JPMorgan European Smaller Companies (JESC) aims to provide capital growth from a portfolio of smaller companies in developed Europe, excluding the UK.
Francesco Conte and Edward Greaves run the £654m trust, searching for attractively valued, high-quality stocks with positive momentum which they believe can outperform the market. The managers believe that Europe offers a unique mix of companies, in particular a number which are disrupting industries with nimble business models. Three key themes are evident in the portfolio and typify the kind of opportunities the managers are seeking: sustainability, wellness and technology.
Supported by a team of 49 analysts, the investment process uses both qualitative and quantitative methods to narrow down a universe of more than 1000 companies. This detailed approach helps to identify and compare three key characteristics for new investment ideas: quality, momentum and value. The managers believe that their balanced approach improves risk-adjusted returns and enables them to outperform through the different stages of cycles (e.g. both during growth rallies and at times when value comes back into favour).
As we discuss in the Performance section, JESC has an excellent long-term track record of outperforming the benchmark and the peer group. Performance over the past year however has been slightly more subdued, largely due to the low exposure the trust has to the highest rated companies which have driven benchmark returns. This has resulted in JESC spending the last year trading at a double-digit discount, which currently sits at 17.1%, offering a potentially attractive entry point for investors looking to access some of the unique smaller companies in developed Europe.
Over the long term, European Smaller Companies has been one of the strongest performing sectors across the globe. The JESC managers believe this is because it represents a unique blend of sectors and companies which are less prominent in other regions. At the same time, since the 2016 Brexit referendum valuations across Europe have fallen considerably. So companies which would potentially command premium ratings in the US are considerably more attractively priced in Europe.
We think the managers’ balanced approach to style could be attractive given the current uncertainty around the macroeconomic environment. Currently economies are reopening, but the danger of a second wave of COVID-19 remains real, as does the continuing uncertainty surrounding Brexit and trade wars. As such, the trust’s balanced style exposure should make the portfolio less exposed to any one of the possible outcomes from the current situation; including a flight to quality, value outperforming in a cyclical rally, or growth stocks outperforming on low rate expectations.
Although the trust has struggled somewhat over the past year or so, causing the discount to widen, the managers have a very strong long-term track record and they are simply ‘sticking to their guns’. They take the view that it is highly rated companies, which they do not invest in, that have driven returns over the past few years. However, if valuations start getting taken into consideration and performance picks up again over time, we expect the discount to narrow.
|Unique investment approach, with a portfolio exposed to high-quality, market leading smaller companies||Often has high levels of gearing which can cause volatility|
|Strong long-term performance track record||Poor short-term performance as highly rated companies have driven market returns|
|Current wide discount potentially offers an attractive opportunity to invest||A high number of stocks can make it harder to generate alpha|