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JPMorgan Smaller Companies’ second consecutive year of outperformance – Shareholders of JPMorgan Smaller Companies (JMI) enjoyed very strong returns in the financial year to 31st July 2018
The company delivered outperformance against the benchmark, combined with a tightening of the discount to net asset value.
Michael Quicke OBE, the chairman noted in his statement that this is the second consecutive year of outperformance, which he sees as “more than compensated for earlier periods of underperformance”. He added that this demonstrates the importance of a longer-term perspective when investing in smaller companies.
“For UK investors, the dominant issue for this financial year is Brexit. It is (almost) without doubt that the UK will leave the EU within the year, but despite the deadline set by Article 50 being only six months away, we still do not know what that exit will look like. The Bank of England assumes that economic sanity will prevail and therefore that the most likely outcome will be a gradual transition to new trading arrangements within the EU. The Prime Minister’s recent Chequers speech on Brexit signalled a very soft exit. However, in our view the increased political uncertainty post that speech, the heightened divisions within the political parties, and the currently stalled negotiations mean that the tail risk of the UK exiting without any deal at all has risen materially.
This leads to a huge lack of clarity for companies, consumers and investors. Add to this the looming threat of global trade wars and it would be easy to become very pessimistic on the short term outlook. However, despite this, the IMF is forecasting UK GDP growth of 1.4% in 2018 and 1.5% in 2019. In the UK the all-important PMI data (purchasing managers’ indices) are still indicating expansion, and lowered inflation expectations are positive for the consumer. While business confidence metrics have slipped, business investment remains low but positive, currently growing at 2-3%.
Despite this backdrop, we strongly believe it is wrong to be too pessimistic. The message from our companies, and the underlying macro-economic data, remain positive. Our experience during the depths of the global financial crisis a decade ago has taught us of the resilience of the UK’s smaller companies. Current forecasts are for earnings growth of over 13% for the FTSE Small Cap Index over the next year, versus sub 8% for the FTSE All Share. Operating as a large number of our investments do in niche structural growth markets, they tend to be much less linked to the overall performance of the UK economy, and can grow significantly faster. We believe that the Company has invested in a portfolio of such companies, and we intend to utilise any market volatility over the next several months to add to a number of our key positions.”
JMI : JPMorgan Smaller Companies’ second consecutive year of outperformance
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