JPMorgan US Smaller Companies 19 April 2023

The team behind JPMorgan US Smaller Companies (LON:JUSC) are quality-first investors in US small-cap companies. As we discuss in the Portfolio section, their fundamental research is characterised by the team’s philosophy of ‘walking the floor’ of their investee companies in order to gain an understanding of how companies really work, going beyond just meeting senior management. The team is led by Don San Jose, who has managed JUSC since 2008, together with his co-managers Dan Percella and Jonathan Brachle, and it’s a tight-knit team with a boutique feel, whilst at the same time benefitting from the vast resources of JPMorgan Asset Management. Over this time, the team have remained true to their fundamentals-led process and have developed a very consistent track record, as a result.

JUSC employs gearing up to 15% and may also hold up to 10% in cash, with the objective of amplifying returns over the long term, rather than trying to time markets in the short term. Currently, the trust is c. 7%, geared which is similar to its long-term average. JUSC is primarily designed for capital growth and any income generated is a natural consequence of investment rather than a specific target. The current historical yield is 0.6%.

JUSC has a five-yearly continuation vote, with the next vote scheduled for 2025. It does not have a fixed target discount, but the board uses share buybacks actively when the discount widens, and has been active recently during a period when the discount has been wider than average. The current discount is c. 10% and in the Discount section we consider factors that could lead to this narrowing.

With almost 2000 stocks in its benchmark, the team’s active management can make a real difference to the outcome and in the Performance section we look at how JUSC has consistently matched or beaten its benchmark over at least a decade, a period when different investment styles have produced dramatically different outcomes. Beating benchmarks is one thing, of course, but in this particular case, US small caps have formed one of the best-performing developed market equity categories over very long periods of time. Therefore, we think long-term investors in JUSC have been more than compensated for the extra risk that smaller companies can bring.

We think it’s uncontroversial to expect that interest rates and inflation will lead to different behaviour by equity markets, compared to the last decade. In that context, we find it interesting that JUSC has performed well, historically, even as different investment styles have come in and out of favour. We think this is a testament to flexible thinking and pragmatism. Therefore, while the key phrase to describe the investment style is ‘quality growth’, we also think of JUSC as having an all-weather style.

There are wider discounts than JUSC’s current 10% in the investment trust sector right now, but JUSC has a good track record of stepping in with share buybacks to limit its discount. While this technique is never a guarantee, investors could still see this as a good entry point, particularly as US smaller companies, as an asset class, are currently trading at a wide discount to the market.