The UK market has been out of favour over the past few years, but Georgina Brittain, co-portfolio manager of JPMorgan UK Small Cap Growth & Income plc (JUGI) updates on the Trust’s performance, and Simon French, UK Economist of broker Panmure Gordon argues that the UK economy is in better shape than generally thought and is set to improve.

Times may have been pretty bleak for the UK market in general, and small companies in particular, but for the JPMorgan UK Small Cap Growth & Income investment trust (JUGI) management team there has been plenty to cheer about recently.

For a start, the merger between the JPM Mid Cap Investment Trust and JPM UK Smaller Companies Investment Trust finally completed at the end of February. The result, renamed JUGI, is more liquid and lower cost with over £500 million under management¹, while its enhanced dividend policy promises a 4% yield from total returns, enhancing its appeal for income investors with a nose for growth.

Moreover, although the market has struggled, numerous individual companies within this dynamic, but deeply unloved, part of the market have produced outstanding returns – and as stock pickers, the JUGI team have a powerful nose for those opportunities.

Smaller companies can produce eye-watering returns

JUGI’s excess NAV return of 11% over the 12 months to end February, against the benchmark index (Numis Small Companies plus Aim)², speaks for itself. But this is no flash in the pan: the trust has produced top-quartile performance over all time periods.

As co-manager Georgina Brittain points out: “Over the past five years the UK has been out of favors, yet the fund has made almost 10% a year on average. That’s in the bad times – and the good times will return in due course.”³

She stresses the ability of the strongest small companies in the portfolio to produce eye-watering returns even against this backdrop. Over the 12 months to end February, eight of the 10 top performers grew by more than 30%, while the highest performer, Ashtead Technologies, returned 129%⁴.

UK economy is improving, and fast

There is growing evidence that the good times could be on their way sooner rather than later, too. Simon French, UK Economist at JUGI’s broker Panmure Gordon, points to several macroeconomic indicators that give cause for optimism regarding the UK economy – the key bellwether for small businesses.

First, real incomes are growing again, with February’s CPI inflation down to 3.4% from 4% in January, and nominal incomes now rising by around 5-6%.⁵

“The Office for Budget Responsibility’s November 2023 forecast was for the steady decline of real purchasing power through 2024/25, but actually since Q4 2023 we have seen strong disinflation, especially for the price of gas, which is feeding through to wider food and services prices,” explains French.

Secondly, after decoupling from wider global trends in 2023, UK inflation is no longer far adrift from the rest of the G7, with the spread between the two at its lowest level for two years. Recoupling with broader inflationary trends will help boost investor confidence, French says.

However, he anticipates that the Bank of England will want to see the seasonally adjusted data for April in order to gauge how persistent inflationary pressures might be, before making any changes to interest rates. “We’re expecting rates to ease in August,” he adds.

Thirdly, household balance sheets are historically strong as households have ‘de-geared’ their debt over the past 15 years. As French observes: “At the time of the financial crisis in 2008, UK households were burdened with net debt of around £650 billion, but now they’re more or less debt neutral.”⁶

In fact, people’s focus on debt reduction rather than consumption is one reason why the UK economy has grown so sluggishly, given that household spending underpins around 60% of UK GDP. However, looking forward, French sees those healthy balance sheets as a positive for the resilience of UK consumer spending.

Conditions right for a dramatic upturn in performance

So is the time coming for small company performance to roar again? Apart from the macroeconomic drivers, Brittain highlights a number of reasons why she and the team believe the conditions are right for a dramatic upturn in performance.

“Valuations are the start and the end of outperformance, and they are now at extremely low levels, especially in regard to free cash flow (FCF) yields [which show free cash flow as a proportion of share price and indicate a company’s capacity to reduce its debt, pay dividends and facilitate growth],” she says.

To put that into context, a 4% FCF yield is typically considered to indicate decent value; the benchmark index is on 5% at present, while JUGI’s portfolio sits on more than 7%. “These are not normal numbers – small companies are still very, very undervalued,” she adds.

Additionally, small companies themselves are currently “the only buyers in town” for small-cap shares, carrying out regular buybacks on these rock-bottom valuations. “But when outflows stop and other buyers come back in, we do expect the market to move,” says Brittain.

Merger activity is already picking up within UK plc, with two or three deals a week, focusing particularly on the small companies’ space where bargains are most obviously in evidence. JUGI participated in just one takeover in 2023 but has already seen a couple this year with another in the pipeline, and here too Brittain anticipates busier times ahead.

Patience remains the name of the game, but JUGI is strongly positioned to produce a sustained and full-throttle roar as sentiment improves for the UK smaller companies’ market. 

¹ Total assets £525mn as of 25/04/2024

² Net asset value performance data has been calculated on a NAV to NAV basis, including ongoing charges and any applicable fees, with any income reinvested, in GBP.

³ Source: Net asset value performance data has been calculated on a NAV to NAV basis, including ongoing charges and any applicable fees, with any income reinvested, in GBP. NAV is the cum income NAV with debt at fair value, diluted for treasury and/or subscription shares if applicable, with any income reinvested. Excess returns calculated geometrically. Benchmark changed from the FTSE Smaller Companies Index ex IT to the NUMIS Smaller Companies Index plus AIM ex IT on 1st January 2019. Source: J.P. Morgan Asset Management, annualized performance, net of fees (%).

⁴ Source: Factset. Data is gross of fees in GBP. Attribution results are for indicative purposes only.

⁵ Source OBR, Panmure Gordon.

⁶ Source Bank of England, Panmure Gordon

Investment objective

The Company's objective is to achieve capital growth from UK listed smaller companies and a rising share price over the longer term by taking carefully controlled risks. The Company has the ability to use borrowing to gear the portfolio within the range of 10% net cash to 15% geared in normal market conditions. Gearing may magnify gains or losses experienced by the Company. The Company makes quarterly distributions, that are set at the beginning of each financial year. On aggregate, the intention is to pay dividends totalling at least 4% of the NAV as at the end of the preceding financial year.

Risk profile

• External factors may cause an entire asset class to decline in value. Prices and values of all shares or all bonds and income could decline at the same time, or fluctuate in response to the performance of individual companies and general market conditions.
• This Company may utilise gearing (borrowing) which will exaggerate market movements both up and down.
• This Company invests in smaller companies which may increase its risk profile.
• The share price may trade at a discount to the Net Asset Value of the Company.
• The single market in which the Company primarily invests, in this case the UK, may be subject to particular political and economic risks and, as a result, the Company may be more volatile than more broadly diversified Company's.
• Companies listed on AIM tend to be smaller and early stage companies and may carry greater risks than an investment in a Company with a full listing on the London Stock Exchange.

Investment Performance:

Past performance is not reliable indicator for current of future events. 

This is a marketing communication and as such the views contained herein do not form part of an offer, nor are they to be taken as advice or a recommendation, to buy or sell any investment or interest thereto. Reliance upon information in this material is at the sole discretion of the reader. Any research in this document has been obtained and may have been acted upon by J.P. Morgan Asset Management for its own purpose. The results of such research are being made available as additional information and do not necessarily reflect the views of J.P. Morgan Asset Management. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Changes in exchange rates may have an adverse effect on the value, price or income of the products or underlying overseas investments. Past performance and yield are not reliable indicators of current and future results. There is no guarantee that any forecast made will come to pass. Furthermore, whilst it is the intention to achieve the investment objective of the investment products, there can be no assurance that those objectives will be met. J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our EMEA Privacy Policy www.jpmorgan.com/emea-privacy-policy. Investment is subject to documentation. The Annual Reports and Financial Statements, AIFMD art. 23 Investor Disclosure Document and PRIIPs Key Information Document can be obtained free of charge in English from JPMorgan Funds Limited or at www.jpmam.co.uk/investmenttrust.

This communication is issued by JPMorgan Asset Management (UK) Limited, which is authorised and regulated in the UK by the Financial Conduct Authority. Registered in England No: 01161446. Registered address: 25 Bank Street, Canary Wharf, London E14 5JP.

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