Ian Cowie: how I am profiting from the ‘Biden bounce’

Our columnist names the US trust he has backed in his ‘forever fund’ since 2014. 

Smaller companies investment trusts focused on the biggest economy in the world can deliver supersize gains for shareholders. Just one month since Joe Biden beat Donald Trump in the presidential election on 3 November, shares in one North American smaller companies investment trust have soared by 25%, but continue to trade at a modest 2% premium to net asset value (NAV).

Fears that defeat for Trump might be followed by a stock-market slump have failed to materialise so far. Now the question for investors is how to benefit from the ‘Biden bounce’.

JPMorgan US Smaller Companies (LSE:JUSC) has been a constituent of my ‘forever fund’ since 2014. Its shares have jumped from 313p before the presidential election to 391p as I write (on 1 December), beating double-digit gains on the Dow Jones benchmark of blue chips and the Nasdaq index of technology stocks, which fell last month.

Over more meaningful periods, the Nasdaq index has beaten everything else out of sight. But now some observers argue that tech stocks cannot rise forever and more traditional businesses may enjoy a revival as financial fashion rotates from growth to value.

• Bargain Hunter: window of opportunity for these trust discounts
• Is this the start of a style rotation or another false dawn?
• Joe Biden wins US election: fund managers name winners and losers

Entry point remains a key consideration for investors and the first step towards making a profit is often to buy low. There is certainly plenty of scope for US smaller companies to catch up with bigger rivals.

The Association of Investment Companies (AIC) North America sector delivered average total returns of 24% over the last year, 102% over the last five years and 238% over the last decade. Over the same three periods, the Morningstar US Small Cap index (used as there are only two US smaller company trusts) has returned 11%, 58% and 180%. 

JUSC, which has been managed by Don San Jose since 2008, leads Jupiter US Smaller Companies (LSE:JUS) over all three periods with total returns of 15%, 121% and 397%. By contrast, its sole rival lagged with -5.6%, 72% and 178%. Neither trust yields much income, with JUSC paying dividends of 0.6% and JUS no dividends at all.

San Jose aims to generate capital growth by identifying businesses with a sustainable competitive edge, trading at a discount to intrinsic value. JUSC’s underlying assets rely more on American lifestyles than digital technology.

For example, its top stake, Toro (NYSE:TTC), makes lawnmowers, snow movers and irrigation equipment. Another top 10 holding, Pool (NASDAQ:POOL), is America’s biggest supplier of swimming pool equipment and Douglas Dynamics (NYSE:PLOW) sells snow and ice control systems.

Elsewhere, AptarGroup (NYSE:ATR) gives exposure to food and drug dispensers. Meanwhile, Performance Food Group (NYSE:PFGC) sells a range of snacks and other grub.

Simon Elliott, head of research at Winterflood, the analyst, commented: “JUSC is run by an experienced team whose investment thesis revolves around durable competitive advantages, quality management and cash generation. This strategy has consistently yielded results, with the fund outperforming the Russell 2000 benchmark in all but one year since 2010.

“When JUSC’s managers are assessing potential investments, strong cashflows, a good return on capital and shareholder-friendly distribution policies are key criteria. Pool Corp is a good example of all these. Given that pool equipment and maintenance is largely non-discretionary, the stock has strong defensive characteristics as a result of pandemic restrictions.”

• Lindsell Train: winners and losers revealed
• Fidelity China Special Situations: a massive 2020 for this trust
• Take control of your retirement planning with our award-winning, low-cost Self-Invested Personal Pension (SIPP)

Whatever happens next with the coronavirus crisis and vaccines to cure it, the sun is likely to continue to shine in California, Florida and Texas, while snow will remain a seasonal nuisance further north. Both should be good for JUSC.

Investors, however, may prefer larger companies in the North America sector. Over the last year, Baillie Gifford US Growth (LSE:USA) leads the pack with eye-stretching returns of 106%, followed by Canadian General Investments (LSE:CGI) returning 37%, and JPMorgan American (LSE:JAM) up 20%.

It is notable that Baillie Gifford US Growth’s top 10 holdings are led by the electric carmaker, Tesla (NASDAQ:TSLA), and the online marketplaces Amazon (NASDAQ:AMZN) and Shopify (NYSE:SHOP). The latter two are also among CGI’s top 10 assets.

If big businesses continue to grow bigger, then North America funds may continue their rich vein of form. But a trend is only a trend until it stops. Smaller companies enable investors to diversify their exposure to the world’s biggest economy.

Ian Cowie is a shareholder in JPMorgan US Smaller Companies (LSE:JUSC) as part of a diversified portfolio of investment trusts and other shares.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.