The US economy is in full swing, with unemployment running at a 50-year low and company earnings growing. And the country’s equity market also shows no sign of slowing down, despite clocking up the longest bull run in history earlier this year.
US economy is growing
Experienced management team
Good long-term performance record
Potential volatility
“Interest rates remain low and are forecast to rise at a modest, steady pace,” says Mark Sherlock, head of US equities at Hermes Investment Management. “This has been well telegraphed to the market. While monetary conditions remain reasonably loose, continued economic growth appears supported.”
This favourable economic environment should be particularly supportive of growth by smaller companies, according to Tom Elliott, senior international investment strategist at deVere Group. He says: “I favour small caps [over US large caps] for three key reasons. First, they are less vulnerable to trade war tariffs than US multinationals. Second, they have more concentrated exposure to strong business and consumers than large exporters. And third, they provide greater sector diversification than the [large cap] S&P 500 index offers.”
Historically, investing in small caps has also led to greater returns. This is because smaller companies tend to have higher growth potential than already large companies and they are less researched by analysts, making it easier for active managers to come across hidden gems at good valuations.
A good way to get exposure is via JPMorgan US Smaller Companies Fund (GB00B8H99P30). The fund has generated good long-term performance. Over five and 10 years it has beaten the Investment Association North American Smaller Companies sector average and its benchmark, the Russell 2000 Growth index. It also beats the sector and the index over one and three years.
And JPMorgan US Smaller Companies has a very attractive risk/reward profile with a three-year Sharpe ratio of 1.77. The Sharpe ratio measures how much return a fund generates for the amount of risk it takes, and any figure above one is a good score.
It also benefits from an experienced and long-standing management team. Fund manager Eytan Shapiro has been managing JPMorgan US Smaller Companies since 1994. He is chief investment officer of the growth and small cap US equity team at JPMorgan Asset Management and has 35 years’ investment experience. According to data provider FE, over the past 10 years Mr Shapiro has delivered a cumulative return of 374.4 per cent against 291.7 per cent made by a composite of his peer group. Meanwhile, Mr Shapiro’s co-manager Timothy Parton has experience managing a variety of small- and mid-cap portfolios during a 32-year career at JPMorgan.
Technology makes up the fund’s largest sector at 25 per cent; 9 percentage points higher than the tech weighting in the Russell 2000 Growth index. Top 10 tech holdings include Envestnet (NYQ:ENV), a provider of wealth management technology to financial advisers, and Entegris (NSQ:ENTG), which is involved in the manufacture of semiconductors.
But investors should be aware that smaller companies are likely to be more volatile than larger companies, and may be less resilient in the face of an economic downturn-induced market fall than large caps. So the fund’s performance could suffer if the US economy were to take a turn for the worse.
But the fund is well diversified with 120 holdings, which can help reduce volatility, and the managers also have a strong risk/reward record, suggesting they are well placed to find good companies in future. So, if you can invest for the long term, JP Morgan US Smaller Companies’ experienced managers, good track record and high growth potential make it an attractive option. Buy. EA.
JPMorgan US Smaller Companies Fund (GB00B8H99P30)
PRICE | 763p | MEAN RETURN | 33.19% |
IA SECTOR | North American Smaller Companies | SHARPE RATIO | 1.77 |
FUND TYPE | Open-ended investment company | STANDARD DEVIATION | 16.19% |
FUND SIZE | £220m | ONGOING CHARGE | 0.90%* |
No OF HOLDINGS | 120* | YIELD | 0% |
SET UP DATE | 1/05/87 | MORE DETAILS | https://am.jpmorgan.com |
MANAGER START DATE | Eytan Shapiro: 30/11/94; Timothy Parton: 30/04/14 |
Source: Morningstar, as at 8/18/18, *JPMorgan Asset Management, as at 31/08/18
Performance
Fund/benchmark | 1-year total return (%) | 3-year cumulative total return (%) | 5-year cumulative total return (%) | 10-year cumulative total return (%) |
JPM US Smaller Companies | 25.0 | 107.7 | 118.4 | 394.8 |
IA North American Smaller Companies sector average | 14.8 | 77.1 | 98.7 | 312.8 |
Russell 2000 Growth Index | 13.5 | 73.0 | 103.1 | 361.0 |
Source: FE Analytics, as at 5/10/18
Top 10 holdings as at 31/08/18 (%)
Teladoc | 2.0 |
Envestnet | 1.8 |
Ollies Bargain Outlet | 1.7 |
Trex | 1.7 |
Advanced Disposal Services | 1.6 |
National Vision | 1.6 |
Performance Food | 1.6 |
Entegris | 1.5 |
Wolverine World Wide | 1.5 |
Evercore Partners | 1.5 |
Sector breakdown as at 31/08/18 (%)
Technology | 24.6 |
Healthcare | 23.7 |
Consumer discretionary | 19.1 |
Producer durables | 13.6 |
Materials & processing | 7.3 |
Financial services | 6.3 |
Consumer staples | 2.8 |
Energy | 1.4 |
Utilities | 0.0 |
Cash | 1.2 |
Source: JPMorgan Asset Management