JPMorgan MidCap 10 September 2020

JPMorgan Mid Cap Investment Trust (JMF) aims to generate long-term capital growth from investment in a portfolio of UK mid-cap stocks. Managed by Georgina Brittain and Katen Patel, the trust looks to identify structural winners in the mid-cap market and utilises a stylistically blended approach which combines qualitative and quantitative elements.

As we discuss under Portfolio, the managers seek to identify companies with a combination of quality, value and operational momentum characteristics. They believe this approach to be particularly well suited to the mid-cap market, given the lower levels of broker coverage of most stocks potentially giving rise to a greater number of mispriced opportunities or underappreciated growth opportunities. Given the exceptional economic backdrop seen in 2020 thus far, Georgina and Katen have been very much focussed on ensuring JMF remains concentrated in the greatest growth opportunities at this time, in companies which stand to benefit from the ongoing and anticipated operating environment.

JMF is currently trading on a discount of over 14% (as at 25/08/2020). As we discuss under the Performance and Discount sections, this level of discount is wide relative to the trust’s history under the current management team.

Although JMF is primarily focussed on generating capital growth, the board has also aimed to increase the dividend in excess of inflation. As we cover in the Dividend section, JMF currently yields c. 3.3% on a historical basis. With substantial revenue reserves, the board should have capacity to grow the dividend in the current financial year even if underlying income is impaired.

Georgina and Katen have demonstrated the ability to add value over the benchmark through stock selection over the long term. Given the current economic situation, the focus on quality and resilience is welcome, whilst the relatively wide discount relative to the trust’s own history gives us a good idea of general sentiment towards the sector. In the short term, we think that relative returns are likely to remain strongly influenced by perceptions of economic performance and future policy support, as well as by company fundamentals.

We think the portfolio’s current tilt towards cyclicality makes sense as a reflection of the relative valuations available, but perceptions that systemic risks are growing and/or of rising insolvency risks could be a headwind to this position in the short term. This is probably true, irrespective of the quality of underlying balance sheets: rock-solid companies in sectors deemed at risk from a weak recovery will likely be hit by any disappointing economic data, irrespective of the impact on their fundamental outlook.

However, for investors willing to look through any short-term volatility, the discount at this level could represent an attractive entry point for UK investors. With a reasonable yield which is well supported by revenue reserves, shareholders can reasonably expect dividends to cushion any short-term share price volatility in total return terms.