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Top US small cap trust finds slim pickings in toppy markets

22 August 2019

Don San Jose says finding new stocks for JPMorgan US Smaller Companies is hard amid 'high valuations', with only two added in first half of the year.

Don San Jose is finding new stocks for his top-performing JPMorgan US Smaller Companies (JUSC) trust hard to come by amid 'high valuations', with only two additions made to the portfolio in the first six months of the year.

Semiconductor and fibre laser producer Nlight (LASR.O) and restaurant suppliers Welbilt (WBT.N) were added, with San Jose admitting in half-year results for the trust that 'the team's new idea production this year has been challenged'.

Despite the trust's struggles with high valuations, San Jose has not adopted a bearish position on stock markets. While investors have been gripped with fears of a US, and broader global, recession, San Jose is expecting continued expansion of the economy and company earnings this year and the next.

But as the US and China continue to wrangle over trade, San Jose said the outcome of this dispute 'will be integral to investor sentiment and will likely continue to contribute to uncertainty moving forward'.

'While continued earnings growth should provide support to the equity market, we are monitoring the incremental risks that could represent headwinds for US stocks,' he said.

'In particular, we continue to watch closely the state of trade relations, movements in global economic growth, and the implications of Fed policy, all of which have the potential to heighten volatility.'

The trust's strong returns have continued this year, with the net asset value (NAV) up 21.2% in the first half of the year, versus 16.9% from the Russell 2000 index. The shares were up 19%, as the discount widened to 4.9%.

JPMorgan US Smaller Companies is the best-performing US-focused trust over three, five and 10 years, while over one year Baillie Gifford US Growth (USA), which launched in March 2018, takes the top spot.

The trust’s main allocations are to financial services, producer durables and the consumer discretionary sectors, which together make up nearly 60% of the portfolio.

Financial services and consumer discretionary were the two sectors that contributed the most over the period, with specialist insurer Kinsale Capital Group (KNSL.O) benefiting from ‘larger insurance companies exiting the market it operates in, increasing its market share and returns’, said San Jose.

The trust is meanwhile underweight healthcare and technology. San Jose said he has a ‘difficult time finding opportunities that meet our quality and valuation criteria’ in the latter, and technology stock Sailpoint Technologies (SAIL.N) detracted from performance after revenue guidance was lowered.

Among the pharmaceutical companies the trust does back is Catalent (CTLT.N), whose shares rallied after it acquired gene therapy drug manufacturer Paragon.

The trust implemented its previously announced fee cut in the first half of the year, cutting the management fees to 0.9% a year for the first £100 million of gross assets and to 0.75% after. Previously a flat 1% fee applied.

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