Fund Manager Q&A: JP Morgan Mid Cap Investment Trust

What is the underlying strategy of the fund?

The backdrop to the strategy is our behavioural investing approach – taking natural human traits and biases and identifying where those traits and biases impact investment decisions and then trying to take advantage of the mis-pricing that can result by using a disciplined approach to investing, as highlighted by the process slides attached.

Our key focus is looking for stocks that display positive earnings momentum, indicating a company is performing ahead of its own and market expectations. Quality comes as a given and we will also have a positive bias to high quality companies in the portfolio. This is then combined with an analysis of valuation and taking a view on what we believe is priced in to the share price.

What advantages do you feel mid cap companies exhibit over larger cap companies from an investors perspective?

Mid cap companies tend to be more nimble and flexible allowing fewer constraints on growth, often operating in clear market niches where management can focus their attention.

Coming from a smaller base also means it is easier to demonstrate strong growth characteristics, whilst also being mature and large enough to be able to fund this growth from internal cash-flow generation.

There tends to be less analyst coverage and less market information on mid cap companies vs. large cap companies allowing for more instances of mispricing and therefore investment opportunities.

M&A activity has historically been more prevalent in the mid cap space than the large cap space, with larger companies having to pay a significant premium to acquire mid cap companies due to the growth prospects mid cap companies display.

All of the above is reflected in the longer-term outperformance of the FTSE250 against nearly every other major index globally.

What challenges will the UK equity market face within the next one to two years?

The referendum on EU membership will be a key challenge and will undoubtedly cause some market volatility (and investment opportunities…), although it is our base case assumption, supported by opinion polls, that the UK will remain within the EU but with more favourable terms.

Another challenge is the return to a normalised level of interest rates – this process has been postponed a number of times but we strongly believe that when rate rises do occur, they will be from a position of strength and assist a return to a more normalised economic environment.

A potential Chinese slowdown is the current challenge facing markets, however, the UK mid cap space is somewhat insulated from the impact of a Chinese GDP slowdown, and in fact, the UK economic impact should be more than offset from the benefit accruing from lower commodity and oil prices.

Which sectors within the UK equity market do you feel provide particular opportunity?

The UK consumer is in rude health, with consumer confidence levels at multi-year highs and disposable income levels rising rapidly. As a result, we have a more domestic focus, being overweight general retailers, Household Goods & Construction (essentially the UK Housebuilders) and banks, and believe conditions for all of these sectors are still very positive. However, it should be noted that all of these sector overweights are purely a by-product of bottom-up stock selection.

Many believe 2016 will see an increase in the Bank of England base rate. Will this cause any changes to your strategy?

As alluded to earlier, we believe interest rate rises will be from a position of strength, but will also be very measured with only small incremental rises taking place. Given the policy of forward guidance from the Bank of England, we expect any rate rises to be well flagged and priced into the market, and therefore would not expect to change our strategy as a result. As rates return to more normalised levels, investments will be assessed on a company by company basis depending on individual circumstances.