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.
It’s hard to ignore the buoyancy evident in the UK at the moment. With the vaccination programme in full swing, the government is pressing ahead with the final stages of ‘unlocking’ the economy and UK consumers are taking full advantage.
Compared to June 2019, consumer spending in the UK in June 2021 rose 11.1%, showing that consumers are beginning to part with the estimated £150bn in excess savings they stockpiled in 2020. And with foreign travel still a challenging prospect, much of this spending will continue to be focussed on the UK.
At the same time, after over a year of uncertainty, businesses are enjoying newfound confidence in the economic outlook. BDO’s business confidence index suggests that optimism among companies in June was at its highest point since 2005.
Investment is once again on the cards for these businesses, after spending much of 2020 cutting costs, driven by tax incentives, ultra-low interest rates and soaring consumer demand. Indeed, having surveyed the finance heads of 107 of the UK’s biggest companies, Deloitte predicts that hiring and capital expenditure will hit their highest level in over six years over the remainder of 2021.
A leader not a follower
For investors such an environment can provide rich pickings. In particular, for those looking at smaller companies, the strength of the UK consumer is particularly supportive. Smaller companies tend to be the recipients of more domestic spending than their larger counterparts and also benefit from spending filtering down from bigger companies.
Against this backdrop Georgina Brittain, manager of the consistently high-performing JPMorgan Smaller Companies (JMI) for over 20 years, says “this is as excited as I’ve ever been”.
With conditions so favourable, she says that the portfolio is currently in ‘sell-to-buy mode’, meaning that she and her co-manager Katen Patel are actively scouring their portfolio holdings to find companies they are willing to exit in favour of new acquisitions through both IPOs and existing public companies.
But while this might prompt fears of following the market, the team’s track record demonstrates their skill in balancing new opportunities with running ongoing winners.
The tumult of the last year has been a clear reflection of this: since the UK went into lockdown on 23 March 2020 to 11 July 2021, the trust posted a total return of 193.68% against the Morningstar IT UK Smaller Companies total return of 141.62%.
Eyes on the prize
A key aspect of this success has been the team’s longstanding commitment to investing for the long term and with conviction. This focus means that every position in the portfolio is overweight to their Numis Smaller Companies including AIM excluding investment companies benchmark.
One company that demonstrates these qualities is Dunelm. The team held it with conviction prior to the pandemic and will continue to do so for now. This is because the story at Dunelm is an ongoing process of improvement, centred on investment in technology.
Indeed, prior to the pandemic but following JMI’s initial investment, Dunelm’s management began investing heavily into its technology capabilities. This culminated in the launch of a new online platform in December 2019, which prompted online sales to grow 30% even before the first lockdown drove shoppers online. The company continued to flourish through the various lockdowns, partly due to this strong foundation, alongside a burgeoning focus on home improvement as customers were confined to their homes.
However, the story is not over. Rising online sales give the company more insight into its customers and should allow it to improve both its online offering and product selection, alongside targeting customers more effectively. Brittain describes this as a ‘virtuous circle’ and a good reason to maintain the portfolio position for the foreseeable future.
Holding your nerve
Another aspect of the team’s long-term vision and high conviction approach is that they are willing to hold their nerve when portfolio companies are put under pressure by the market. In the last year, this was clearly demonstrated by Games Workshop.
While it would have been easy to assume the closure of its experienced-led stores would impact the company, with so many finding they had idle hands in the lockdowns of 2020, it performed strongly through the course of the year, seeing online sales surge. However, an in-line earnings report and dividend in early 2021 prompted the shares to drop, with some investors disappointed the company did not see another surge in earnings.
Since then, the stock price has recovered and continued to climb. The long-term investment case for the company remains solid, with its intellectual property, unique proposition and resilient consumer appeal all unimpeded as we emerge from the Covid-19 pandemic, meaning that the JMI team intend to hold firm in their position.
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