JPMorgan UK Small Cap Growth & Income

JPMorgan Smaller Companies (JMI)

25/03/2021

Results analysis from Kepler Trust Intelligence

·    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 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

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.

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. 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 are before a full recovery in earnings is yet factored in. We 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. This in turn can create demand for UK assets in general…

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