JPMorgan European Discovery 26 November 2018
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by JPMorgan European Discovery. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
JPMorgan European Smaller Companies investment trust aims to provide capital growth from a diversified portfolio of smaller companies in developed Europe, excluding the UK. It is managed through a high-conviction, stockpicking approach which has delivered impressive results over the 20 years that Francesco Conte has been at the helm. The trust is comfortably the largest and is one of the most liquid in the AIC European Smaller Companies sector, with a market cap of close to £600m.
Fund managers Francesco Conte and Edward Greaves have consistently delivered high levels of alpha over one, three and five years. In comparison to the much larger IA Europe ex UK sector, the trust sits in the middle of the pack in alpha and returns over the short and long term.
Bucking their historic trend, the managers have outperformed in the current period of volatility in markets. YTD, the trust is outperforming the benchmark and its IA and AIC peers thanks to Francesco and Edward having aggressively shifted the portfolio towards a more defensive stance during the summer.
Overall, the managers remain benchmark agnostic, with sector and regional allocation driven by their stockpicking. The managers search for three key characteristics among companies; quality, momentum and value. Holdings often move from the value category to the momentum category but must be considered “good quality” throughout. Last summer, the managers moved away from cyclical stocks and shifted to a more defensive positioning. This now means that pharmaceuticals (+6.4%), oil equipment, services and distribution (+5.2%) and health care equipment and services (4.8%) are the largest overweights within the portfolio. At a stock level they are invested in companies that are macro-agnostic, and less dependent on overall country GDP.
The trust saw its discount narrow during 2017 but so far in 2018 the discount has widened significantly from -5.7% on the 1st of January to -13.5% on the 12th of November. This movement echoes the entire AIC European Smallers sector, where the current average is -11.2%, and reflects troubled sentiment toward the region as a whole. Looking past short term noise, however, the managers are positive about the outlook, and see plenty of exciting opportunities in European markets.
JPMorgan European Smaller Companies has an outstanding track record and a highly experienced, well embedded, management team. We see the double-digit discount - largely a consequence of investor aversion to all things Europe as Brexit continues to grind on - as an attractive entry point into the trust for investors with a long time horizon.
The managers have consistently outperformed their benchmark, as well as their open and closed end peer group, and with JPMorgan's immense resources at their disposal and the managers' extensive experience, the case for the trust is compelling. Their active management approach is exemplified by their repositioning of the portfolio over 2018, helping to shield the trust from extended losses during the October correction, and the current defensive tilt should give the trust an additional edge in the current market volatility.
|An outstanding track record of alpha-generation||The trust is vulnerable as a result of its euro exposure to a resurgent sterling, which is possible if 'good Brexit' materializes
|Versatile investment approach allows for quick repositioning of the portfolio
||Political uncertainty in Europe is unlikely to go away any time soon, so volatility is likely to remain an issue
|Wide discount offers an attractive opportunity
|A very experienced management team, with access to JPMorgan's formidable resources|