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Investment Trust Watch: Brittain bounces back

Investment Trust Watch: Brittain bounces back

If Georgina Brittain, manager of the JPMorgan Smaller Companies (JMI) investment trust, is feeling under pressure, she's not letting it get to her.

JPMorgan's UK small-cap trust has come under scrutiny in recent months. Ahead of a continuation vote, now passed, towards the end of last year, the trust's chairman Michael Quicke challenged Brittain and co-manager Katen Patel to show more courage in their stock picks after a period of underperformance.

Then New York activist investor Saba Capital Management rocked up, emerging with a 6.2% stake in the trust last month. Saba has a record in the US of challenging closed-end funds with heavy discounts, and with the discount on JMI's shares having approached 23% last summer, its presence on the share register would have fuelled speculation of its first tilt at a UK trust.

All of which has made the trust's resurgent performance timely. JMI has been on a tear over the last six months, with the shares up 31.2%, well ahead of any other UK smaller company trust and more than double the 13.8% sector average return.

While the emergence of an activist investor in the share register of an investment trust can often lead to a narrowing of the share price discount to net asset value (NAV) in anticipation of action to come, it's worth underlining the role Brittain and Patel's performance has played.

Ignoring the fluctuations in the rating of the shares, their NAV returns are still comfortably ahead of others in the sector over six months, at 23.2%.

That has been amplified by the narrowing of a discount that has averaged 19.2% over the last 12 months to 14%. That's still higher than the 11.1% average discount for trusts in the sector, but means the trust is 'expensive' relative to its own one-year history, with a Z-score of 2.9.

Just to recap, a Z-score is a measure used by analysts to indicate if an investment trust is trading above or below its 12-month range. Broadly speaking, a Z-score of -2 or below shows a trust is getting comparatively inexpensive, while a score of 2 or more is becoming expensive compared to its own trading history.

'Expensive' trusts Share price premium (-discount) to NAV % 12-month average premium (-discount) % Z-score
Pacific Alliance China Land (PACL) -12.0 -18.9 4.8
Alternative Liquidity (ALF) -40.8 -75.6 3.9
Impax Environmental Markets (IEM) -5.7 -10.8 3.3
JPMorgan Smaller Companies (JMI) -14.0 -19.2 3.0
Jupiter European Opportunities (JEO) 0.6 -3.2 2.8
Fair Oaks Income 2014 (FA14) 18.0 6.1 2.8
Aberdeen Private Equity (APEF) -2.1 -15.3 2.7
Dunedin Enterprise (DNE) -12.1 -39.2 2.7
Schroder Asian Total Return (ATR) 4.6 -1.9 2.6
North American Income (NAIT) -4.9 -8.3 2.6
Phoenix Spree Deutschland (PSDL) 33.1 17.8 2.4
Aberdeen Asian Smaller Cos (AAS) -11.7 -14.4 2.3
Globalworth Real Estate (GWI) 12.6 -12.2 2.3
Tufton Oceanic Assets (SHIP) 6.1 4.4 2.3
Henderson Diversified Income (HDIV) 5.8 3.2 2.3

Source: Numis 11/1/18

The buoyant last six months represents a turnaround for the trust, which endured a bruising 2016 as its stocks were hit hard by the Brexit vote. 

Only Montanaro UK Smaller Companies (MTU) and Strategic Equity Capital (SEC) performed worse among UK small cap trusts over the year, as the trust's heavy positioning in stocks exposed to the UK consumer weighed in the aftermath of the EU referendum.

But Brittain and Patel reacted swiftly, dramatically reducing the trust's holdings in consumer services companies and bulking up exposure to industrial companies and those reliant on overseas markets for a high proportion of their revenues.

The shares have also been boosted by a healthy level of buybacks. While JMI hasn't been able to compete with the likes of Invesco Perpetual UK Smaller Companies' (IPU) blockbuster tender, or the more controversial £30 million spent by River and Mercantile UK Micro Cap (RMMC) on compulsory redemptions, over £15 million spent on its own shares last year is not bad going.

Whether that 14% discount comes in any further will depend on Brittain and Patel's strong run persisting. Should it not, Saba might have something to say.

'Cheap' trusts Share price premium (-discount) to NAV % 12-month average premium (-discount) % Z-score
Masawara (MASA) -55.1 -36.1 -3.8
RM Secured Direct Lending (RMDL) -0.5 3.8 -3.5
Doric Nimrod Air Two (DNA2) 18.0 56.5 -3.2
Yatra Capital (YATRA) -36.5 17.1 -3.1
JPMorgan American (JAM)  -6.5 -4.8 -3.1
Doric Nimrod Air One (DNA) -5.3 30.9 -3.0
Hadrians Wall Secured Investments (HWSL) 3.8 8.4 -2.8
Doric Nimrod Air Three (DNA3) 35.3 84.4 -2.7
GCP Infrastructure Investments (GCP) 9.0 15.3 -2.7
3i Infrastructure (3IN) 5.3 14.9 -2.6
NewRiver Retail (NRR) 4.4 15.8 -2.6
Gulf Investment Fund (GIF) -22.3 -17.0 -2.3
Amedeo Air Four Plus (AA4) 4.9 46.4 -2.3
Tiso Blackstar Group (TBGR) -51.0 -33.6 -2.1
F&C UK Real Estate Investments (FCRE) -0.8 4.0 -2.1

Source: Numis 11/1/18

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