JPMorgan Smaller Companies (JMI) aims to give investors access to fast-growing, innovative smaller companies that often have their own structural growth drivers, making them less directly linked to the performance of the overall UK economy.
Georgina Brittain has managed this trust for more than 20 years and was joined by Katen Patel six years ago. The team uses a bottom-up stock picking approach to take advantage of the inefficiencies in the small-cap market that offer a diverse range of alpha-generating opportunities. The team uses both quantitative and fundamental analysis to find companies that exhibit quality, momentum and value characteristics, creating a diverse portfolio of 88 holdings. The largest sector overweights come from the media (6.3%), leisure goods (6.2%) and financial services (3.9%) sectors. At the other end of the spectrum, the trust has little exposure to support services (-3.1%), travel and leisure (-2.9%) and pharma and biotech (-2.7%) relative to the benchmark.
Returns over the long term have been impressive for the trust, which has outperformed the benchmark in eight of the past ten calendar years. Over a five-year period, the trust has generated NAV total returns of 55.1%, once more beating the benchmark’s return of 29.6%, as well as the AIC and IA peer groups, which returned 51% and 53.3% respectively. More recently, the trust’s performance has been a tale of two halves. The trust was hit particularly hard during the fourth quarter of 2018, losing close to 20% NAV total returns. Since then the trust has bounced back, returning NAV total returns of 19.3%, double the benchmark returns of 9.9% and considerably more than the AIC peer group (12.8%) and the IA peer group (12.1%).
Alongside capital appreciation, the trust offers investors a reasonable level of income. Currently the trust yields 2.4% and the dividend has increased by 23.7% over the past five years. Nevertheless, the trust has had a stubborn discount since the European Union membership referendum in 2016 and over the past year the trust has traded, on average, at a discount of a little under 15%. Currently the discount sits at 14%, as at 26 Jul 19.
JMI offers investors the chance to invest in some of the most innovative and exciting companies that the UK has to offer. The case for smaller companies as a long-term investment is extremely compelling, and the manager’s clear, repeatable process makes the trust an attractive way to take advantage of this, in our view.
The trust’s current discount of 14% is one of the widest in the sector and there are multiple trusts with considerably worse performance figures trading at narrower discounts. We believe this could therefore provide an extra impetus behind the share price when sentiment improves towards UK small caps, which could benefit investors who take a long-term view and invest on this attractive discount.
|Wide discount even relative to worse performing peers||High levels of gearing can see the trust amplify volatility, as we saw in Q4 of 2018|
|Strong track record over the long term relative to the benchmark and peers||Stubborn discount due to continued uncertainty surrounding the UK|
|Highly experienced fund manager with two decades' experience on the trust||Dividends are variable to the trust is unlikely to appeal to income-seekers|