JPMorgan US Smaller Companies (JUSC) offers investors a portfolio of small-cap US equities, with a process that places great weight on the quality of a company and the strength of its management team. JUSC benefits from the expertise of its strong team of four dedicated investment professionals, with its lead manager, Don San Jose, having 24 years of experience. The team’s focus on quality means that they will typically forgo zero-earning stocks, binary growth stocks or so-called ‘meme’ stocks. Instead, they prefer companies with resilient business models and strong earnings, which can still remain on an upward growth trajectory. We cover the team’s process in more detail, and give examples of key holdings, in the Portfolio section.
This focus on quality has been particularly pertinent recently, as much of the market is favouring low-quality value companies which were heavily sold off during the pandemic. Although JUSC has underperformed in the near term, its managers are happy to sit on the side-lines, patiently waiting for the eventual re-rating of companies with strong earnings. As we outline in our Performance section, the team’s process has served them well over the long term, given their outperformance against their benchmark, the Russell 2000 Index.
JUSC currently trades on a 3.3% discount which is slightly wider than its long-term average, and likely the result of the headwinds that quality investing has faced recently. JUSC also has net gearing of 6.6%; while this is modest in absolute terms, it is still the highest level of any North American trust.
In our view, JUSC offers investors a measured approach to a small cap sector that is increasingly characterised by volatility stemming from ‘meme’ stocks and expensive, low-earning companies. Yet by only investing in quality companies, the managers have created a generally resilient portfolio. The JUSC team believe that their portfolio of reliable companies will be carried by the strength of the companies’ earnings and management. While past performance should never guide future returns, we believe JUSC’s long-term outperformance does provide evidence of the ability of these portfolio companies to survive and outperform through various market cycles (and thus through fluctuating investor preferences).
We are currently at a late point in the economic cycle, which is arguably beneficial for US small caps. We think the ongoing US trend towards sustained economic growth thanks to support from policymakers and the subsiding of COVID-19 cases should support the earnings trajectory of JUSC’s companies. Over time we would envisage rising investor demand for smaller US companies, given their sensitivity to domestic consumption.
However, presently the managers are experiencing something of a headwind for quality companies, given the market rotation into once out-of-favour value companies. We think this may present a good potential entry point, with JUSC’s current discount likely reflecting the market’s current procyclical sentiment. Once we return to a more normalised economic environment, we may see JUSC’s discount narrow.
|Historically attractive asymmetric risk/return profile||Gearing can enhance losses during down markets
|Long-term economic outlook may be advantageous for small caps, but short-term headwinds offer attractive entry point
||If the value rally continues then JUSC may continue to underperform in the near term
|Continues to retain its long-term bias to quality companies
||Small-cap strategies are associated with higher volatility