Access to the heart of America: JPMorgan US Smaller Companies

JUSC provides access to the heart of America…by Alan Ray

Outlook

JPMorgan US Smaller Companies (JUSC) is a small- and mid-cap specialist investment trust with a long track record of investing in high quality small cap companies in the US. Over the last year, the US small-cap index has performed well, driven by a narrow band of about ten ‘AI-adjacent’ stocks that don’t fit the JUSC investment strategy due to concerns about lack of profitably and valuation. As a result, JUSC’s short-term underperformance has begun to impact on the longer-term performance figures. This shouldn’t, though, disguise JUSC’s longer record of outperformance, which we look at in the Performance section.

JUSC has been managed by Don San Jose since 2008. Don and his two experienced co-managers, Dan Percella and Jonathan Brachle use ‘quality growth’ as a starting point, and take a hands-on approach, meeting and visiting companies they invest in regularly. They are supported by a dedicated small-cap research team and manage c. US $5bn in similar strategies.

With an objective of capital growth, JUSC pays a single Dividend each year, and yields 0.8%. Gearing is currently 8%, slightly above the long-term average but well within policy limits. The Discount is currently 9%, and the board has made active use of buybacks in response. The board recently announced a revised fee structure, detailed in the Charges section, which could result in a lower ongoing charges figure.
 

Analyst’s View

 
In our previous note on JUSC we showed how relative performance, which was strong for many years, has been undone by a short period where the market has chased returns in a narrow group of unprofitable or highly-valued companies that have AI, or AI-adjacent businesses, leaving the types of companies that JUSC focuses on at attractive valuations. This situation has been exacerbated by the war in the Persian Gulf, which has created market volatility and economic uncertainty that has not been constructive for small-caps. However, this leaves the portfolio at levels that the JUSC team see as highly attractive compared to history.

At the same time, the composition of the US’s large-cap S&P 500 remains highly concentrated, and in the Portfolio section we chart how this compares to JUSC and its benchmark, which are notably different in sector composition. JUSC’s portfolio of small-caps gives investors access to a group of companies that represent the diversity and scale of the US economy in a way that the S&P currently doesn’t and comes at a lower valuation. It’s obviously difficult to call when a messy geopolitical situation might end, or start to get better, but, perhaps ironically, the US economy is less exposed to events than, say, Europe, and if the team’s short-term observation of faster earnings growth for smaller companies turns into a trend, and valuation multiples also recover, then JUSC’s recovery could be very strong indeed.

Bull

• High quality companies remain undervalued, in the team’s view
• The US economy, perhaps ironically, is under less pressure than others from an energy price shock
• JUSC has strong diversification potential compared to the S&P 500

Bear