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JPMorgan US Smaller’s shareholders made 53% in 2016

JPMorgan US Smaller Companies Investment Trust has announced results for the year ended 31st December 2016. The share price increased by over 53% during the financial year. The backdrop to the dramatic share price rise was an increase of 50.1% in the Company’s net asset value, which compares favourably with the rise of 44.4% in the benchmark, the Russell 2000 in sterling terms. Around half of the gain in the benchmark was down to the weakness of sterling against the US dollar post the Brexit vote.

Based on the current revenue run rate and a significant change in attitude to dividends within US small cap company managements (dividends are now an important part of a company’s capital allocation priorities) the Board would expect the revenue deficit to be cleared in 2017 and will then be in a position to consider paying a dividend.

Stock selection in the producer durables sector proved very beneficial. In the sector, Douglas Dynamics, a snow and ice management equipment maker, rose on strong earnings results due to strength at their dealer base which helped their core commercial snow/ice business. The company also benefited from continued strong demand for the products they launched in 2015. They continue to hold a position in the name, but have trimmed it somewhat on strength to manage position sizes and exposure. They have confidence in the company’s strong leadership position in the stable core truck-mounted snowplough market, management’s strategy to expand into other work truck attachments, and their intense focus on shareholder value creation. Within the same sector, a turf equipment provider, Toro, similarly contributed to performance as it continued to impress investors through strong earnings results while raising their quarterly dividends. They are positive on its solid share gains in both equipment and irrigation industries and overall healthy demand.

On a stand-alone basis, an investment in the energy name Patterson-UTI Energy added the most value for the period. The operator of contract drilling and pressure pumping reported earnings which beat consensus, and proved it can continue to execute in this tough market environment through a strong balance sheet and operational execution. The company benefitted from improving drilling activities as well as increased revenue in their pressure pumping segment. The company also rose on the heels of higher oil prices which helped the overall industry.

In contrast, underweights in the technology and financial services sectors as well as weak stock selection within materials & processing and technology weighed on relative returns.

An investment in the materials & processing name AptarGroup hurt performance. The company, which is a leader in dispensing technologies failed to meet investors’ expectations. The struggles derived from their Beauty & Home and Food & Beverage segments during challenging market conditions, which weighed on their volumes. The stock price was also pressured on lowered guidance pointing to macro uncertainty. However, they remain positive on the company due to their pharmaceutical segment which is growing with healthy margins and the company continues to be a leader in the niches they participate in. In addition, they possess a strong balance sheet and have demonstrated solid capital allocation over time.

A position in Sequential Brands, which owns a portfolio of consumer brands, detracted from performance in the consumer discretionary space. Sequential’s share price plunged after the company lowered their 2017 EBITDA guidance by 10%. Inconsistent execution on deals, a weaker balance sheet and concerns about the credibility of management led them to adjust our position accordingly. A position in the health care company Hanger also detracted for the period. The company delayed filing financial statements with the Securities and Exchange Commission and was delisted from the New York Stock Exchange. It initiated an accounting review in 2014 and more recently lawyers have found potential acts of fraud within the lower levels of the company, which sparked a further review of it’s financials. The latest update included the possibility of the board pursuing claims against the previous CFO and CAO and making internal changes to rectify accounting control weakness. They did not view Hanger as a core holding and have exited the position.

JUSC : JPMorgan US Smaller’s shareholders made 53% in 2016

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