JPMorgan UK Smaller Companies 06 July 2022

JPMorgan UK Smaller Companies (JMI), managed by Georgina Brittain and Katen Patel, focusses on identifying what the managers believe are the most exciting and highest-quality opportunities within the UK small-cap space. JMI benefits from the wealth of analyst resources available to it, with Georgina alone having more than two decades under her belt as manager, experience which is particularly important given the poor coverage that small-cap stocks receive.

The team’s investment process can largely be summarised in three questions: is it a good business? Is it attractively valued? Is the outlook improving? In practice, this means that the team have a strong bias towards quality-growth stocks, which we outline in more detail in the Portfolio section. The team highlight the strong earnings that their holdings have demonstrated over the last 12 months, where they have seen some of the biggest earnings upgrades of the last decade.

JMI has demonstrated strong long-term Performance through beating both its peers and benchmark over five years, and is in fact the best-performing UK small-cap trust over this period. JMI’s more recent performance has not been as strong due to the trust having been caught up in the global growth-stock sell-off, underperforming over the last 12 months. JMI’s discount has widened recently in line with the direction of its peer group, and it is currently trading on a 14.3% discount, marginally wider than its peer group average. We also note that JMI has recently seen its sustainability rating upgraded by Morningstar to ‘above average’.

We believe that JMI offers investors distinct benefits. The first is that the trust offers access to a committed approach to growth-focussed UK small-cap investing, albeit with a bias to quality stocks. The team have been able to demonstrate long-term success in the execution of this strategy, with investors also benefitting from the substantial weight of resources available to the management team. We believe that both these factors are important in selecting small-cap managers, as the idiosyncratic nature of the sector means that managers have a greater propensity to generate alpha (so long as they can demonstrate that they know where to look, and have the resources to carry out sufficient due diligence on under-researched stocks). We believe the JMI team can demonstrate these things, meaning that JMI is a compelling option for long-term investors looking to capitalise on the high-growth opportunities within the UK.

Conversely, there are also near-term opportunities within the trust because JMI’s near-term performance and discount have both taken a downturn over 2022, even though the nature of the opportunities that the JMI team seek to capitalise on are not based on macroeconomic sentiment or short-lived opportunities like cyclical commodity rallies. Instead, the team believe their holdings represent multi-year growth opportunities, given either their secular growth potential or market dominance. As such, if investors are aligned with the JMI team they may view the current market as an opportunity to ‘buy the dip’ and capitalise on the eventual powerful combination of both positive NAV reversal and a potential discount narrowing once the market begins to normalise.