Join our community of smart investors

Tap into US small-cap growth

US small-caps are well positioned to benefit from a number of market positives and this fund is a good way to capture those gains
April 19, 2012

Despite the allure of large-cap defensive equities in 2012, it has been smaller companies that have enjoyed a strong rally, beating rebounds in FTSE 100 stocks by a significant margin.

IC TIP: Buy at 1027pp
Tip style
Growth
Risk rating
High
Timescale
Long Term
Bull points
  • Attractive growth prospects
  • Strong performance
  • Trading on discount
Bear points
  • Volatile
  • Currency risk

In the first quarter of 2012, the FTSE small-cap index rose 14.7 per cent, while the FTSE 100 index fell 2.2 per cent. But analysts are now torn over whether the momentum behind UK small caps can continue, as recent price rises have taken small-cap valuations back to their historical averages relative to large caps while the outlook for growth continues to be lacklustre. Views are mixed on the outlook for UK and European small caps. But the fortunes of US small caps look more certain.

Since the financial crisis, the asset class has been powered by central bank easing, improving economic conditions and fairly robust mergers and acquisitions (M&A).

Cash-rich US corporates are increasingly targeting smaller companies profiting from powerful commercial trends such as the shift to cloud computing and growth in web-based social media in the technology sector. The rationale for such M&A deals is simple, as one fund manager explains: large US companies are sitting on cash-rich balance sheets, near-record profit margins and have access to cheap credit. But the one thing they lack is growth – and a successful merger/acquisition can help facilitate such an expansion.

IC TIP RATING
Tip styleGrowth
Risk ratingHigh
TimescaleLong term

While the crisis in Europe remains a threat to the broader global economy, small-cap US companies have the benefit of being relatively insulated from the turmoil in Europe, as the majority of their revenues are generated on domestic shores.

A good way for sterling investors to tap into the positive story backing US smaller companies is via the JPMorgan US Smaller Companies Investment Trust. The fund provides access to potentially faster-growing smaller US stocks. Investors benefit from a proven investment approach that seeks out well-run companies with a record of attractive and sustainable profit.

The portfolio is a product of the investment team's bottom-up investment approach and disciplined portfolio construction. Fund manager Glenn Gawronski seeks out companies that have a sustainable competitive advantage and are run by competent management teams who have a record of success and are good stewards of capital. He is supported by a team of four investment professionals.

The fund trades on a discount of around 7 per cent (compared with its 12-month average discount of 9.5 per cent). This is significantly cheaper than its competitor fund, F&C US Smaller Companies, which trades on a premium of around 1 per cent. While the latter has a more impressive track record over the long term – five and 10 years – in recent years the JPMorgan fund has caught up, posting the best performance over one and three years.

Throughout 2011, the fund manager significantly increased exposure to the consumer discretionary sector, resulting in a sizeable overweight position relative to the benchmark. Unlike many US smaller companies funds, it is underweight technology, which in some ways is indicative of its investment process and style. "Within technology, we have a difficult time finding companies that possess a sustainable competitive advantage, particularly in light of the rapid change in this sector," says Mr Gawronski.

The fund has a reasonable total expense ratio of 1.66 per cent – broadly in line with the Association of Investment Companies North American Smaller Companies industry average of 1.61 per cent.

While smaller companies are by definition volatile and a high-risk area, low valuations and poor investor sentiment could be a potentially powerful combination for future growth. The fundamentals for this sector look promising and this is a good fund to provide investors with the necessary exposure. Buy.

JPMORGAN US SMALLER COMPANIES (JUSC)
PRICE:1,027pGEARING:111.218
AIC SECTOR:North American Smaller CompaniesNAV:1109.96p
FUND TYPE:Investment TrustPRICE DISCOUNT TO NAV:-7.51%
SIZE OF FUND:£63.1 m*1-YEAR PRICE PERFORMANCE:5.66%
No OF HOLDINGS: More than 80*3-YEAR  PRICE PERFORMANCE:107.89%
SET UP DATE:1962*5-YEAR PRICE PERFORMANCE:20.26%
3-YEAR VOLATILITY:21.97*TOTAL EXPENSE RATIO:1.66%*
3-YEAR TRACKING ERROR:4.76*YIELD:na
SHARPE RATIO 0.40MORE DETAILSjpmorganassetmanagement.co.uk

Source: Thomson Reuters Datastream & *JPMorgan

Performance figures as at 13 April 2012

Top 10 holdings (as at 29 February 2012)

Company%
Jarden2.9
Coventry Health Care2.4
Silgan2.4
Penn National Gaming2.2
ProAssurance2.2
Waste Connections2.2
Cimarex Energy2.0
Calamos Asset Management2.0
Team1.9
RBC Bearings1.9

Sector breakdown

Sector%
Financial services23.8
Consumer discretionary21.3
Producer durables15.6
Healthcare10.2
Technology7.2
Materials & processing6.7
Energy5.5
Utilities2.9
Consumer staples1.1
Cash5.7