Jupiter US Smaller Companies

JUS’s new manager brings a new strategy, and scope for the discount to narrow…

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Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by Jupiter US 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.

Jupiter US Smaller Companies

Jupiter US Smaller Companies (JUS) will be renamed Brown Advisory US Smaller Companies (BASC) in mid-May, subject to shareholder approval, after the mandate was taken over by the new manager on 1 April 2021. Chris Berrier heads up the Brown Advisory US Small Cap Growth team, and is the new lead manager. He has run the same strategy in the open-ended space since 2006, which has outperformed both the small cap Russell 2000 index and the Russell 2000 Growth. As discussed in performance, the Brown Advisory US Small-Cap Growth strategy’s performance over the past five years has been particularly strong, and it has continued its longer-term trend of generating above-market returns with below-market levels of risk.

Chris’ strategy is essentially a quality growth approach. He aims to find companies that can demonstrate consistent growth ahead of the market over the long run, typically via opening up a new market, dominating a niche, or having a differentiated business model or product. This is encapsulated by the proprietary concept of ‘3G’ – growth, governance and go-to-market, as discussed in performance.

The growth strategy is a departure from the value strategy implemented by the former manager, who announced his retirement last October. While most trusts in those sectors have since seen their discounts narrow, JUS’ discount remains wider than the sector averages at 5.9%. The only US small-cap peer is trading on a small premium.

As a part of the new management contract, the board has negotiated a fee cut, with the management fee falling by 5bps, and a tiered system introduced which will see it fall further as and when net assets grow. The trust does not pay a divided.

Kepler View

We think US small caps are at a potentially exciting entry point, with the progress of the vaccination programme, and state re-openings, giving the domestic US economy a boost. The coming stimulus package of the Biden administration should boost economic activity further, which should be disproportionately felt in the more domestic-facing small caps. Over the past few years, large caps have outperformed small caps, a ­­reversal of the long-run tendency in the US. Regulatory pressures on the large-cap tech stocks, as well as high valuations in some areas of the market, give reasons to doubt this trend will continue.

The arrival of the Brown Advisory US small-cap growth strategy into the closed-ended sector could therefore prove to be well-timed. Chris and the team bring with them an enviable pedigree, with long-term outperformance of their style index as well as the small-cap index, most impressively achieved with relatively low risk.

In our view, this has opened up a potentially interesting discount opportunity in the shares. The one US small-cap peer, JPMorgan US Smaller Companies (JUSC) is trading on a 3.5% premium while JUS is trading on a 5.9% discount. Yet the Brown Advisory US Small Cap Growth strategy has outperformed JUSC in recent years, and offers similar stylistic exposures. We think some unfamiliarity with the new manager, some delayed impact of the poor performance of the old manager, and the news of the manager change not spreading has led to this disparity.

bull bear
New manager has an excellent track record of outperforming a tough market to beat
Value has been outperforming growth since Q4 2020, and may continue to do so
The current economic environment seems bullish for US small caps
At c. £168m in net assets, the trust will be too small for some professional investors
The discount seems anomalous compared to the closest peer
There may be an overhang of investors who invested for the previous manager or a value strategy
Thomas McMahon
Thomas is a senior investment trust analyst and joined Kepler in April 2018. Previously he was senior analyst at FE Invest, where he was responsible for fund selection for a range of model portfolios. He covered all asset classes over time, but has particular experience with emerging markets and fixed income as well as UK smaller companies funds. He has a degree in Philosophy from Warwick University and is a CFA charterholder.

Fund History

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