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The smaller end of the market in the States is benefiting from strong economic conditions, lower taxes and takeover interest
Thursday 25 Oct 2018 Author: James Crux

An 8% discount to net asset value (NAV) on Jupiter US Smaller Companies (JUS) presents a great buying opportunity. With the US economy remaining strong, domestics benefiting from lower taxes and smaller corporate fry attractive as takeover targets, there’s scope for the discount to narrow and the portfolio to be worth a lot more in time.

Fund manager Robert Siddles seeks out value opportunities within the vast universe of US small caps. While his value-oriented approach means the fund may lag when markets roar ahead, the portfolio should prove more resilient when markets encounter tougher times – a bit like now.

He focuses on capital preservation and avoiding downside risk, investing in attractively valued firms with a strong franchise, robust free cash flow, pricing power and management owning plenty of shares in the business (known as ‘skin in the game’).

Following a review instigated by the board, portfolio concentration has increased with Siddles seeking to hold the best performers for longer, while selling weaker performers more quickly.

Bouncing back from a disappointing prior year, NAV per share rose 21.1% in the year to 30 June, outperforming the 14.2% advance of the benchmark sterling-adjusted Russell 2000 Index.

Sixteen of the investment trust’s 41 holdings are ‘companies capable of delivering reliable earnings growth over a long period and where the stock price at purchase is very cheap compared to the underlying business value,’ says Winterflood analyst Kieran Drake.

Siddles believes US economic growth can continue despite rising interest rates and the trade war with China, according to Drake following a recent meeting with the fund manager. Donald Trump’s tax cuts are stimulating economic growth and boosting the earnings of domestic US firms, too.

Strong franchises generating sustainable free cash flow make attractive takeover candidates and there were three takeovers in Jupiter’s portfolio last financial year. Amplify Snack Brands was taken out for a tasty premium by Hershey, while two regional banks – State Bank Financial and CoBiz Financial – were also bought.

Jupiter US Smaller Companies’ current biggest holding is Ollie’s Bargain Outlet, a branded goods discounter geared into the financially squeezed US consumer’s quest for value and boasting good growth potential.

Investors are also buying exposure to Chef’s Warehouse, a food distributor to upmarket restaurants; used car seller America’s Car-Mart; global freight railroads operator Genesee & Wyoming; nursing home operator Ensign; and insurance specialist Alleghany, among others. (JC)

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