J.P. Morgan Fund Manager

Don't miss a trick: Aim for the middle

Why you should consider making space for mid caps in your clients’ portfolios

Go to the profile of Katen Patel
Dec 20, 2017
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UK investors focused on the mega-cap multinationals that dominate the FTSE 100 may be missing a trick. Dropping down a rung into the mid cap FTSE 250 provides greater scope for diversification and more opportunity for active managers to show their worth.

Greater opportunity

It may come as a surprise to many investors, but one of the best performing indices globally in recent decades has been the FTSE 250 Index, which has outperformed the large cap FTSE 100 by some 400% over the last 30 years (Source: Bloomberg as at 30 September 2017).

Despite this compelling performance, it can be difficult to gain access to the UK mid cap market. Even unconstrained UK equity portfolios may have only limited mid cap exposure. Yet the mid cap index offers broader benefits to investors than the crowded large cap FTSE 100, which dominates most UK equity funds and represents some 80% of the overall UK stock market.(Source: Factset as at 30 November 2017)

The mid cap FTSE 250 Index, which covers over 200 companies with a market capitalisation between £700 million to around £5-6 billion (Source: Bloomberg as at 30 November 2017), is full of world class, high growth companies operating in exciting niche areas. However, many of these stocks attract little attention from the analyst community, with mid caps receiving 60% less coverage than their large cap peers [Source: Liberum as at 30 September 2017]. This could provide opportunities for active managers, particularly those with the resources to conduct rigorous in-house stock research.

Better diversification

Unlike the FTSE 100, which is dominated by a relatively small number of mega cap stocks representing just a small number of sectors, the mid cap 250’s  largest stock makes up just 1.3% of index (Source: Bloomberg as at 30 November 2017) , providing investors with much broader diversification across industries and economic sectors.

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And it’s not just greater sector diversification—the mid cap index provides a more balanced geographical exposure, with FTSE 250 constituents generating roughly half of their revenues in the UK and half overseas. This compares to around 70% of FTSE 100 revenues coming from overseas .(Source: Factset as at 30 September 2017).

More UK exposure

While the long-term benefits of mid cap investing are clear, short-term factors are also playing in favour of mid cap stocks. For example, the devaluation of sterling in the wake of the Brexit vote is making UK companies more attractive to foreign buyers, and this pick up in merger activity is being felt most keenly in the more domestically focused FTSE 250.

Therefore, by increasing exposure to mid cap stocks, investors can also increase their exposure to companies that may become a takeover target.

JPMorgan Mid Cap Investment Trust plc

The JPMorgan Mid Cap Investment Trust plc allows investors to gain exposure to a high conviction portfolio of 70 mid cap stocks, weighted towards international revenues (55%). We seek stocks with strong, consistent performance numbers and sustainable dividends (the trust currently has a yield of 2.4% (Source: Bloomberg as of 30 November 2017)).

This has allowed us to grow the company’s dividend in each year since 2012, when Georgina Brittain took over portfolio management duties (I joined the management team a year later in April 2013). The trust also has almost two years of revenue reserves, allowing for a sustainable and progressive dividend.

Performance is strong. Since the management change in April 2012, the trust has outperformed the benchmark index (the FTSE 250 ex ITs) by a cumulative 67.5%, providing a 200% total shareholder return (to end of October 2017). And year to date, the trust is ahead of the index by 11.9%, giving a total shareholder return of 26%.

Past performance is not a reliable indicator of current or future results. Source: FTSE International Limited ("FTSE") © FTSE 2017. As at 30 September 2017. Net asset value performance data has been calculated on a NAV to NAV (using the cum income NAV with debt at fair) basis, including ongoing charges and any applicable fees, with any income reinvested, in GBP Benchmark.

With the share price currently trading at a discount to NAV of around 6 (Source: Bloomberg as at 30 November 2017), The JPMorgan Mid Cap Investment Trust plc may therefore provide an attractive entry point for investors looking to gain exposure to the compelling opportunities for diversification and growth provided by UK mid cap stocks.

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Investment objective and policy

The Company aims to achieve capital growth from investing in medium sized UK listed companies, by outperformance of the FTSE Mid 250 Index. The company will predominantly invest in quoted companies from the FTSE Mid 250 Index, although, where appropriate, it may invest in quoted UK companies outside of this index as well as companies quoted on the Alternative Investment Market which is the London Stock Exchange market for smaller, growing companies. The company has the ability to use borrowing to gear the portfolio within the range of 5% net cash to 25% geared in normal market conditions. 

Risks

  • The value of investments and the income from them can go down and up, and you may not get back as much as you paid in. Past performance is not a guide to the future.
  • Investments in smaller companies may involve a higher degree of risk as these are usually more sensitive to price movements.
  • External factors may cause an entire asset class to decline in value. Prices and values of all shares or all bonds could decline at the same time.
  • This trust may utilise gearing (borrowing) which will exaggerate market movements both up and down.

For Professional Clients/ Qualified Investors only – not for Retail use or distribution. 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. Investment is subject to documentation (Investment Disclosure Document, Key Features and Terms and Conditions), copies of which can be obtained free of charge from JPMorgan Asset Management (UK) Limited. This communication is issued by JPMorgan Asset Management (UK) Limited, which is authorised and regulated in the UK by the Financial Conduct Authority. Registered in England No: 01161446. Registered address: 25 Bank Street, Canary Wharf, London E14 5JP. 0903c02a81fe4bef

Go to the profile of Katen Patel

Katen Patel

Fund Manager, J.P. Morgan Asset Management

Katen Patel is portfolio manager of the JPMorgan Mid Cap and JPMorgan Smaller Companies Investment Trusts, as well as the JPM UK Smaller Companies Fund within J.P. Morgan Asset Management's UK Equity team.

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