JPMorgan UK Small Cap Growth & Income (LSE: JUGI) is worth considering as a way to play the recovery in UK small caps while earning an appealing income.
UK equities of all shapes and sizes have looked cheap compared with the rest of the world for the best part of the past decade. However, two things have changed over the past few years that have shifted the narrative significantly in favour of investors.
The first has been the demand from private equity and trade buyers to acquire UK businesses. This is a side effect of low valuations and excess capital in private equity markets, and the rate of take-outs is only accelerating.
The second has been the willingness of businesses to return money to their investors. The UK market has become the share buyback capital of the world as management – under pressure from their boards and investors, and lacking other compelling investment opportunities – have poured free cash into buybacks.
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JPMorgan UK Small Cap Growth & Income trust pays dividends
The £500 million JPMorgan UK Small Cap Growth & Income trust, which was formed via the merger of JPMorgan's small and mid-cap trusts in 2024, is one of several JPMorgan-managed trusts that have committed to pay an annual dividend that is based on a percentage of net asset value (NAV), rather than on income received from their holdings.
The trust targets total annual dividends of at least 4% of NAV (based on NAV at the end of previous financial year on 31 July), which are funded from both capital and income. For example, the trust reported NAV of 373.1p for the year to 31 July 2026, up around 10p year on year. It hence proposes to pay dividends of 3.73p per share each quarter in the current year ending 31 July 2027, totalling 14.9p for the year. That represents a yield of 4.1% on the current price of 364p.
This approach makes a lot of sense in the world of small and mid caps, where reinvesting for growth should be a priority for the underlying companies over shareholder returns. It gives managers Georgina Brittain and Katen Patel much more flexibility to invest where they see growth, not just income.
The added side effect of this approach is that it forces managers to top-slice their holdings and book the profit, which is then returned to investors. An automatic approach to taking profits removes some of the market-timing risk that comes with active management.
JPMorgan UK Small Cap Growth & Income is deeply undervalued
Still, income is only part of the attraction here, since the portfolio is also deeply undervalued and should offer scope for capital gains.
The trust's portfolio of approximately 80 stocks is trading at a forward price/earnings ratio of around 11, according to Brittain, while the Deutsche Numis Smaller Companies plus AIM index trades on 13. The free cash-flow yield is around 9%.
The team focuses on finding the most profitable UK small and medium-sized companies with the best domestic and international growth potential. Return on invested capital (Roic) is one of their key metrics when looking for the most productive businesses. The top holding is Premier Foods, the owner of the Mr Kipling brand of cakes, at 5% of the portfolio.
JPMorgan UK Small Cap Growth & Income also makes use of gearing, with borrowing averaging around 10% of NAV – a level the managers feel is comfortable given the liquidity of the portfolio. So there are the four levers that can help create value: income, growth, valuation and gearing. What's more, the trust is still trading at a modest discount to NAV (5%, down from over 10% earlier this year), so investors can currently buy the underlying portfolio on a double discount.
Notwithstanding the headwinds that have held back UK equities over the past ten years, the shares have produced a strong total return of 11.9% per year compared with 5.9% for the benchmark. As these headwinds become tailwinds, the trust appears primed to keep delivering for investors.
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