Focus on reality, not perception

Guy Anderson, portfolio manager, looks at the UK small and mid cap sector and wonders if these often overlooked stocks can continue to defy expectations.

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Apr 12, 2018
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Historical outperformance

Despite continued negative investor sentiment towards the UK, much of which is driven by the uncertainty emanating on an almost daily basis from the Brexit negotiations, domestic-oriented medium and small sized companies outperformed their larger and more internationally exposed counterparts last year1.

While this performance was unexpected by many market commentators, it was not actually an anomaly. Over the past 60 years, UK mid and small caps have outperformed in two years out of every three. What’s more, this phenomenon is mirrored in other markets around the world and, we believe, there is no reason why it shouldn’t continue.

Structural advantages

We believe medium and small sized companies offer a number of structural advantages, including:

  • Flexible business models that are more able to adapt to change, innovate and therefore grow rapidly;
  • Greater opportunities for mergers and acquisitions, both on the buy and sell side; and
  • Less well-researched stocks with the potential for active managers to identify significant market mispricings.

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The UK mid and small cap sector is also an incredibly diverse and dynamic part of the market, ranging from fledgling companies in exciting new industries to established global leaders in their specific niches. Therein lies a wealth of opportunity for experienced stock pickers.

Seeking value

Across this exciting spectrum of companies we search for those with some combination of the following characteristics: attractively valued, operating in growing end markets, sustainable competitive advantages and either approaching, or undergoing, a period of positive change.

Most importantly, we seek to identify opportunities where we see a dislocation between market expectations and the likely outcome. We believe this approach can consistently identify attractively valued stocks across the mid and small cap sector of the market.

Defying expectations

Despite the continued uncertainty over Brexit, we believe mid and small caps remain well positioned. It would be easy to focus on all the negative factors that are constantly being dragged through the press, just as we could have done last year. However, it would be opportune to step back and think about reality, and not just perception.

That’s not to say that there aren’t any risks around Brexit, while the UK economy does carry the hallmarks of being in the late cycle, so one must be alert to this. But there are positives too. For example, the UK economy has been more resilient than almost anyone expected and is supported by a global economy that is picking up growth across the board.

Set against low expectations, and with the structural drivers of long-term outperformance2 remaining as valid today as at any other time in the last 60 years, perhaps mid and small caps can continue to defy expectations.

*Please note that past performance is not a reliable indicator of current and future results.



Guy Anderson is a portfolio manager of The Mercantile Investment Trust plc. Read more >

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1 Source: Bloomberg. Data from 31 December 2016 to 31 December 2017



2 Source: Numis Smaller Companies Index 2017 Annual Review – Numis/Elroy Dimson, Scott Evans and Paul Marsh – London Business School. NSCI = Numis Smaller Companies Index. The NSCI covers the bottom ten percent of the UK equity market. Study published 16th January 2018.

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This is a marketing communication and as such the views contained herein are not to be taken as an advice or recommendation to buy or sell any investment or interest thereto.  Reliance upon information in this material is at the sole discretion of the reader. Any research in this document has been obtained and may have been acted upon by J.P. Morgan Asset Management for its own purpose. The results of such research are being made available as additional information and do not necessarily reflect the views of J.P. Morgan Asset Management. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Changes in exchange rates may have an adverse effect on the value, price or income of the products or underlying overseas investments. Past performance and yield are not reliable indicators of current and future results. There is no guarantee that any forecast made will come to pass. Furthermore, whilst it is the intention to achieve the investment objective of the investment products, there can be no assurance that those objectives will be met. J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our EMEA Privacy Policy www.jpmorgan.com/jpmpdf/1320694304816.pdf.



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Go to the profile of Guy Anderson

Guy Anderson

Fund Manager, The Mercantile Investment Trust plc, J.P. Morgan Asset Management

Guy Anderson is portfolio manager of The Mercantile Investment Trust within J.P. Morgan Asset Management's UK Equity team.

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