JPMorgan US Smaller Companies has announced its final results for the year ended 31 December 2015. During the period, the company’s NAV increased by 4.0%, which the company says reflects both good stock selection and a rise in the US dollar against sterling. The Company’s share price rose by 6.8% over the year as the discount to NAV narrowed year-on-year. These compare favourably against the Russell 2000, which increased by 0.9% in sterling terms. The company is proposing to pay a dividend.
The Board says that, as part of its regular review of costs, it had become clear that the annual management fee of 1.2% on the Company’s gross assets up to £100 million, and 1% on any gross assets in excess of that amount, was starting to look out of line with other specialist overseas investment trusts. Therefore, following discussions with the manager, with effect from 1st January 2016 the annual management fee is now a flat 1% calculated using gross assets.
In terms of performance attribution, the managers say that, with only a handful of sectors posting a positive return for the year, stock selection was critical and was the key driver of the portfolio’s performance. In particular, the stock selection in the consumer discretionary, materials & processing, financial services and energy sectors added value. Each of these sectors outperformed their benchmark peer group by an average of 15%.
Overweight positions in Pool Corporation and Jarden were among the top contributors in the consumer discretionary sector as well as the portfolio overall. Pool, a wholesale distributor of pool equipment and supplies, reported better than expected earnings during the year. The managers say that these results were particularly impressive as many investors were concerned that California’s drought and oil-related job losses in Texas would weigh on results. They say they have selectively trimmed the position to manage risk but the stock remains a core holding as we appreciate the visibility in the business from a recurring revenue stream and they remain confident in management’s strategy and the fundamentals of the business. Jarden, a provider of a broad range of consumer products, announced that they were being acquired by Newell Rubbermaid at roughly a 25% premium to Jarden’s share price pre-merger speculation. The managers say that they think management has again made a smart capital allocation decision in selling the company at this point.
The managers say that the strong performance in the materials & processing sector was predominately driven by the exposure to Patrick Industries and to a lesser extent positions in AptarGroup and Comfort Systems. Patrick Industries manufactures building products and materials for the recreational vehicle and manufactured housing industries. The managers say that Patrick reported strong earnings during the year as it used its balance sheet strength to make key acquisitions that helped drive results. They also say that, whilst they believe that the long term demographic trends support continued growth in the industry, they have been trimming the holding on strength.
The fourth of the companies top contributors was Waste Connections, a provider of solid waste collection, transfer and disposal services. The managers say that the stock was rewarded for its positive third quarter earnings report, which demonstrated continued momentum in the company’s core solid waste business. They trimmed some of the position during the year, but continue to have conviction in the name and it remains one of the largest positions. In contrast, stock selection and underweight exposure in health care and technology sectors detracted the most from relative performance.
The managers say that, within healthcare, it was names that they didn’t hold that caused the most damage. Specifically, Anacor Pharmaceuticals, Dyax and Neurocrine Biosciences drove the benchmark’s performance in the sector as they rallied on average 190% for the year. However, the managers say that they continue to find it difficult to find compelling investment ideas within the health care space that meet our investment criteria, particularly in the biotech sub-sector and they remain underweight this area.
Within technology, the exposure to Rovi for some of the period detracted the most from the overall portfolio as well as the sector. The company has been engaged in patent litigation throughout the year, and announced that all five of the patents under question in an interactive program guides (IPG) patent infringement case versus Netflix were deemed invalid. While Rovi holds over 3,500 patents, the fact that all five were named invalid called into question the validity of the remaining portfolio. The managers exited the name following the announcement.
Another detractor during the period was Ascent Capital Group, a holding company that provides home security alarm monitoring through its subsidiaries. The managers say that Ascent’s customer attrition levels remained elevated amid increasing entrants and competition in the home security alarm market. They have exited the position as they have lost confidence in the management team after a year of poor operational execution, ineffective capital allocation, and rising competition industrywide. In terms of outlook, the managers say that they have always been reluctant to make specific predictions about the market but they believe US equities can deliver reasonably good returns, although probably accompanied by rising volatility, and the transition to more normal interest rates that lies ahead may result in periodic turbulence for equity investors.
They say that the key reasons for a positive view on equities are that profits remain healthy and could possibly improve as headwinds from the strong US dollar and low energy prices moderate, the US consumer is in decent shape, and from a valuation perspective, comparative values between equities and bonds remain favourable for equities as an asset class.
JUSC : JPMorgan US Smaller – good stock selection and US dollar strength