JPMorgan MidCap 18 March 2020

JPMorgan Mid Cap (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 have detailed in the Portfolio section, the managers seek to identify companies with a mixture of quality, value and momentum styles, and believe this approach is well suited to a mid-cap market where stockbroker coverage is lower than in the large-cap market (and thus there are more opportunities to identify unappreciated growth and/or mispricing opportunities).

Relative performance was very strong over the 12 months to 14/02/2020, with NAV returns significantly outstripping the benchmark index. The wider market seems to have recognised this, with the discount narrowing over this period to its present level of c. 2.7% (as of 14/02/2020), helping to ensure share-price returns were very strong over this period.

Whilst the primary aim of JMF is to generate capital growth, the managers and board also aim to see the dividend rise in excess of inflation every year. This has been comfortably achieved in recent years, allowing the board to increase distributions at a rate substantially above inflation whilst simultaneously accumulating further revenue reserves, as we cover in the Dividend section. JMF presently yields c. 2.1%.

As a result of the managers’ positive outlook for the UK mid-cap market, gearing has been increased and now stands at c. 9%. This reflects the variety of opportunities they continue to identify.

JMF has a disciplined and repeatable investment process with demonstrable success in the mid-cap market. The closed-ended structure and the attendant ability to utilise gearing are positives for investors looking to access the UK mid-cap market, as it should help ensure upside market capture remains strong, although admittedly presenting a headwind on occasions of market stress.

Recent months (at the time of writing) have seen strong returns, but (as the managers have themselves highlighted) there remains long-term valuation potential in UK domestic assets which could continue to drive outperformance over the medium term. Furthermore, the JMF portfolio on a look-through basis has a higher free-cash-flow yield, higher returns on equity, and stronger operational momentum than the index, which should reasonably be expected to ultimately be reflected in stronger returns.

Historically, the volatility of the discount has been high relative to AIC UK All Companies peers. One possible reason is investors using the trust to quickly adjust their exposure to UK mid-caps UK mid-caps as they go “risk-on” or “risk-off”. The present level of discount is trading near par, and further narrowing should not reasonably be expected; however, in the past when the discount has moved wider than the peer group it has often represented an attractive entry point. Ample revenue reserves should continue to support a reasonable dividend yield and continued growth of distribution in real terms.