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Hello.
I'm John Brachle, co-manager of the JPMorgan US Smaller
Companies Investment Trust, which invests
in the heart of America.
The S&P 500 is made up of 500 of the largest
companies in the world.
And on average, those companies tend
to generate 1/3 of their revenue outside of the US.
If you look at the Russell 2000, which
is a proxy for the US small cap market,
there are 2,000 companies.
And on average, they generate 80% of their revenue
from inside of the US.
So we think investing in US small caps
really is investing in the heart of America.
And not only that, investing in small caps
gives investors interesting opportunities
to invest in unique market niches
and in business drivers that tend to be
less exposed to global events.
And it does tend to be the large caps that
get the attention of Wall Street analysts and of the media.
But we think that provides really nice opportunities
for stock picking within small caps
because they tend to be more under followed.
So we're bottoms-up investors.
We don't look to make macro calls
or chase short term themes or trends.
We seek to own high quality companies run by really
good management teams.
And we like to pay attractive prices for those companies.
We have a dedicated research team.
And we use a generalist sector coverage model,
which means each analyst can spend their time on whatever
part of their coverage universe they see the most value
in at a given point in time.
And in terms of how we go about finding new ideas to invest in,
there are a number of different ways.
One of those is company meetings and company conferences.
I think on average between the five of us,
we meet one company per day throughout the year,
including names that we own and names that we're interested in.
Also, quantitative screens.
We screen for things like profit margins,
balance sheet, valuation.
We especially emphasize profit margins just
given we think that says a lot about the durability
of a company's competitive advantage.
And in general, we like to be really disciplined on what
we pay for things.
We like to have multiple valuation signals at once
before we'll initiate on a name.
And we seek to own these companies
for a really long time.
I think we have several in the fund
that we've owned for five years and even some for 10 years.
So I think quality shows up in the companies
that we invest in in a number of ways.
Number one, it's the strength of cash flow generation.
And that comes from investing in companies
with really high profit margins, which is typically
a function of a really strong competitive position
and pricing power, and also low capital intensity
so it doesn't take a lot of asset,
investment to generate those cash flows.
Number two, the durability of those cash flows.
So we like to invest in companies
with a high degree of recurring revenue or predictable demand.
Tends to be products that are mission
critical for their customers or that
are non-discretionary in nature.
And number three, we like to invest
in management teams that are good stewards of those cash
flows.
Great company doesn't necessarily
mean great investment.
We do pay a lot of attention to what
we pay for things and that results in a lot of valuation
discipline and patience in terms of when we go about initiating
on a new company.
Well, over the long term, a small cap returns
have outpaced mid caps and large caps.
And I think the starting point today for small caps
is quite compelling, especially relative to large caps.
Small caps have underperformed large caps
for seven straight years and today
comprise just a little bit over 4% of the total US equity
market capitalization versus 7% historically.
And from a valuation perspective,
small caps have historically traded at a premium
to large caps.
Today, they trade at the widest discount in over 20 years.
So there's reason that small caps have underperformed,
especially in the near term.
Small caps tend to be a more economically sensitive asset
class within equities.
And obviously, there are a lot of macro concerns percolating
at the moment.
So there is potential for small caps
to continue to struggle in the near term.
But over the long term, we think this
is a great entry point for patient long-term investors.
Our team has worked together on this investment
trust for a really long time.
Co-managers Don San Jose, Dan Pacella, and I
have spent the majority of our careers
on this investment trust and investing in US small caps.
And I often get asked by some of our investors,
what is it that makes you different?
And my response is always it's the discipline
to our investment process.
We really do what we say we're going to do.
It shows up in what the portfolio looks like
and how it performs in various market environments.
So I think what our investors should
expect is a portfolio with defensive attributes.
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