JPMorgan MidCap Investment Trust (JMF) aims to generate long-term capital growth from investment in a portfolio of UK mid-cap stocks. Managed by Georgina Brittain and Katen Patel, the trust looks to identify structural winners in the mid-cap market and utilises a stylistically blended approach which combines qualitative and quantitative elements.
As we discuss under Portfolio, the managers are currently seeing significant opportunities and attractions within the UK mid-cap space where high quality companies with good operational momentum are, in their view, trading at attractive valuations. They believe the mid-cap market generally tends to offer long-term opportunities for stockpickers given lower levels of broker coverage and the greater potential for shares being mispriced relative to the opportunities for companies.
Despite strong returns and despite (or perhaps reflecting) the significant opportunity the managers currently see in the UK market, the discount on JMF remains wide at c. 11.5% (as at 01/03/2021). As we discuss under Performance and Discount, this is wide relative to the wider market and the trust’s own history. Under Performance, we have looked at historic instances where JMF has traded at similar discount levels and subsequent returns, and these have on average seen strong subsequent outperformance by JMF.
Although JMF is primarily focussed on generating capital growth, the board has also aimed to increase the dividend in excess of inflation. Under Dividend we note that we believe the current historic yield of c. 2.6% looks well supported by substantial revenue reserves at present, and we think the board should have capacity to grow the dividend in the current financial year even assuming underlying income is impaired.
The long-term track record of Georgina and Katen is very strong, and we don’t think the short-term underperformance over the past 12 months should be of concern to existing shareholders. Consistency of process and deep analytical resources in a part of the market with limited analyst coverage offers advantages in stock picking, whilst the balanced factor input process should ordinarily limit the relative headwinds the trust could face from any particular set of macroeconomic or market conditions.
We regard the presently wide level of discount as an attractive entry point for the trust; our analysis suggests discount levels of similar or greater width have typically seen strong subsequent outperformance. Given the tendency of JMF to capture market upside effectively and its explicitly mid-cap focus, any UK market outperformance should give a further boost to NAV returns in our opinion, and we are optimistic on the outlook for a UK market which is, as the managers point out, displaying robust positive earnings revisions and yet trades on a significant valuation discount to international peers.
The current, relatively full, deployment of gearing should further support any upside capture, whilst the robust levels of revenue reserve cover available to the board means we suspect that investors can be paid a reasonable dividend (c. 2.6%) to wait in the short term.
|Strong long-term track record
||Gearing can exacerbate downside, as well as amplify upside
|Current discount level looks highly attractive
||Sharp value rally has proven a slight headwind to relative returns which seems likely to persist
|Experienced team with significant analytical resources available to them
||Charges are slightly above average for sector