JPMorgan MidCap 22 September 2022
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by JPMorgan MidCap. 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 MidCap (JMF) aims to capture the best growth opportunities in the UK mid-cap market through a sophisticated mix of quantitative and qualitative analysis intended to uncover attractively valued, high-quality stocks with positive momentum.
To that end, managers Georgina Brittain and Katen Patel screen their universe for companies which look cheap on a free cash flow basis, have high-quality earnings and are experiencing positive earnings or share price momentum. They then do qualitative analysis of companies and their industries to validate what the numbers suggest. Typically the end portfolio will be cheaper than the market, will have higher returns on invested capital and will be seeing positive earnings revisions. This is a potentially powerful mix and, as we discuss under Performance, the trust’s long-term track record is very good, with JMF tending to considerably outperform the FTSE 250 and its direct mid-cap peers in rising markets.
However, there is a tendency for JMF to suffer more in falling markets, and this has hurt returns over the past year. This has been compounded by significant exposure to consumer-facing companies at the start of the year, with the managers having expected inflation to peak earlier than it has. Gearing has also played a role, and although it has been reduced, the portfolio remains geared.
After such a rough period for markets, discounts are wide on mid-cap trusts, and JMF is on a 14.5% Discount. While this compares to its five-year average discount of 8.2%, we note that JMF has traded at or above par when risk appetite has been high. Although the managers recognise there is macro uncertainty on the horizon, they note that their companies are performing well operationally and that the valuation of their portfolio is particularly attractive – as is the share price discount.
We think JMF’s stock selection strategy – and in particular the focus on earnings growth and momentum, along with the tendency to run with gearing and the ability to dip into small caps and hold winners into the FTSE 100 – makes the trust a strong candidate for a long-term allocation in this high-growth market, with the potential to squeeze the juice out of it. However, as we have seen over the past year, investors have to be prepared for short-term losses when the market falls, given the risks in the market and approach. Georgina and Katen have a strong long-term track record, and as we note under Performance, we have previously seen the trust give up much of its outperformance only to win it back and more in the next cycle.
After the current sell-off the trust’s Discount is attractive. We acknowledge the macro uncertainty – as do the managers – and clearly it is possible that markets will see another leg down this winter if the feared recession materialises. However, timing the market is notoriously hard, and we think the wide discount offers some downside protection in light of the tendency for the trust to trade above par when risk appetite is high.
- Strong long-term track record of performance
- Current discount level looks attractive
- Experienced team with well-established and well-resourced process in place
- Tendency to underperform in falling markets
- Charges moderately above sector average
- Gearing can exacerbate downside, as well as amplify upside