The JPMorgan US Smaller Companies Investment Trust plc (JUSC) remains focused on profitable companies in the US small cap universe, despite the recent rally in low-quality stocks
High quality vs. high flying
Investing in higher-quality companies has been a winning strategy over time. Sometimes other factors will drive near-term market returns and that’s been happening in US small cap equities.
Increasing excitement around artificial intelligence (AI), fading concerns over the impact of US tariffs and an interest rate cut from the Federal Reserve have created a wave of enthusiasm around high-growth, momentum stocks since April 2025. Many unprofitable technology companies, bitcoin names, flying taxi developers and meme stocks are up over 100% in 20251—some of the companies don’t even generate revenues, let alone earnings.
The reverse has been true for quality companies—those with less debt and stronger earnings: they are not only underperforming the market but have actually declined. The past six months have been one of the worst periods for higher-quality stocks in decades.
The low-quality rally has been a substantial headwind for JUSC but the experienced portfolio managers know that the market can change direction quickly. Historically, following periods of highly concentrated large cap leadership, small cap stocks outperformed for multiple years. As the performance divide grows, the potential for reversal increases. For example, Microsoft*, Apple* and NVDIA* now each have market capitalisations that are greater than the entire Russell 2000 US small cap index. A small decline in any of these mega-cap stocks frees up a lot of capital to potentially move into more attractively valued small cap stocks.
Small cap companies with AI exposure
The JUSC portfolio managers are continuing to find opportunities in companies with exposure to the AI ecosystem that can benefit in the current environment. Allergo MicroSystems*, a global leader in developing power and sensor solutions, is benefiting from secular tailwinds in industrials, robotics and data centre cooling applications and was the top contributor to performance over the 12 months ending 30 September 2025.
JUSC also has a position in Macom*, which provides energy-efficient products that enable fast and accurate data transmission over long distances—needed for wireless communication and satellites—and very short distances, such as within data centres. About a quarter of the company’s revenue comes from data centres while about half comes from the defence sector. The stock has been a top positive contributor over last three years.
Another portfolio holding related to data centres is Modine*, an industrial company that makes critical heating, ventilation and air-conditioning (HVAC) components. Roughly a quarter of this highly profitable company’s revenues now comes from data centre cooling.
Quality opportunities across sectors
The portfolio managers have also been adding to high-quality companies across sectors, many of which are now trading at attractive valuations vs. historical levels. JUSC initiated a position in Chemed*, a company with two strong business lines that are not economically sensitive and a good management team. Chemed* owns the leading hospice care platform in the US, which has strong underlying fundamentals due to the ageing population. The company also owns the leading brand in plumbing services, which is a resilient and profitable business.
At the sector level, JUSC remains most underweight health care relative to the benchmark, largely because many health care companies are in the biotech industry and most don’t make any money—about a third don’t even have revenues. In health care, JUSC has exposure on the services and supply side, such as the position in Envista*, a dental consumables company.
The largest overweight is in the industrials sector, boosted by holdings in companies such as Modine* and AAON*, both of which are related to HVAC services in data centres. The second largest overweight is financials, driven by positions in property and casualty insurance, M&A advisers and an options exchange.
Looking ahead
JUSC focuses on downside protection, which was helpful in the turbulent early months of 2025 when investors were risk averse in the lead-up to the tariff announcement in April. However, in strong markets, especially ones that are driven by lower-quality companies, JUSC is likely to underperform. In this environment, the portfolio managers continue to focus on finding companies that are generating profits, grounded in strong business models and trading at attractive valuations.