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Results analysis: JPMorgan UK Smaller Companies

JMI has built on its excellent track record, taking a balanced approach to a dynamic asset class…
John Dowie
Last update 13 October 2021

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.

  • JPMorgan UK Smaller Companies (JMI), formerly JPMorgan Smaller Companies, has reported strong results for the year ending 31 July 2021. Outstanding returns from UK smaller companies have been accompanied by substantial outperformance. JMI’s NAV total return was 68.1% compared to a 50.3% total return for the Numis Smaller Companies plus AIM Index (excluding Investment Companies). The share price total return was 79.4% as the discount narrowed from 13.8% to 8.0%. As of 11/10/2021 the discount was 9.6% (Source: JPM Cazenove).
  • The board have confirmed a final dividend for the financial year of 5.7p per share, an increase of 3.6% from the 2020 dividend of 5.5p per share. Due to the level of dividends received from portfolio companies not having fully recovered in the aftermath of the Coronavirus outbreak, the trust’s payout for the year was supported by revenue reserves. 
  • Over the period the trust benefitted from positions in defensive names robust to the effects of the pandemic (for example, Ergomed, a pharmaceutical service provider) as well as discounted cyclical names that suffered from the initial impact of the pandemic and were bought on weakness, but emerged stronger in the recovery as weaker competitors fell by the wayside, an example being Jet2. 
  • During the year, the trust bought into four IPOs, all technology related, selectively participating in this nascent but growing sector of the UK market. The portfolio has also benefitted from the heightened M&A activity in the UK market, with three companies held being bid for.
  • The managers have a bullish outlook on both the UK economy and UK smaller companies, reporting that median earnings are forecast to grow 18% this year and 19% next year as the recovery continues. With the Numis index at a forward P/E ratio of 14.1x the managers believe that the market is fundamentally undervaluing this growth potential.
  • Due to the significant rise in the trust’s assets the board has increased the revolving credit facility to enable the managers to gear up to the limit of 10% of net assets set by the board, if they so choose. As at 11/10/2021, the facility totalled £50m with an option to increase to £60m and the gearing of the trust stood at 9.4%. 
  • In terms of corporate governance, the board are signalling their commitment to following best practice. The board has employed Lintstock to evaluate their performance, Lintstock being a board advisory firm that provides objective and independent counsel to over 120 companies in the UK and internationally. Additionally, all the directors will stand for reappointment at the forthcoming AGM.
  • Commenting on the performance of the trust over the last year, the chairman stated: ‘The [managers] are to be congratulated as they have kept cool heads and negotiated the evolving pandemic with skill and an eye to opportunity. Their many years of experience and robust investment process have enabled them to capitalise on the strong recovery as lock-down restrictions have eased, fuelled by continued government and central bank stimulus.’

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