JPMorgan European Discovery 21 June 2022
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 Discovery (JEDT) offers investors a portfolio of high-quality European small- and mid-cap equities. JEDT’s managers, Francesco Conte and Edward Greaves, have created a portfolio which not only demonstrates better quality metrics but also superior valuations and earnings momentum than the wider market. All three aspects are important outcomes of the team’s investment process.
Francesco and Edward tell us they hope that their diverse set of high-quality companies will insulate JEDT from the worst turmoil in Europe’s equity markets, arising from rising global inflation and the outbreak of the war in Ukraine. As we discuss in the Portfolio section, the managers believe high-quality companies are best positioned to absorb the impacts of inflation, either by being exposed to long-term structural growth trends that can sustain earnings growth despite inflation or by being better able to pass on increases in input prices to their consumers and limit those impacts.
JEDT has outperformed its benchmark in four of the past five calendar years, but has lost more than the market in the volatile past two quarters. Yet as we point out in the Performance section, this has primarily been the result of stylistic headwinds rather than poor stock selection, with higher energy costs and the team’s focus on quality having impacted the trust over 2022. JEDT currently trades at a 18.3% discount, the widest in the peer group. In the last six months the board has initiated a series of buybacks which may potentially place a floor on JEDT’s discount.
JEDT’s wide discount could be an opportunity to ‘buy the dip’. The Ukraine war has led to an indiscriminate sell-off in European markets, and investors may find that many high-quality businesses – including those in JEDT’s portfolio – are trading at cheaper valuations. This could provide a good long-term entry point, with the possibility of a quick rebound if a peace deal is signed.
In any case, investors have the opportunity to capitalise on a double discount with JEDT, offering the potential powerful combination of a narrowing share price and improving NAV returns. Moreover, JEDT’s board has been proactively buying back shares at around a 16% discount, which may help alleviate investors’ concerns about further widenings. Additionally, we think JEDT’s portfolio of high-quality companies may be able to offset the impact of rising inflation, which we believe is the major long-term risk factor facing equity markets.
Even for investors who do not wish to time the market during such a volatile period, JEDT can still represent a potential ‘core’ equity exposure for investors looking for European small-cap exposure, as the predominant factor underpinning the portfolio is quality. We believe this factor is important with long-term holdings, as high-quality companies are more likely to weather difficult economic periods.
- Discount offers attractive entry point
- Clear focus on high-quality companies which may insulate the portfolio from inflationary forces
- Has demonstrated strong stock selection, despite the stylistic headwinds
- Use of gearing can enhance losses on the downside
- Has recently been swept up in a wider growth stock sell-off
- Europe is currently in the grip of heightened political risk