JPMorgan European Discovery 21 February 2023

JPMorgan European Discovery (LON:JEDT) provides core exposure to European smaller companies, an asset class which has generated impressive long-term returns. JEDT’s investment approach has long combined fundamental research and human judgement, using dispassionate quantitative data and analysis to form opinions, based on three principal factors: Value, Quality and Momentum. In recent years, JEDT’s quantitative analysis has begun to include machine learning systems that can analyse large quantities of unstructured data, for example, reading and scoring the transcripts of hundreds of company results’ presentations for positive or negative statements. But, as ever, these are still tools for the human fund managers to use to help make better-informed decisions, rather than being decision-makers in their own right.

JEDT’s management team has been very stable over many years, with Francesco Conte at the helm for 24 years and his co-manager, Ed Greaves, for 11 years. The same pattern of long-term stability is evident across the JPMorgan Asset Management UK and European Smaller Companies teams, with long tenure more common than not. Thus, the team today are responsible for JEDT’s long-term outperformance and have been instrumental in developing the processes and systems that support their ultimate judgements.

JEDT trades at a c. 14% discount at the time of writing, which is a little wider than its long-term average discount and, after a period of no gearing, has recently introduced a modest 10% level of gearing, which the team say is an indication of their increased optimism for the Portfolio.

European smaller companies have been one of the best performing equity categories over long periods of time. JEDT has a very long track record of capturing and exceeding this. The team’s use of a mixture of fundamental research, for which read ‘human’, and machine leaning, provides investors with a portfolio informed by experienced fund managers but with an unemotional extra input that avoids attachment to current holdings and provides consistent analysis of the factors that the human side of the equation looks for. In our recent conversation with Ed Greaves, Francesco’s co-manager, he was keen to emphasise that this is a practical tool providing decision-making information for the fund managers, rather than an artificial intelligence system making the decisions. A lot of time has been spent in recent years in trying to understand how humans make decisions in investment and we know that investors tend to place greater faith in stocks they own, than those they don’t. We think having a series of non-human tools to constantly assess that faith can only be helpful to an open-minded fund manager.

Smaller companies often bear the brunt in a market and economic downturn. Investors keep coming back to them in the end because they are often faster to adapt and innovate. Europe, as a whole, is a large market, and smaller companies are often international leaders in niches that exist below the global super-sectors, such as energy or pharmaceuticals. JEDT operates at this end of the smaller companies’ universe, rather than at the truly microcap end, which is a different specialism. The long-term results speak for themselves. At its current 14% discount, JEDT is, in our view, a good value way to gain long-term exposure to an asset class with the capability to rapidly adapt to an economic landscape that may well be very different to the one we have grown accustomed to.