JPMorgan UK Small Cap Growth & Income (JUGI) has reported a year of underperformance ahead of its merger with Aberdeen UK Smaller Companies Growth (AUSC).
A lack of mining stocks and the AI sell-off in software stocks were the main factors in the £419m investment trust’s 7.2% investment return lagging the 9.8% gain in the Deutsche Numis Smaller Companies plus AIM index in the 12 months to 31 July.
However, annual results showed that shareholders did better than the underlying growth in net asset value (NAV) as the share price delivered a 9.1% total return, including the trust’s 4% dividends, that was just below its benchmark.
AUSC shareholders should probably not be too concerned by the small underperformance ahead of the proposed merger next month as JUGI’s five-year record is stronger.
While JUGI’s five-year total shareholder return of 8.2% highlights the difficulties of the market in UK smaller companies as interest rates have risen and investors have sought out US tech stocks, it is much better than AUSC’s near 17% loss over the same period.
Over 10 years, shareholders have received a 211.2% return, well ahead of the underlying 159.9% growth in the portfolio, with both smashing the index return of 69%.
Fund managers Georgina Brittain and Katen Patel indicated the cheap valuation of their companies could pave the way for a similar long-term recovery, highlighting their increase in gearing, or borrowing, from 8.1% to 10.6% during the year.
“We remain geared, as UK mid and small caps remain very cheap relative to their own history, and relative to the FTSE 100.”
They added: “Further evidence of the undervaluation of the smaller end of the UK market is the amount of M&A activity that continues to take place (both corporate buyers and private equity), and the number of companies initiating share buybacks due to their cheap equity. We firmly expect both of these themes to continue. We continue to find compelling opportunities within our large investment universe.”
The managers saw strong performances from their long-term position in Lion Finance, the former Bank of Georgia, and Applied Nutrition, a supplements company they bought at flotation two years ago, and North Sea oil and gas extractor Serica Energy.
They also benefited from bids for accounting group JTC, facilities manager Mitie and car dealer software provider Pinewood Technologies, reinvesting the money into over-50s services provider Saga and business loan platform Funding Circle, while taking new positions in the initial public offer of Beauty Tech Group and XP Power.
Hits to performance came from Cerillion, the provider of software and billing systems to major telecoms companies which severely derated on concerns over contract delays and deferrals, although they remain holders.
Not holding mining companies Greatland Resources and Pan African Resources also hurt as both stocks rallied in the first half of the financial year before exiting the benchmark.
Our view
QuotedData senior analyst David Batchelor said: “JUGI’s underperformance over the year is disappointing, particularly given the strength of its longer-term record, but the attribution figures suggest this was more a question of being in the wrong sectors than poor stock picking. Stock selection added 0.7%, while sector positioning detracted 4.3%, principally because of an underweight to basic materials.
“The scale of JUGI’s buybacks is striking. The trust spent £31.6m repurchasing 7.5% of its opening share capital, adding 0.8 percentage points to NAV returns, yet its discount remained close to 9%. This underlines the difficulty of generating sustained demand for UK smaller company trusts, even those with strong long-term records. The proposed merger with AUSC, JUGI’s second consolidation in three years, offers a potentially more lasting solution through greater scale, liquidity and lower charges.”
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