WEBVTT

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[MUSIC PLAYING]

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Hello.

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I'm John Brachle, co-manager
of the JPMorgan US Smaller

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Companies Investment
Trust, which invests

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in the heart of America.

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The S&P 500 is made up
of 500 of the largest

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companies in the world.

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And on average,
those companies tend

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to generate 1/3 of their
revenue outside of the US.

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If you look at the
Russell 2000, which

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is a proxy for the
US small cap market,

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there are 2,000 companies.

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And on average, they
generate 80% of their revenue

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from inside of the US.

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So we think investing
in US small caps

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really is investing in
the heart of America.

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And not only that,
investing in small caps

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gives investors
interesting opportunities

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to invest in unique
market niches

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and in business
drivers that tend to be

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less exposed to global events.

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And it does tend to
be the large caps that

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get the attention of Wall Street
analysts and of the media.

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But we think that provides
really nice opportunities

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for stock picking
within small caps

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because they tend to
be more under followed.

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So we're bottoms-up investors.

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We don't look to
make macro calls

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or chase short term
themes or trends.

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We seek to own high quality
companies run by really

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good management teams.

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And we like to pay attractive
prices for those companies.

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We have a dedicated
research team.

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And we use a generalist
sector coverage model,

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which means each analyst can
spend their time on whatever

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part of their coverage universe
they see the most value

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in at a given point in time.

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And in terms of how we go about
finding new ideas to invest in,

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there are a number
of different ways.

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One of those is company meetings
and company conferences.

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I think on average
between the five of us,

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we meet one company per
day throughout the year,

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including names that we own and
names that we're interested in.

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Also, quantitative screens.

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We screen for things
like profit margins,

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balance sheet, valuation.

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We especially emphasize
profit margins just

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given we think that says
a lot about the durability

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of a company's
competitive advantage.

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And in general, we like to
be really disciplined on what

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we pay for things.

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We like to have multiple
valuation signals at once

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before we'll initiate on a name.

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And we seek to own
these companies

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for a really long time.

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I think we have
several in the fund

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that we've owned for five years
and even some for 10 years.

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So I think quality shows
up in the companies

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that we invest in
in a number of ways.

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Number one, it's the strength
of cash flow generation.

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And that comes from
investing in companies

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with really high profit
margins, which is typically

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a function of a really
strong competitive position

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and pricing power, and
also low capital intensity

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so it doesn't take
a lot of asset,

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investment to generate
those cash flows.

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Number two, the durability
of those cash flows.

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So we like to
invest in companies

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with a high degree of recurring
revenue or predictable demand.

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Tends to be products
that are mission

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critical for their
customers or that

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are non-discretionary in nature.

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And number three,
we like to invest

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in management teams that are
good stewards of those cash

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flows.

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Great company
doesn't necessarily

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mean great investment.

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We do pay a lot of
attention to what

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we pay for things and that
results in a lot of valuation

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discipline and patience in terms
of when we go about initiating

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on a new company.

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Well, over the long
term, a small cap returns

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have outpaced mid
caps and large caps.

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And I think the starting
point today for small caps

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is quite compelling, especially
relative to large caps.

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Small caps have
underperformed large caps

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for seven straight
years and today

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comprise just a little bit
over 4% of the total US equity

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market capitalization
versus 7% historically.

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And from a valuation
perspective,

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small caps have historically
traded at a premium

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to large caps.

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Today, they trade at the widest
discount in over 20 years.

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So there's reason that small
caps have underperformed,

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especially in the near term.

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Small caps tend to be a more
economically sensitive asset

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class within equities.

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And obviously, there are a lot
of macro concerns percolating

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at the moment.

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So there is potential
for small caps

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to continue to struggle
in the near term.

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But over the long
term, we think this

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is a great entry point for
patient long-term investors.

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Our team has worked
together on this investment

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trust for a really long time.

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Co-managers Don San
Jose, Dan Pacella, and I

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have spent the
majority of our careers

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on this investment trust and
investing in US small caps.

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And I often get asked by
some of our investors,

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what is it that
makes you different?

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And my response is always
it's the discipline

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to our investment process.

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We really do what we
say we're going to do.

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It shows up in what the
portfolio looks like

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and how it performs in
various market environments.

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So I think what our
investors should

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expect is a portfolio
with defensive attributes.

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