JPMorgan US Smaller Companies Investment Trust (JUSC) offers investors a portfolio of US small-cap equities chosen via a bottom-up, quality-centric investment process. JUSC is run by a dedicated four-strong team, led by the experienced Don San Jose. The team look for what they consider to be the highest-quality companies, with quality being determined by a company’s business model and management quality above all other factors. While turnover is generally low, the team have taken advantage of the disruption caused by the pandemic to add over 25 new positions to their portfolio in 2020.
The market has placed an ever-increasing premium on many of the quality factors which underpin JUSC’s portfolio, thanks in large part to COVID-19, which has contributed to JUSC’s recent strong performance. Over the last five years to 13/02/2021 JUSC has been able to deliver an NAV total return of 164.9%, compared to the 163.4% of its benchmark (the Russell 2000 Index) and the 129.9% of Jupiter US Smaller Companies, its sole peer in the AIC North American Smaller Companies sector. We understand that much of this outperformance has come through stock selection, and not sector exposures.
JUSC currently (as at 13/02/2021) trades on a 1.6% premium, having recovered from its pandemic-induced discount. We note that the current premium is commensurate with the trading patterns of JUSC prior to the pandemic, where it traded around NAV (albeit with some volatility).
We would also highlight the strong ESG credentials of JUSC, which is rated as ‘above average’ by Morningstar, despite its overweight to the industrial sector: a sector which has not been historically associated with good ESG.
US small caps could be an interesting place to invest at this point in the cycle. The sector is likely to see a tailwind from the stimulus measures of the new presidency, as well as from America’s vaccine roll-out. Such factors should directly support the US consumer, often the prime determinant of the fortunes of smaller companies less able to tap into overseas demand. Moreover, small-cap companies shares have historically recovered faster from a recession, as they are typically oversold during a market rout.
We think it is impressive that the team has managed to generate outperformance of the market without investing in the more speculative areas of the US small-cap sector, specifically the zero-profit names in technology and biotech which have been among the biggest winners of COVID-19. The depth of JUSC’s resources has probably contributed too. The four team members are dedicated entirely to managing the small-cap strategy, a key advantage given the amount of energy needed to analyse the many idiosyncrasies between small caps. The team have shown a clear dedication to the quality space, not just through their successful analysis, but also by leveraging their professional interactions within the industry, allowing them to identify names which fall through conventional stock screens.
We believe JUSC might also suit a more cautious investor who wishes to see evidence of consistently strong earnings and experienced management in the underlying companies – something which is not consistently present in the broader small-cap index.
|Track record of successful stock selection and strong performance
||Quality bias may underperform during a post-COVID-19 value rotation
|New US stimulus may lead to tailwinds for US small caps
||Underperformed its benchmark over one year due to avoidance of binary-outcome companies
|Disciplined investment process, leading to a consistently quality-biased portfolio
||Use of gearing may amplify losses in downturns