JPMorgan UK Smaller Companies 25 January 2024
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.
The managers of JPMorgan UK Smaller Companies (JMI), Georgina Brittain and Katen Patel, look to take advantage of the lack of research at the smaller end of the UK equity market cap spectrum to find highly innovative or disruptive firms. They take a bottom-up approach that aims to identify companies that can grow rapidly and become the medium and large firms of tomorrow (see Portfolio). Following an announcement in November 2023, JMI is planning a combination with stablemate trust JPMorgan Mid Cap (JMF), subject to shareholder approval.
The combination will grow JMI’s asset size, increasing liquidity and lowering costs. It will also see the introduction of an enhanced dividend strategy, which will see a 4% yield on NAV paid from a combination of income and capital, an increase of around 50% from the current level. There will also be a reduction in the Charges which are expected to fall by c. 20%.
The managers have delivered excellent Performance over the long term, generating alpha in six of the past seven years and generating strong cumulative outperformance of the benchmark. The trust had a rare challenging period in 2022 but has recovered since, driven by strong stock selection.
Despite the bounce back, the managers believe valuations in the portfolio are low as a result of negative sentiment, best demonstrated by a good free-cash-flow rate versus the benchmark, whilst still exhibiting considerably higher quality and better momentum. The managers have looked to capture this by increasing Gearing towards the top end of the range.
The negative sentiment has resulted in the trust trading at a wide Discount. The current level is in line with the five-year average and the peer-group average, despite the long-term outperformance.
In our opinion the proposed combination has a number of beneficial features for investors. It will likely result in lower Charges, as well as offering an enhanced Dividend policy, which is often popular amongst retail investors. We believe this new vehicle would offer investors a stronger total return offering, with income alongside the capital growth potential of the asset class.
We believe the track record of managers Georgina and Katen is very impressive, the pair having delivered considerable outperformance of the benchmark over the long term, demonstrating the effectiveness of their process and the strength of the resources available to them at JPMorgan. Despite this, the trust is trading on a wide Discount, which we believe is a result of negative sentiment towards the UK small-cap market. As such, we think this could make a compelling entry point for long-term investors. The recently announced combination could have an impact on this, due to the expected improvement in liquidity from the combined vehicle, should it achieve shareholder approval.
The portfolio is currently positioned to capture a recovery in the UK too, with Gearing towards the top end of the range, and the managers rotating into their higher-conviction ideas to ensure they are capturing the best value, quality, and momentum on offer. Should their thesis on a potential recovery prove correct, we believe there is considerable upside on offer from both a continued recovery in Performance and a narrowing of the discount.
- Excellent long-term track record
- Trust is trading at a wide discount to NAV
- Post-combination should enjoy benefits of scale, being cheap and more liquid
- Gearing is towards the top of its range, which can amplify market movements
- Less concentrated portfolio than peers, which can be a headwind in rising markets
- Has historically been more volatile than peers