Three legs outpace the benchmark

The manager of JPMorgan US Smaller Companies transformed the trust with a three-pronged strategy, central to which is an adherence to highly selective picking from 2,000 stocks.

The JPMorgan US Smaller Companies investment trust is unrecognisable from the firm it was more than three years ago, having transformed and been led back to positive returns.

Originally set up as a Global Smaller Companies trust, the trust switched to an American micro-cap mandate in 1998, changed its name from Fleming Fledgling to Fleming US Discovery, and was managed by a team headed by Chris Jones for 10 years. However, during 2006 to 2008 the trust ran into difficulties owing to a focus on growth and technology stocks, prompting the board to implement a series of changes.

Glen Gawronski, the head of JPMorgan’s Small Cap Active Core Strategy team, was appointed as manager, the mandate was extended to include the whole of the Russell 2000 index, the portfolio was realigned to focus on higher-quality companies through bottom-up screening, and the name was later changed in 2010. The trust can invest across the spectrum in micro caps, small caps and larger small caps – up to $2.5 billion (£1.6 billion).

Since Gawronski took control in November 2008, the portfolio has made an annualised return of 26.1% against the benchmark’s 18.5% and has outperformed other trusts in the US Smaller Companies sector. (Investment trusts continues below)

The manager likens his stockpicking approach to the three legs of a stool:

“We look at the quality of the business, for example a higher return on equity than the index, the quality of the management team and we make sure we are buying when the company is undervalued.”

The $103m trust targets an annual turnover of 30% to 60%, meaning each stock has a two-to-three-year average holding period. With 2,000 stocks to choose from, Gawronski says it is important to stay disciplined.

“We look at each individual stock based on its own merit and risk and return profile. We never forget that we are buying equity ownership in a business and we try not to get caught up in the markets,” Gawronski says.

Since November 2008 the fund has outperformed the Russell 2000 by 8.5% annually, while in the past year the trust has outperformed by 500 basis points.

Gawronski attributes recent performance to stockpicks such as HFF Inc, a mortgage banking firm, which he says has benefited from a renewed interest in property.

”What is great about the US is once a company reaches a certain size, new companies always emerge”

“As the economy has come back and real estate is selling again since the depth of the recession, the stock is up 100% year on year. It has a fabulous management team and has come back as real estate has come back. HFF was a top 10 holding last year but we have trimmed our position so it is now 160 basis points.”

While performance overall has been positive, one detractor from the trust’s gains is Janus Asset Management, which Gawronski says has suffered from bad performance in its large-cap growth strategies, notably the Twenty fund, the Forty fund and the International fund.

Gawronski is generally optimistic on the outlook for American small caps.

“Year-to-date US small caps are doing best out of any size company in the US. Things are moving up from an asset price standpoint. US corporation is in good shape since the financial crisis and relative valuations are pretty solid. There is 6.5% earnings yield on my portfolio.”

He adds: “People are in a risk-on environment. That is not great for us as we try to protect on the downside and struggle in a rising market.

“As market prices rise it is harder to find ideas which fit our parameters. However, what is great about the US is once a company reaches a certain size, new companies always emerge.”