JPMorgan European Discovery 13 August 2024

JPMorgan European Discovery (JEDT) is a FTSE 250 trust targeting principally capital growth from a portfolio of smaller continental European equities. The trust is managed under the principles of value, quality, and momentum, with the team managing JEDT having access to a deep bench of resources across the firm including traditional analysts, data scientists, and ESG specialists.

In February 2024, JEDT's board announced that, following an internal review, the team managing JEDT would change, with the head of JPMorgan Asset Management's unconstrained equity team Jon Ingram, together with portfolio managers Jack Featherby and Jules Bloch, taking on responsibility for the trust. The team will continue with essentially the same investment process, although with some refinements discussed in the Portfolio section. The team believes that European smaller companies are fundamentally mispriced, on average trading at a discount to historical averages.

Over the last five years, JEDT's NAV total return of c. 43% has slightly trailed the benchmark (49%) and the peer group (c. 60%). However, over ten years, JEDT has generated over double the returns of large-cap equities, and comfortably beaten its benchmark and the peer group average, which is discussed in the Performance section.

JEDT's Discount, c. 10% at the time of writing, has been on a narrowing trend in the last 12 months, paced by a share buyback programme that has seen the board spend over £60m in the latter stages of 2023 and into 2024. As a FTSE 250 trust with a market cap of over £700m, JEDT has the capacity to absorb such a buyback, but as we note in the discount section, it is fundamentally an investor in smaller companies and buybacks remain at the discretion of the board.

JEDT yields c. 2.3% and primarily targets capital returns. The team isn't given any income targets to meet and as such the trust's dividend can be viewed as a byproduct of the strategy. While last year's dividend was significantly increased, the previous five years saw a flat dividend, and thus investors should not expect a progressive dividend.

Readers may be suffering from 'small-caps are cheap' fatigue by now, and not just in Europe. But European large-cap equities rose last year while many investors were looking the other way, and more recently small-caps have begun to do the same. This is only a short-term signal, but coming after such a long period of the 'small-caps are cheap' message from fund managers, perhaps investors are finally starting to look more closely.

We looked recently at how the data shows, measured by flows in and out of European equity funds, that investors have not favoured Europe generally, and within that small-caps, for several years. The JEDT team make the interesting point that European portfolios which have been underweight small-caps are starting to feel quite exposed by that underweight, and anecdotally the team are seeing more interest in small caps from funds that invest across the market-cap spectrum, which seems to bear out the recent positive performance.

The recently appointed team managing JEDT will not be reinventing a well-established process but do see an opportunity to refine the way they work and use all the tools available to them. While JEDT's discount has responded positively to recent share buybacks, the c. 10% discount remains an attractive level, on top of the perhaps even more attractive valuations available in the underlying assets, and JEDT is a large, liquid FTSE 250 trust which provides a core diversified exposure to this asset class.