SMid fund manager sentiment recovers, with positioning tilting more cyclical and outflow pressure improving from last year

Overview

This report is JPMorgan's monthly SMid PM Sentiment Meter, which aims to observe the peer positioning of global and Pan-European Small/Mid-Cap fund managers through fund and equity ownership data. It covers passive and active fund flows, relative performance, cash levels, regional flows, sector allocations, style exposures, and differentiated holdings of the top 10% of performing fund managers.

Core views

The report believes that SMid assets remain significantly under-owned by institutions: cumulative outflows over the past four years have exceeded those during the global financial crisis, with the UK particularly affected over the past five years, leaving valuations among the cheapest globally. Although most active SMid fund managers underperformed their benchmarks over the past 12 months, the authors still expect SMid to be better suited to active management than Large-Cap in the foreseeable future and potentially generate more alpha. In terms of allocation, SMid investors tilted more cyclical last month, increasing exposure primarily to Financials and Materials and using Energy as the main funding source. In terms of style, Europe favors Quality, the US favors Value, and Asia ex-Japan favors Growth.

Analysis framework

The report's core analytical framework consists of fund AUM, active and passive net inflows, relative benchmark performance, cash ratios, regional and sector weights relative to indices, style-quintile fund flows, and differences in the holdings of top-performing funds; it also compares dedicated SMid funds with Large/All-Cap funds, as the latter hold approximately twice the SMid-Cap AUM of dedicated SMid funds.

Methodology notes

• Fund flow analysisActive and passive fund net inflows as a percentage of prior-year AUM

  Uses net inflows as a percentage of AUM to measure changes in investor risk appetite toward SMid, Large/All-Cap, and different regions.

  The report tracks active and passive fund flows separately for Global, UK, Europe, the US, and Asia ex-Japan to assess redemption pressure, incremental buying, and the degree of institutional underweighting.

• Relative performance analysisRelative benchmark performance over the past 12 months

  Measures the proportion of active funds that outperformed or underperformed their benchmarks.

  The report shows that approximately 63% of global active SMid fund managers underperformed their benchmarks over the past 12 months and further compares the performance of Large/All-Cap fund managers.

• Portfolio allocation analysisRegional, sector, and style exposures

  Compares fund AUM allocations across regional, sector, and style groupings with index weights.

  The report assesses fund managers' active preferences through overweights or underweights relative to indices including MSCI ACWI SMid, MSCI UK SMid, MSCI Europe ex-UK SMid, MSCI US SMid, and MSCI Asia ex-Japan SMid.

• Peer learningStars: top-performing 10% of SMid funds over the past 12 months

  Analyzes differences in sector allocations and tracking error between the top 10% of fund managers and average fund managers.

  Global Stars exhibit more contrarian sector positioning relative to peers and generally assume higher tracking error.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Global SMid equities

  Core research subject

  Strengths

  Low institutional ownership, limited influence from passive flows, and high potential for active-management alpha.

  Weaknesses

  Most active fund managers underperformed their benchmarks over the past 12 months, indicating clear short-term performance pressure.

  Comparison

  The authors believe SMid is better suited to active management than Large-Cap because Large-Cap is more affected by passive fund flows.

  Risks

  If fund-flow improvement is not sustained or earnings expectations are revised downward, the underweight-recovery thesis may be delayed.

• UK SMid

  Key positive regional view

  Strengths

  It experienced the greatest impact from outflows over the past five years and currently trades at valuations among the cheapest globally; following the upgrade to OW, the FTSE 250 has significantly outperformed relevant European small-cap indices.

  Weaknesses

  Long-term outflows indicate that investor confidence still needs to recover.

  Comparison

  The FTSE 250 has outperformed Europe ex-UK Small Cap by 546 bps since the beginning of June.

  Risks

  If the UK macroeconomic or earnings environment deteriorates, cheap valuations may not translate into sustained excess returns.

• Asia ex-Japan SMid

  Region with relatively strong fund flows

  Strengths

  Recorded year-to-date inflows, with SMid funds receiving continued fund-flow support over the past several years.

  Weaknesses

  Asia ex-Japan SMid fund managers came under relative performance pressure over the past 12 months, while the cash ratio of Large-Cap funds rose to a historical high.

  Comparison

  Unlike the backdrop of long-term outflows in Pan-Europe and the US, Asia ex-Japan SMid fund flows have been more resilient.

  Risks

  If high cash levels reflect declining risk appetite, subsequent equity allocations may be constrained.

• Financials and Materials

  Main areas of increased exposure by SMid fund managers last month

  Strengths

  Benefiting from a recovery in cyclical positioning, they were the most common global targets of increased allocation by SMid PMs.

  Weaknesses

  Sector performance is more dependent on the macroeconomic cycle and interest-rate environment.

  Comparison

  Financials and Materials attracted more inflows than Energy.

  Risks

  If the cyclical trade reverses, these sectors may face a pullback.

• Energy

  Main funding source

  Strengths

  Some regions may still offer overweight exposure or value characteristics.

  Weaknesses

  It faced the most consistent selling pressure globally.

  Comparison

  Compared with Financials and Materials, Energy was used as a source of funds for reallocation.

  Risks

  If energy prices rebound, reducing Energy exposure may result in relative underperformance.

Key data

• SMid year-to-date outflows1.4% of AUMBetter than 4.1% of AUM over the same period last year.
• Proportion of active SMid fund managers underperforming over the past 12 monthsApproximately 63%The proportion of underperformers ranges from approximately 54% to 90% across regions.
• UK SMid relative performanceFTSE 250 has outperformed MSCI Europe Ex-UK Small Cap by 546 bps since the beginning of JuneThe report states that JPMorgan upgraded UK SMid to OW on June 5.
• Cash level assessmentApproximately 3% to 4% of AUM typically represents near-full investmentSMid fund managers' cash levels were broadly stable last month; the cash ratio of Asia ex-Japan Large-Cap funds rose to a historical high.
• Sector allocation changesIncreased exposure to Financials and Materials, reduced exposure to EnergySMid investors tilted more cyclical last month; Tech remained favored in some regions but was reduced in others.
• Regional allocation changesIncreased exposure to the US and Asia ex-Japan, reduced Pan-Europe exposureAt month-end, international SMid investors remained overweight Pan-Europe and the US relative to MSCI ACWI SMid.

Impact & implications

For asset allocation, the report suggests that SMid's low ownership, relatively inexpensive valuations, and improving fund flows may provide room for a recovery in small- and mid-cap stocks, particularly UK SMid. For stock selection, the report does not advocate chasing high-valuation aggressive growth, instead emphasizing valuation re-rating, earnings visibility, and achievable expectations. Cyclical sectors are receiving greater attention, but exposures to Tech, Financials, Materials, and Energy differ across regions, so investors should assess them in conjunction with regional styles.

Risks

• Although SMid fund flows have improved from last year, they remain negative; renewed redemption pressure could hinder the underweight-recovery thesis.
• Approximately 63% of global active SMid fund managers underperformed their benchmarks over the past 12 months, indicating continued short-term pressure on active management.
• Increased cyclical exposure depends on macroeconomic growth and earnings resilience; if the economy slows, allocations to Financials, Materials, and Industrials may come under pressure.
• If high-valuation growth stocks fail to deliver earnings, the report's emphasis on avoiding high-multiple aggressive growth may remain a market risk.
• The cash ratio of Asia ex-Japan Large-Cap funds has risen to a historical high, potentially reflecting declining regional risk appetite.

What to watch

• Whether subsequent monthly net inflows into active and passive SMid funds shift from outflows to sustained inflows.
• Whether UK SMid's relative performance following the OW upgrade can continue, particularly the performance of the FTSE 250 relative to Europe ex-UK Small Cap.
• Whether fund-flow directions for Financials, Materials, and Energy continue, indicating whether cyclical positioning is still strengthening.
• Changes in regional exposures to the US, Pan-Europe, and Asia ex-Japan, as well as the magnitude of overweights or underweights relative to MSCI ACWI SMid.
• Whether style rotation among Quality, Value, and Growth in Europe, the US, and Asia ex-Japan broadens or reverses.
• Whether top-performing Stars funds continue to generate alpha through higher tracking error and contrarian sector positioning.