JPMorgan UK Smaller Companies 21 May 2021
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by JPMorgan UK Smaller Companies. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
On 21/09/2021 JPMorgan Smaller Companies Investment Trust plc announced its corporate name change to JPMorgan UK Smaller Companies Investment Trust plc.
JPMorgan Smaller Companies (JMI) focusses on UK smaller companies. Managed by long-standing managers Georgina Brittain and Katen Patel, JMI consists of a portfolio of companies which the managers believe exhibit superior value, quality and operational momentum characteristics when compared to the wider stock universe.
As discussed under Portfolio, JMI is constructed with a balanced but pragmatic focus on these different stylistic elements. The primary focus of the managers is on identifying stock-specific opportunities, utilising the broader resources of JPMorgan Asset Management and a variety of quantitative and qualitative tools. With the small-cap universe typically seeing lower levels of broker coverage, the managers believe this tends to offer greater potential for growth opportunities being mispriced by the wider market. Whilst bottom-up led (and with macro views informed by this research), the managers are cognisant of top-down factors and seek to assess their portfolio against base-case scenarios on an ongoing basis.
Currently this is leading the managers to seek to ensure JMI is overweight to domestic UK revenue generation and to more cyclical areas of the universe. This is not prescriptive, but helps them to determine portfolio weightings. It also informs the deployment of gearing; as we discuss, gearing facilities have in recent months been expanded to ensure the gearing ratio can remain reflective of the positive outlook of the management team after significant NAV gains (see Performance).
As we further discuss under Performance, returns have been strong over the long and shorter term. Stock selection and sector allocations appear to have been notable contributors to outperformance in this regard.
JMI boasts a strong long-term track record relative to peers and the benchmark index, and the evidence suggests that this has primarily been driven by stock selection and sector allocations (with the former tending to drive the latter). We note with interest the consistency with which JMI has displayed a positive information ratio over the previous ten years (as discussed under Performance), despite intermittently more challenging periods.
With an uncertain market backdrop likely to remain in place, the balance of stylistic approaches gives us comfort that we do not need to unduly worry about macroeconomic factors having an outsized impact on relative returns. Nonetheless, the overweight to UK domestic revenues and sizeable deployment of gearing certainly aligns JMI with a bullish outlook for the UK in the nearer term. Given we share this positive outlook on the relative merits of the UK market compared to global peers, this seems a positive to us.
Longer term, the recent decision to expand the gearing facilities available to the managers (to ensure they could maintain the gearing ratio, following sizeable NAV gains) looks a positive development, ensuring that the managers retain flexibility to gear the portfolio as they deem appropriate to the opportunities they are identifying. The experience of the team, not just on JMI but across market cycles, offers further reassurance, and their willingness to buy in the teeth of the 2020 sell-off demonstrated a degree of detachment from day-to-day market volatility.
|Consistent and significant outperformance over the long term
|Overweight to UK revenue generation could weigh on returns if UK economy underperforms
|Stylistic balance and disciplined investment framework
|Gearing can exacerbate downside (as well as amplify upside)
|Experienced team with significant depth of analytical resources
|Discount is notably narrower than has been the historic norm