JPMorgan European Smaller Companies Trust (JESC) offers investors a diversified portfolio of developed European (ex UK) smaller companies. JESC’s portfolio is constructed using a structured, bottom-up investment process. Managers Francesco Conte and Edward Greaves utilise a three-factor process when constructing JESC’s portfolio, aiming to balance value, momentum and quality factors (as we outline in the Portfolio section).
The investment process is an adaptive one, with the managers willing to adjust their weightings to opportunities they see presented – whether value or growth – something which they have been doing in light of COVID-19. JESC’s underlying companies are often global in reach, with the managers able to invest in companies of up to £8bn in capitalisation. While the team utilise a long-term bottom-up process, a number of common themes emerge through their stock selection, such as sustainability.
JESC has outperformed its benchmark over both a one- and five-year period, generating a one-year NAV return of 29.2% and a five-year NAV return of 100.8%, compared to the benchmark’s respective 13.7% and 70.2% returns. Largely as a result of its more balanced portfolio compared to growthier peers, JESC has underperformed its AIC European Smaller Companies peer group, which generated a one and five year NAV return of 35% and 124.9% respectively. We go into more detail in the Performance section.
While JESC’s primary objective is capital growth, it does pay out most of its revenue return as dividend, with a current dividend yield of 1.4%. JESC currently trades on an 11.5% discount, the widest of its peer group. We believe that this is the result of the broader aversion investors have to European equities, but possibly also due to JESC’s uncharacteristic period of underperformance in 2019.
We view JPMorgan European Smaller Companies Trust (JESC) as providing a flexible yet ultimately structured approach to European small-cap investing. By using a three-factor approach to portfolio construction, the team are able take a pragmatic approach to different market conditions, as they have done with COVID-19. In what is a volatile sector with underlying companies that have little analyst coverage, we believe this is a clear advantage of JESC’s process. 2020 is a case in point, and despite not being particularly well positioned going into the crisis, the team’s pivot meant the trust outperformed the benchmark by a considerable margin.
We believe the five-year outperformance of JESC against its benchmark, the MSCI Europe ex UK Small Cap Index, also demonstrates the effectiveness of its investment process. Given that JESC trades at the widest discount of its peer group, we view this as a potentially attractive entry point to the trust. While the discount has already begun to narrow from its 2020 highs (even with the impact of COVID-19 on European markets), there may be further tailwinds supporting demand for JESC’s shares – conditional on the team’s post-COVID-19 positioning playing out.
|Structured approach to portfolio construction when investing in small caps
||Has underperformed peers over five years, more recently largely thanks to being underweight to growth companies
|Trades at a wide discount relative to peers
||Use of gearing can amplify losses
|Long-term outperformance versus benchmark, while currently positioned for a COVID-19 economic recovery
||Adaptive investment process means the trust is not easily pigeonholed as regards growth/value