katen patel

Written by Katen Patel

February, 2021

In association with

Size matters

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

For Professional Clients only – not for Retail use or distribution

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 a reliable indicator 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.

OEIC: Prior to any application investors are advised to take all necessary legal, regulatory and tax advice on the consequences of an investment in the products. Investment is subject to documentation, which is comprised of the Prospectus, Key Investor Information Document (KIID) and either the Supplementary Information Document (SID) or Key Features/Terms and Conditions. These documents, together with the annual report, semi-annual report and instrument of incorporation are available free of charge from JPMorgan Asset Management (UK) Limited. 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.

Investment Trusts: 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 from JPMorgan Funds Limited or 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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