JPMorgan US Smaller Companies 31 May 2022
Disclaimer
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by JPMorgan US 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.
JPMorgan US Smaller Companies (JUSC) follows an investment philosophy that aims to identify high-quality investment opportunities within the US small-cap market. The trust is managed by the highly experienced team of Don San Jose, Dan Percella and Jonathan Brachle. The importance of quality is ingrained in the team’s investment process, be that through the quality of management and the business model.
As we highlight in the Portfolio section, the team have made some subtle changes to JUSC, capitalising on recent market movements. Specifically they have rotated into banks and out of real estate, based on the comparative valuation opportunity. JUSC is ultimately a low-turnover strategy with a circa four-year holding period, and the team are confident in the overall outlook for US small caps, thanks to the robust consumption outlook. However, they believe a prudent and balanced approach to stock selection is important as growth and value factors are unlikely to dominate returns like they have done in recent years.
JUSC’s Performance has been strong over both a five- and a one-year period, primarily as a result of its quality bias. The team’s aversion to the more speculative end of the market has been of particular importance in the near term, as the more highly valued, low- to zero-earning companies have been hit hard by rising interest rates and market risks. Despite JUSC’s recent outperformance it currently trades on a 7.9% Discount, wider than its own long-term average.
We believe that for long-term investors, JUSC’s quality-focussed but ultimately balanced approach to investing may be desirable. JUSC’s commitment to the quality factor is encouraging, as clear stylistic commitment makes a portfolio more reliable and indicates a team who are confident in their investment process.
Given the outlook for higher interest rates, the market environment has the potential to become difficult for high-growth small caps, which could support JUSC’s quality approach. High-quality companies should be able to better insulate investors from the damage of rising inflation, and so JUSC may be well positioned for the current environment. As a result, JUSC’s wide discount in comparison to its historical levels may offer an attractive entry point.
We believe that JUSC works well as a stand-alone US small-cap allocation, given it is managed to achieve a stylistic balance while retaining a high active share. We also note that in today’s heightened-risk environment, domestically focussed US small caps could be an unconventional form of ‘safe haven’ thanks to the country’s relative economic strength, and that is what the managers believe. However, we note that small-cap investing is inherently riskier than large-cap investing, which may not make it suitable for conservative investors.
Bull
- Quality factor has better insulated JUSC from recent market downturns in comparison to its benchmark
- Consistent focus on solely high-quality businesses and management teams
- Historically wide discount may offer attractive entry point
Bear
- May struggle in periods of stylistically driven equity markets
- Gearing can enhance losses on the downside
- Small-cap investing may not be suitable for low-risk investors
Fund History
