William Sobczak
View profile
Updated 25 Mar 2021
Save Article Download

Disclaimer

Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by JPMorgan UK 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.

  • Today JPMorgan Smaller Companies (JMI) released its half year results for the period ending 31 January 2021. Over the six months to 31/01/2021 JMI produced share price total returns of c. 42.9% and NAV total returns of c. 30.9%, outperforming the benchmark Numis Smaller Companies plus AIM (excluding Investment Trusts) Index which rose by c. 28.7%. Over this period, JMI’s discount narrowed from 13.7% at the start of the financial year to 6.0% as at 31/01/2021. 
  • The managers sought to maintain a balance between exposure to companies they observed as suffering minimal or no operational impact from COVID-19, and companies which, though heavily impacted by the COVID-19 pandemic, they believed were well positioned to emerge with a strengthened market position. As an end to lockdowns draws nearer, they have started to add further to a number of positions which they expect to benefit from the re-opening of the economy.
  • The board recognises that there continues to be uncertainty in global markets. However, it believes this only further underlines the attractiveness of smaller companies, which are able to ‘make their own success’, regardless of macroeconomic headwinds.
  • The managers are optimistic on the outlook for the UK. They anticipate significant pent-up demand will be released as lockdown policies are phased out, offering the potential for strong economic growth in the latter part of 2021. However, they note that challenges remain in the near-term and that they anticipate a rise in insolvencies in small- and mid-cap UK companies in the first part of 2021.

 

Kepler view

JPMorgan Smaller Companies (JMI) continues to represent a compelling proposition for investors. The trust has now delivered NAV total returns of 107.4% over the past five years to 25/03/2021, in comparison to 64.6% from the benchmark and 61.4% from the peer group average (Source: Morningstar).. At a portfolio level, the managers have been careful to strike a balance between COVID immediate ‘beneficiaries’, where operations were unimpacted or even boosted by lockdown policies, and companies for which any benefit may be more long-term in its nature. Companies from both categories have contributed to returns, with major contributors to performance including Jet2, OSB, Codemasters and Ergomed.

As a route to an end to lockdown policies became more tangible, the management team have been adding to a number of positions they anticipate benefitting from the re-opening of the economy, such as National Express and Marstons. Accordingly, JMI now has a strong overweight to the UK economy and domestic revenue generation when compared to the benchmark. If, as they anticipate, the very elevated household savings rate does indeed indicate pent-up demand which will be unleashed into the economy later in 2021, we would expect holdings such as these to further take up the reins and help drive performance.

The gearing facilities have been relatively fully utilised, reflecting the bullish outlook of the managers and the abundance of stock-specific opportunities they are observing at this time. Noting their view that the UK economy could see an accelerating recovery later in 2021 and that government and central bank policy is likely to remain supportive for the foreseeable future, they do not believe current UK market valuations are in any way demanding. These valuations, which they believe to be attractive, are before a full recovery in earnings is yet factored in. We would agree there is a compelling valuation opportunity in the UK market, and a more rapid vaccine rollout compared to peers should allow more rapid normalisation of economic activity in the UK. This in turn can create demand for UK assets in general, and should, we think, make the domestic revenue generation overweight in JMI more attractive.

Despite the bias towards UK domestic revenue generation, the balanced input to stockpicking, which helps ensure company specific developments are driving relative returns, should mean shareholders are able to rest assured that they are not beholden to a particular market or macroeconomic outcome to drive relative and absolute returns, in our opinion. Over the long-term, the experience and analytical resources available to the two managers in a lightly researched market should offer significant opportunities for alpha generation, and over the five years to 25/03/2021 JMI has displayed an annualised alpha of 4.3 and an annualised information ratio (relative to the benchmark) of 0.9 (Source: Morningstar).

Although the discount has narrowed significantly since the start of JMI’s financial year, this has been a reflection of wider market demand with no board intervention in the form of buybacks. The trust still remains on a discount of c. 3.6% (as at 25/03/2021), but further shareholder uplift from discount narrowing may be limited and this is notably narrower than the typical discount level seen in recent years. Nonetheless, the ability to buy into what appears a cheap asset class, via a vehicle whose managers have generated long-term outperformance, at a discount to NAV remains compelling to us.

Login to read the full article

Kepler Trust Intelligence provides research and information for professional and private investors. In order to ensure that we provide you with the right kind of content, and to ensure that the content we provide is compliant, you need to tell us what type of investor you are.

Continue

Welcome to Kepler Trust Intelligence

Kepler Trust Intelligence is authorised in the UK by the Financial Conduct Authority.
Please enter a valid email address
{{item.msg}}
Please enter a valid password
{{item.msg}}
Please enter a valid email address
{{item.msg}}
Please check your email. If an account exists you'll be sent instructions on how to reset your password.
Kepler Trust Intelligence is authorised in the UK by the Financial Conduct Authority. To ensure that we are able to provide content which is appropriate for you, please tell us a little about yourself.
Please choose an option
{{item.msg}}
Please enter a company name
{{item.msg}}
Please enter a location name
{{item.msg}}
Please choose an option
{{item.msg}}
Please enter a platform
{{item.msg}}
Please choose an option
{{item.msg}}
Please enter a trust
{{item.msg}}
?
The information contained herein is not for distribution and does not constitute an offer to sell or the solicitation of any offer to buy any securities in the United States to or for the benefit of any United States person (being residents of the United States or partnerships or corporations organised under the laws thereof). The investment funds referred to herein have not been registered in the United States under the Investment Company Act of 1940 and units or shares of such funds are not registered in the United States under the Securities Act of 1933.
Please confirm
{{item.msg}}
Please select an option
{{item.msg}}
See benefits
A free Kepler Trust Intelligence account allows you to access premium content including the ‘Kepler View’ – our verdict on the trusts we cover – and historical research so you can see how our view has changed over time. An account also unlocks useful facilities like the ‘follow’ button which lets you keep track of the trusts you’re interested in and as a logged in user you can also download PDFs of our research, and choose the layout of the page you’re reading to suit your preference. We will not share your details unless you give us permission to do so, and we won’t bombard you with emails – we only send one a week.
Please select an option
{{item.msg}}
Please enter your first name
{{item.msg}}
Please enter your last name
{{item.msg}}
Please enter a valid email address
An account already exists with this email - have you forgotten your password?
{{item.msg}}
Please enter a valid password
{{item.msg}}
Please enter a valid password
{{item.msg}}
How will this information be used? Your answers help us to tailor our content to relevant investment trusts, and to ensure that the asset allocation and portfolio strategy research we produce is appropriate to our userbase.
Our Website uses Cookies Cookies are small text files held on your computer. They allow us to give you the best browsing experience possible and mean we can understand how you use our site. Some cookies have already been set. You can delete and block cookies, but parts of our site won’t work without them. By using our website you accept our use of cookies. For further information please refer to the Kepler Privacy Notice.
Need help?

One more thing...

Did you know, you can 'follow' individual trusts on Kepler Trust Intelligence? Use the functions below to set up alerts and we'll send you research and updates on your chosen trusts.

Suggested trusts to follow

Browse all funds
Need help?
Current Site Kepler Trust Intelligence is produced by the investment companies team at Kepler Partners and is the UK’s premier source of detailed qualitative research on investment trusts. Absolute Hedge is a market leading UCITS research database providing proprietary research on funds, themes and strategies in the UCITS space. Kepler Liquid Strategies is a Dublin domiciled UCITS fund platform featuring a number of best-of-breed fund managers. Kepler Partners is a corporate advisory and asset raising boutique specialising in the regulated funds market in Europe and investment trusts in the UK.