and 573 of the Act toallot equity securities (within the meaning of Section 560 ofthe Act) for cash pursuant to the authority conferred byResolution 10 as if Section 561(1) of the Act did not apply toany such allotment, provided that this power shall belimited to the allotment of equity securities for cash up toan aggregate nominal amount of £499,610, representingapproximately 5% of the issued share capital as at the dateof the passing of this resolution at a price of not less thanthe net asset value per share and shall expire upon theexpiry of the general authority conferred by Resolution 10above, save that the Company may before such expirymake offers or agreements which would or might requireequity securities to be allotted after such expiry and so thatthe Directors of the Company may allot equity securities inpursuant of such offers or agreements as if the powerconferred hereby had not expired.

Authority to repurchase shares – Special Resolution 12. THAT the Company be generally and subject as hereinafterappears unconditionally authorised in accordance withSection 701 of the Act to make market purchases (withinthe meaning of Section 693 of the Act) of its issued ordinaryshares of 25 pence each in the capital of the Company.

PROVIDED ALWAYS THAT

(i) the maximum number of ordinary shares herebyauthorised to be purchased shall be 5,991,323 or if less,that number of ordinary shares which is equal to14.99% of the Company’s issued share capital as at thedate of the passing of this resolution;

(ii) the minimum price which may be paid for an ordinaryshare shall be 25 pence;

(iii) the maximum price which may be paid for an ordinaryshare shall be an amount equal to: (a) 105% of theaverage of the middle market quotations for anordinary share taken from and calculated by reference

Notice of Annual General Meeting



Notice of Annual General Meetingcontinued


to the London Stock Exchange Daily Official List for thefive business days immediately preceding the day onwhich the ordinary share is purchased; or (b) the priceof the last independent trade; or (c) the highest currentindependent bid;

(iv) any purchase of ordinary shares will be made in themarket for cash at prices below the prevailing net assetvalue per ordinary share (as determined by theDirectors);

(v) the authority hereby conferred shall expire on17th January 2014 unless the authority is renewed at theCompany’s Annual General Meeting in 2013 or at anyother general meeting prior to such time; and

(vi) the Company may make a contract to purchaseordinary shares under the authority hereby conferredprior to the expiry of such authority and may make apurchase of ordinary shares pursuant to any suchcontract notwithstanding such expiry.

By order of the BoardJonathan Latter, for and on behalf of JPMorgan Asset Management (UK) Limited, Company Secretary 14th June 2012

Notes

These notes should be read in conjunction with the notes on thereverse of the proxy form.

1. A member entitled to attend and vote at the Meeting may appointanother person(s) (who need not be a member of the Company) toexercise all or any of his rights to attend, speak and vote at theMeeting. A member can appoint more than one proxy in relation tothe Meeting, provided that each proxy is appointed to exercise therights attaching to different shares held by him.

2. A proxy does not need to be a member of the Company but mustattend the Meeting to represent you. Your proxy could be theChairman, another Director of the Company or another personwho has agreed to attend to represent you. Details of how toappoint the Chairman or another person(s) as your proxy orproxies using the proxy form are set out in the notes to the proxyform. If a voting box on the proxy form is left blank, the proxy orproxies will exercise his/their discretion both as to how to vote andwhether he/they abstain(s) from voting. Your proxy must attendthe Meeting for your vote to count. Appointing a proxy or proxiesdoes not preclude you from attending the Meeting and voting inperson.

3. Any instrument appointing a proxy, to be valid, must be lodged inaccordance with the instructions given on the proxy form.

4. You may change your proxy instructions by returning a new proxyappointment. The deadline for receipt of proxy appointments alsoapplies in relation to amended instructions. Any attempt toterminate or amend a proxy appointment received after therelevant deadline will be disregarded. Where two or more validseparate appointments of proxy are received in respect of the sameshare in respect of the same Meeting, the one which is last received(regardless of its date or the date of its signature) shall be treated asreplacing and revoking the other or others as regards that share; ifthe Company is unable to determine which was last received, noneof them shall be treated as valid in respect of that share.

5. To be entitled to attend and vote at the Meeting (and for thepurpose of the determination by the Company of the number ofvotes they may cast), members must be entered on the Company’sregister of members as at 6.00 p.m. two business days prior to theMeeting (the ‘specified time’). If the Meeting is adjourned to a timenot more than 48 hours after the specified time applicable to theoriginal Meeting, that time will also apply for the purpose ofdetermining the entitlement of members to attend and vote (andfor the purpose of determining the number of votes they may cast)at the adjourned Meeting. If, however, the Meeting is adjourned fora longer period then, to be so entitled, members must be enteredon the Company’s register of members as at 6.00 p.m. twobusiness days prior to the adjourned Meeting or, if the Companygives notice of the adjourned Meeting, at the time specified in thatnotice. Changes to entries on the register after this time shall bedisregarded in determining the rights of persons to attend or voteat the Meeting or adjourned Meeting.

6. Entry to the Meeting will be restricted to shareholders and theirproxy or proxies, with guests admitted only by prior arrangement.


7. A corporation, which is a shareholder, may appoint an individual(s)to act as its representative(s) and to vote in person at the Meeting(see instructions given on the proxy form). In accordance with theprovisions of the Companies Act 2006, each such representativemay exercise (on behalf of the corporation) the same powers as thecorporation could exercise if it were an individual member of theCompany, provided that they do not do so in relation to the sameshares. It is therefore no longer necessary to nominate adesignated corporate representative.

Representatives should bring to the Meeting evidence of theirappointment, including any authority under which it is signed.

8. Members that satisfy the thresholds in Section 527 of theCompanies Act 2006 can require the Company to publish astatement on its website setting out any matter relating to:(a) the audit of the Company’s accounts (including the Auditors’report and the conduct of the audit) that are to be laid beforethe AGM; or (b) any circumstances connected with Auditors ofthe Company ceasing to hold office since the previous AGM,which the members propose to raise at the Meeting. TheCompany cannot require the members requesting thepublication to pay its expenses. Any statement placed on thewebsite must also be sent to the Company’s Auditors no laterthan the time it makes its statement available on the website.The business which may be dealt with at the AGM includes anystatement that the Company has been required to publish on itswebsite pursuant to this right.

9. Pursuant to Section 319A of the Companies Act 2006, the Companymust cause to be answered at the AGM any question relating to thebusiness being dealt with at the AGM which is put by a memberattending the Meeting except in certain circumstances, including ifit is undesirable in the interests of the Company or the good orderof the Meeting or if it would involve the disclosure of confidentialinformation.

10. Under Sections 338 and 338A of the 2006 Act, members meetingthe threshold requirements in those sections have the right torequire the Company: (i) to give, to members of the Companyentitled to receive notice of the Meeting, notice of a resolutionwhich those members intend to move (and which may properly bemoved) at the Meeting; and/or (ii) to include in the business to bedealt with at the Meeting any matter (other than a proposedresolution) which may properly be included in the business at theMeeting. A resolution may properly be moved, or a matter properlyincluded in the business unless: (a) (in the case of a resolution only)it would, if passed, be ineffective (whether by reason of anyinconsistency with any enactment or the Company’s constitution orotherwise); (b) it is defamatory of any person; or (c) it is frivolous orvexatious. A request made pursuant to this right may be in hardcopy or electronic form, must identify the resolution of whichnotice is to be given or the matter to be included in the business,must be accompanied by a statement setting out the grounds forthe request, must be authenticated by the person(s) making it andmust be received by the Company not later than the date that is sixclear weeks before the Meeting, and (in the case of a matter to beincluded in the business only) must be accompanied by astatement setting out the grounds for the request.

11. A copy of this notice has been sent for information only to personswho have been nominated by a member to enjoy informationrights under Section 146 of the Companies Act 2006 (a ‘NominatedPerson’). The rights to appoint a proxy can not be exercised by aNominated Person: they can only be exercised by the member.However, a Nominated Person may have a right under anagreement between him and the member by whom he wasnominated to be appointed as a proxy for the Meeting or to havesomeone else so appointed. If a Nominated Person does not havesuch a right or does not wish to exercise it, he may have a rightunder such an agreement to give instructions to the member as tothe exercise of voting rights.

12. In accordance with Section 311A of the Companies Act 2006, thecontents of this notice of meeting, details of the total number ofshares in respect of which members are entitled to exercise votingrights at the AGM, the total voting rights members are entitled toexercise at the AGM and, if applicable, any members’ statements,members’ resolutions or members’ matters of business receivedby the Company after the date of this notice will be available on theCompany’s website www.jpmeuropeansmallercompanies.co.uk.

13. The register of interests of the Directors and connected persons inthe share capital of the Company and the Directors’ letters ofappointment are available for inspection at the Company’sregistered office during usual business hours on any weekday(Saturdays, Sundays and public holidays excepted). It will also beavailable for inspection at the Annual General Meeting. No Directorhas any contract of service with the Company.

14. You may not use any electronic address provided in this Notice ofMeeting to communicate with the Company for any purposes otherthan those expressly stated.

15. As an alternative to completing a hard copy Form of Proxy/VotingDirection Form, you can appoint a proxy or proxies electronicallyby visiting www.sharevote.co.uk. You will need your Voting ID, TaskID and Shareholder Reference Number (this is the series ofnumbers printed under your name on the Form of Proxy/VotingDirection Form). Alternatively, if you have already registered withEquiniti Limited’s online portfolio service, Shareview, you cansubmit your Form of Proxy at www.shareview.co.uk. Fullinstructions are given on both websites.

16. As at June 2012 (being the latest business day prior to thepublication of this Notice), the Company’s issued share capitalconsists of 39,968,803 ordinary shares, carrying one vote each.Therefore the total voting rights in the Company are 39,968,803.

Electronic appointment – CREST membersCREST members who wish to appoint a proxy or proxies by utilising theCREST electronic proxy appointment service may do so for the Meetingand any adjournment(s) thereof by using the procedures described inthe CREST Manual. See further instructions on the proxy form.




Return to shareholdersTotal return to the investor, on a mid-market price tomid-market price basis, assuming that all dividends receivedwere reinvested, without transaction costs, into the shares ofthe Company at the time the shares were quoted ex-dividend.

Return on net assetsTotal return on net asset value (NAV) per share, on a bid marketvalue to bid market value basis, assuming that all dividendspaid out by the Company were reinvested into the shares of theCompany at the NAV per share at the time the shares werequoted ex-dividend.

Benchmark returnTotal return on the benchmark, on a mid-market value tomid-market value basis, assuming that all dividends receivedwere reinvested, without transaction costs, into the shares ofthe underlying companies at the time the shares were quotedex-dividend.

The benchmark is a recognised index of stocks which shouldnot be taken as wholly representative of the Company’sinvestment universe. The Company’s investment strategy doesnot ‘track’ this index and consequently, there may be somedivergence between the Company’s performance and that ofthe benchmark.

Benchmark index The Company’s investment universe is defined at the time ofpurchase by the countries and market capitalisation range ofthe constituents of the benchmark index, the HSBC SmallerEuropean Companies (ex UK) Total Return Index. At 31st March2012, the index consisted of 1,000 companies with a marketcapitalisation of between £46million and £2.3 billion across15 countries.

Actual Gearing FactorInvestments, excluding holdings in liquidity funds, expressedas a percentage of shareholders’ funds. This shows the effectof gearing on the net asset value if the market value of theportfolio were to increase by 100%.

Total Expense Ratio (‘TER’)The TER represents the Company’s management fee and allother operating expenses excluding interest, expressed as apercentage of the average of the month end net assets duringthe year.

Share price discount/premium to net asset value (‘NAV’) per shareIf the share price of an investment trust is lower than the NAVper share, the Company’s shares are said to be trading at adiscount. The discount is shown as a percentage of the NAV.The opposite of a discount is a premium. It is more common foran investment trust’s shares to trade at a discount than at apremium.

Performance attributionAnalysis of how the Company achieved its recordedperformance relative to its benchmark.

Performance Attribution Definitions:

Asset allocation Measures the impact of allocating assets differently to thosein the benchmark, via the portfolio’s weighting in differentcountries, sectors or asset types.

Stock selectionMeasures the effect of investing in securities to a greater orlesser extent than their weighting in the benchmark, or ofinvesting in securities which are not included in thebenchmark.

Gearing/cash effectMeasures the impact on returns of borrowings or cashbalances on the Company’s relative performance.

Currency effectMeasures the effect of currency exposure differences betweenthe Company’s portfolio and its benchmark.

Management fee/other expensesThe payment of fees and expenses reduces the level of totalassets and therefore has a negative effect on relativeperformance.

Share buybacksMeasures the enhancement to the net asset value (‘NAV’) pershare created by repurchases of the Company’s shares forcancellation, or repurchases into Treasury, at a discount to theirNAV per share.

Glossary of Terms and Definitions


HistoryOn 24th April 1990, the Company acquired the undertakingand assets of Fleming European Fledgeling Fund Limited(the ‘Fund’) in exchange for the issue of its shares andwarrants. The Fund was an open-ended, unquoted investmentcompany based in Jersey and formed in June 1987 with thesame objectives and investment policies as the Company.The Company adopted its present name in July 2010.

Company NumbersCompany registration number: 2431143 London Stock Exchange number: 0341969 ISIN: GB0003419693 Bloomberg code: JEF LN

Market InformationThe Company’s net asset value (‘NAV’) per share is publisheddaily, via the London Stock Exchange. The Company’s shares arelisted on the London Stock Exchange. The market price is showndaily in the Financial Times, The Times, The Daily Telegraph, TheScotsman, The Independent, The Herald and on the JPMorganInternet site at www.jpmeuropeansmallercompanies.co.uk,where the share price is updated every fifteen minutes duringtrading hours.

Websitewww.jpmeuropeansmallercompanies.co.uk

Subject to shareholders approving the proposed change ofcompany name at the forthcoming AGM, the website addresswill change to www.jpmeuropeansmallercompanies.co.uk

Share TransactionsThe Company’s shares may be dealt in directly through astockbroker or professional adviser acting on an investor’s behalf.They may also be purchased and held through the J.P. MorganInvestment Account, J.P. Morgan ISA and J.P. Morgan SIPP. Theseproducts are all available on the online wealth manager service,J.P. Morgan WealthManager+ available atwww.jpmorganwealthmanagerplus.co.uk

Manager and Company SecretaryJPMorgan Asset Management (UK) Limited

Company’s Registered OfficeFinsbury Dials20 Finsbury StreetLondon EC2Y 9AQTelephone: 020 7742 4000

For company secretarial issues and administrative matters,please contact Jonathan Latter.

CustodianJPMorgan Chase Bank, N.A.125 London WallLondon EC2Y 5AJ

RegistrarsEquiniti LimitedReference 1083Aspect HouseSpencer RoadWest Sussex BN99 6DATelephone number: 0871 384 2325

Calls to this number cost 8p per minute from a BT landline.Other providers’ costs may vary. Lines open 8.30 a.m. to5.30 p.m., Monday to Friday. The overseas helpline number is+44 (0)121 415 7047.

Notifications of changes of address and enquiries regardingshare certificates or dividend cheques should be made in writingto the Registrar quoting reference 1083.

Registered shareholders can obtain further details on theirholdings on the internet by visiting www.shareview.co.uk

Independent AuditorsPricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors7 More London RiversideLondon SE1 2RT

BrokersCenkos Securities plc 6.7.8 Tokenhouse Yard London EC2R 7AS

Savings Product AdministratorsFor queries on the J.P. Morgan Investment Account, J.P. MorganISA and J.P. Morgan SIPP, see contact details on the back cover ofthis report.

Information about the Company

Financial CalendarFinancial year end 31st March Final results announced May/June Half year end September Half year results announced November Interim Management Statements announced July/January Annual General Meeting July

A member of the AIC



J.P. Morgan HelplineFreephone 0800 20 40 20 or +44 (0)20 7742 9995

Your telephone call may be recorded for your security

www.jpmeuropeansmallercompanies.co.uk


Annual Report JPMorgan European Smaller Companies Trust plc · 1 Financial Results 2 Chairman’s...

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