JPMorgan European Discovery 01 September 2021
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 Trust (JEDT) offers investors a portfolio of small- and mid-cap companies across developed Europe (excluding the UK), following a balanced process that can invest in both expensive growth and cheap recovery companies. JEDT has recently changed its name, and was known as JPMorgan European Smaller Companies Trust until June 2021. The new name is intended to better reflect the trust’s investment strategy and portfolio, as it can invest across the European small- and mid-cap market in companies ranging in size from €500m to €8bn.
The management team, led by Francesco Conte and Edward Greaves, follow a process based around three key pillars: ‘value’, ‘quality’ and ‘momentum’. We explain these in greater detail in the Portfolio section. Though the team are bottom-up stock pickers, a number of thematic trends have naturally emerged from their process. While the overarching themes remain the same, the team have begun to make subtle changes to how they are incorporated, adapting to the increasing valuations in certain sectors.
Over the last five years JEDT has outperformed its benchmark, though it continues to lag its peer group average. JEDT’s recent outperformance has been driven by its sectoral allocation, which capitalised on the tailwinds created by some thematic trends. Moreover, the JEDT team highlight the relative strength of European small caps, which have outperformed European large caps by nearly 100% over ten years. European small caps have also kept pace with global equity markets, as we describe in the Performance section. JEDT has also seen its ESG credentials improving, having now been rated as ‘above average’ by Morningstar. JEDT currently trades on a 13.3% discount, one of the widest of any trust in both the European small-cap and large-cap peer groups.
We view JEDT as offering investors a measured approach to European small-cap growth investing. While the managers are clear in their intention to purchase companies with long growth trajectories, this is tempered by their focus on quality and valuation sensitivity. This may be attractive to more cautious investors who still wish to gain access to attractive growth opportunities in Europe without having to expose themselves to substantial valuation risk. We think this may become particularly relevant during a rising interest rate environment, as it could impair the more expensive growth stocks.
JEDT’s increasing ESG credentials could make it appeal to investors who value this highly, now that its ESG score has been upgraded to ‘above average’, which was achieved without adopting an explicit ESG exclusion system. The team’s use of sustainability as an investment theme has been a contributing factor, and may also be able to provide additional tailwinds for JEDT’s NAV return. The EU is in the process of rolling out a series of stimulus and policy measures to promote economic sustainability, which may prove to be directly beneficial for many of JEDT’s holdings, either through increased demand for renewables or through the infrastructure projects vital for their provision.
In our view, JEDT’s current discount could offer a highly attractive entry point, with it having one of the widest discounts of any European trust. Should sentiment towards European equities improve and the managers continue their history of generating outperformance of the benchmark, this could prove a powerful combination.
|Structured approach to quality growth investing, supported by thematic tailwinds
|Balanced approach means it may underperform in sharp value or growth rallies
|Above average and improving ESG credentials
|Revenue reserve has nearly been depleted
|Wide discount offers attractive entry point, even relative to peers
|Use of gearing can amplify losses