Despite the euphoria around the Brexit deal at the end of 2020 and start of the vaccine rollout, the renewed lockdowns in the UK, new virus strains and the astonishing Gamestop/Reddit saga has led the market to become rather directionless in recent weeks with share prices often moving out of sync with fundamentals. Recent earnings reports from UK companies however, have largely been very positive leading to positive earnings upgrades across the UK market.
During the initial stages of the pandemic the UK market saw some of the sharpest cuts to earnings globally, however, as a result, stands to have an equally sharp bounce back during the recovery. Typically during the recovery phase of a market, small and mid-cap stocks tend to benefit the most and, given the valuation picture and projected earnings growth, we see this being no different this time around. Numis point out that in 2 out of every 3 years since the 1950s, small and mid-cap stocks outperform large cap stocks. According to Peel Hunt data (as at the 25 January 2021) the Numis Smaller Companies plus AIM index was trading on a 2022 PE ratio of just 11.7x with forecast earnings growth of 24%.
Our approach throughout the crisis has been to stay disciplined in our investment approach, seeking out long-term winners with good management teams, strong balance sheets and deep moats that should continue to benefit from structural growth drivers. This approach stood us in good stead through 2020 with both our open-ended small cap fund and our closed-ended small cap fund generating returns well ahead of the benchmark. As you would expect, the recent market volatility has not changed our approach and we have the additional tailwind of a very active IPO market bringing new and exciting companies into our investable universe.
We do believe that at some stage within the next 6-18 months life will return to some sort of normality. With this in mind, we believe we have an attractive balance in the portfolio of companies that have benefitted from conditions under the pandemic and those that we believe will thrive once restrictions are lifted. Prime examples would be Computacenter, a value added reseller of software and hardware to corporates and public entities – they have benefitted from the ongoing trend of capex being directed to technology spend as companies get set up for working from home, cloud based services and just generally being ready for the digital age. On the other side, Jet2, a package holiday operator that has been taking significant market share in recent times. They have provided excellent customer service on cancellations and managed the balance sheet well. We believe that they will continue to take market share once international travel restrictions are lifted. In the 12 months to 31 December 2020, the JPM UK Smaller Companies Fund C – Net Accumulation returned 7.6% and the JP Morgan Smaller Companies Investment Trust Net Asset Value returned 10.5% compared to the benchmark return of 4.9%. *
*Past performance is not a reliable indicator of current and future results
Source: J.P.Morgan Asset Management
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