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.
A year ago, the outlook seemed not far off dire for UK smaller companies. On the back of the pandemic – and the subsequent, shocking national lockdown – the market fled from these stocks as many smaller businesses grappled with how to adjust their models for a newly-distant world.
Yet, come March 2021 and the story is very different. UK equities, in general, have fallen back into favour in the first part of this year, as positive news across the board has fuelled optimism in the outlook for UK equities. For investors that held their nerve, the UK has proved a profitable place to be. A trend that seems likely to continue for some time to come.
Not all doom and gloom
In March 2020, the halting of much of our day-to-day lives seemed like a death knell for companies with a physical presence. Indeed, investors flocked to technology and healthcare stocks, sure that these would be the clear beneficiaries of the pandemic.
But while both these sectors undoubtedly flourished for much of 2020, other companies also surprised on the upside.
While some analysts mooted a potential baby boom, one surprising, and almost immediate, consequence of the lockdown was a dash for dogs and charge for cats. Prices for premium puppies surged to double or triple their pre-pandemic norms as prospective owners clambered to get their paws on new pets.
A clear winner from this trend was Pets at Home, the UK’s largest pet shop operator. The business was already gaining a reputation pre-pandemic for its strong growth strategy, such as incorporating vets and grooming salons into its stores. However, a lockdown pet bonanza meant that the company saw its share price rise 60.84% in the twelve months to 31 March 2021.
It is stories like these that show how some investors oversimplified the challenges facing some businesses as the pandemic took hold. For those, such as Georgina Brittain and Katen Patel, managers of the JPMorgan Smaller Companies (JMI), who held their nerve and topped up their market holdings in the post-lockdown sell off, this disconnect has helped fuel their returns heading into 2021.
Cutting through the fog
Over the last twelve months, the trust has offered a share price total return of 91.4%, putting it in the top quartile of the AIC Smaller Companies sector. This is reflective of the trust’s longer-term track record, with a share price total return of 164.8% over five years, again leaving it among the top-performing trusts in its sector.
They were able to do this in part due to having a long-held and proven investment process, which enabled them to keep cool heads through a trying period for the sector. Georgina Brittain has been a named manager on the trust for over two decades, weathering multiple market storms including the 2008 financial crisis in the process. Over that time, the trust has a consistent track record of outperforming both its AIC sector and its benchmark.
Georgina and her co-manager Katen Patel, who joined the trust in 2014, invest on the understanding that pricing among smaller company stocks is fundamentally inefficient, a theory borne out in style by the post-lockdown sell off. Crucially, the managers look to identify stock opportunities in companies which display varying degrees of three different characteristics: quality, value and momentum.
This approach enabled them to identify companies that had some combination of the strategic capabilities to take advantage of the changed conditions under the pandemic, would perform well in more ‘normalised’ times, or were experiencing strong earnings momentum during the lockdown and pandemic.
One success story was Pets at Home, as discussed previously. Another was Future, a publishing company. Most of Future’s publications have significant online footprints and include areas such as technology reviews, which have seen a rise in readership demand. With a strong organic presence in search engine results, Future has been able to support its earnings growth through rising advertising sales, and earnings have been towards the top-end of consensus expectations. The net result of this has been an 88.31% rise in its share price in the twelve months to 31 March 2021.
A sunny forecast
While much of the UK smaller companies market has bounced back from the early lockdown sell-off, there is support for the notion that the market has further to run. One of the factors that had held this part of the market back in recent years was uncertainty over Brexit, as many smaller companies dealt with European-based supply chains and distribution channels.
However, Georgina and Katen highlight that the UK has now made a relatively clean break from the EU, with the long-awaited trade deal in December 2020 bringing heightened clarity for businesses and investors. Whilst companies continue to work through what the implications of a life outside Europe actually means, they have, at the least, a clearer view of what the future looks like. It also looks less likely that a new era of austerity is on the horizon for the UK economy, with the current government indicating that it will continue to invest in the country’s recovery from the pandemic for the short term at least.
Combined, these factors paint a sunny forecast for the UK economy and, in turn, its smaller companies. With the deep resources of JP Morgan at their fingertips, and experience of investing through several market cycles, the management team of JMI are well-placed to take full advantage of this outlook.
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