The ‘astonishing’ resilience of UK consumers has bolstered the belief of JPMorgan’s Georgina Brittain and Katen Patel that the country’s small and mid-cap companies are pulling through the challenges of the past two years. However, the chair of their investment trust thinks the government has much more to do to restore investor support for domestic stocks.

Commenting on maiden half-year results for JPMorgan UK Small Cap Growth & Income (JUGI ), a £440m trust formed at the end of February from the merger of the group’s Mid Cap and UK Smaller Companies listed funds, Brittain and Patel said it was ‘too easy to be gloomy’ about prospects in the wake of high inflation and interest rates.

They said the facts were that while the economy was forecast to grow just 0.4% this year, inflation was predicted to fall to 2.2%, just above the Bank of England’s 2% target, and interest rate cuts were expected.

‘Add to this low levels of unemployment, stable house prices, declining energy costs, rising real wages helped by national insurance cuts, the imminent rise in the national living wage and prospects appear brighter,’ the managers said.

Expanding on their optimism, Brittain (pictured below) and Patel said: ‘The overall resilience of the consumer since the outbreak of the war in Ukraine has been little short of astonishing, given the numerous financial headwinds.’

They pointed to the recent Gfk consumer confidence survey reporting a rebound in individuals’ views on their personal prospects and a 53.4 reading from the services PMI (purchasing managers’ index) which suggested an expanding economy.

‘We do not want to get carried away by these and other positive data points, but it does appear that both consumers and companies are adapting to the reality of higher interest rates,’ the two fund managers said, adding they were hearing how smaller businesses were navigating their way through the headwinds of cost and wage inflation, labour shortages and higher interest costs.

While Andrew Impey, the trust’s chair, decried investors continuing to withdraw from an out-of-favour UK market, and urged the government ‘to do considerably more than the modest measures announced in the Budget’, the managers were pleased to benefit from the wave of mergers and acquisitions the de-rated stock market was producing.

In addition to an agreed offer from private equity firm Permira for pharmaceutical services provider Ergomed last September, the managers said this year the trust had benefited from a bidding war for fintech Equals Group (EQLS), as well as house builder Barratt Developments’ swoop on smaller rival Redrow (RDW) in February.

The positivity was reflected in the interim figures with the smaller companies trust achieving an underlying total return of 8.5% in the six months to 31 January before its combination with the slightly smaller mid-cap fund.

This beat the 1% return from the Numis Smaller Companies plus AIM index with the two largest contributions to performance from Bank of Georgia (BGEO), a Citywire Elite stock, and subsea rental equipment group Ashtead Technology (AT).

Affordable cosmetics brand Warpaint London (W7L) and buy-to-let lender OneSavings Bank (OSB) also contributed positively, the latter rebounding strongly from a profit warning last summer.

The biggest detractors were luxury watch retailer Watches of Switzerland (WOSG) and forex specialist Alpha Group International (ALPH). The managers ‘significantly reduced’ the former before its January profits alert and had ‘subsequently exited’.

Eight new stocks in the mid-cap portfolio were transferred after the merger. These included housebuilder and Citywire Elite stock Bellway (BWY), London property investor Shaftesbury (SHB), outsourcing giant Serco (SRP), and Virgin Money (UKVM), which last month received a bid approach from Nationwide.

Alongside the mid-cap additions, the duo also took new positions in other undervalued stocks, including hostel booking platform Hostelworld (HSW), Keystone Law (KEYS), housebuilder MJ Gleeson (GLE), and ventilation specialist Volution (FAN), the last two also being Citywire Elite stocks.

‘We continue to find exciting and undervalued – and often fairly unknown – investment opportunities without our broad and diverse universe,’ Brittain and Patel said. ‘The current gearing level of just under 10% reflects our confidence in the compelling opportunities and valuations currently available,’ the managers added.

At 291p, the shares stand on a 12.5% discount to net asset value, in line with rivals. However, under the new enhanced quarterly dividend policy, the trust yields an above-average 4.9%. Excluding micro-cap funds, like top-performing Rockwood Strategic (RKW ), JUGI has provided the best five-year performance of mainstream small-cap funds with a total shareholder return of 64.6% beating the 21.7% of the Deutsche Numis Smaller Companies index (excluding investment companies).