JPMorgan Smaller Companies Trust (JMI) offers investors access to some of the fastest growing and innovative companies in the UK. JMI’s managers believe these companies should be able to grow regardless of the state of the general economy, particularly relevant to the UK’s current situation.
The trust is managed by Georgina Brittain and Katen Patel, who employ a bottom-up stock picking approach, aiming to take advantage of valuation inconsistencies within the smaller companies sector. Quality, value and momentum are the characteristics that drive stock selection, contributing to a diverse portfolio of around 90 stocks.
Both short term and long term performance has been excellent, with the trust outperforming the benchmark over one, three and five years. The last year has been particularly eventful, with the first six months showing both strong absolute and relative performance, buoyed by the removal of political uncertainty and the belief that the Conservative government would boost the economy. This was then stopped in its tracks by the outbreak of the coronavirus and its impact on the economy. The smaller companies sector was badly hit, particularly in terms of widening discounts and portfolio performance. Despite this, as we discuss in the Performance section, JMI achieved a creditable outcome and managed to outperform the benchmark and peers.
The trust, despite its continuing outperformance of benchmark and peer group, trades on a discount of 4.3%.
JMI has been one of the most consistent performers in the smaller companies sector, delivering first quartile performance over one, three and five years. In fact, in 2019 the trust was one of the strongest performers in the entire investment trust universe.
Due to the ability of smaller companies to grow regardless of the wider economy, there is a strong case that the trust can continue to perform strongly regardless of the impact of the pandemic. This is also supported by the managers’ focus on finding high quality companies which should be more resilient to tough economic times.
Furthermore, the managers’ vast resources give them an advantage in understanding companies in detail over smaller asset managers. We believe this has been demonstrated in 2020 with the trust holding up better than peers and the benchmark due to their capacity to understand the impact of COVID-19 on cash flows and balance sheets.
Although having narrowed considerably recently, we still believe the current discount of 4.3% presents an attractive opportunity to enter the trust. Given the consistent performance and tilt towards quality, we see it possible that the discount continues to narrow and possibly moves to a premium as the trust continues to deliver attractive returns.
|Excellent long and short term performance
||Gearing can increase the volatility of the trust
|The vast resources of JPMorgan give the managers an advantage in understanding companies
||After the sizeable correction, it might take time for investors to recover their appetite for small caps|
|Trading at a discount to NAV despite exceptional performance
||Uncertainty surrounding Brexit remains