JEDT’s stock picking delivers strong performance…by Alan Ray
Overview
JPMorgan European Discovery Trust (JEDT) is a high-conviction portfolio of c. 70 European smaller companies, targeting capital growth across a broad range of sectors by focusing on under-researched businesses with the potential to grow faster than many large companies.
JEDT’s current management team took the helm in March 2024 and while JEDT’s fundamental proposition remains capital growth from European smaller companies, the team have refined the process and their focus in primarily on stock picking, which analysis shows has been the main source of outperformance under their tenure. Running a 70-stock portfolio means that even the largest positions are between 2% and 3% of NAV,
Over the same period, JEDT’s discount has narrowed to c. 8%, assisted by the above-mentioned strong performance combined with a steady approach to share buybacks. Whereas the trust’s own discount is therefore relatively narrow, the team argue that European small-caps are at a valuation discount to large-caps, which undervalues their greater potential for growth, and there have been long periods in history when small-caps have traded at a premium.
JEDT currently yields 2.2%. JEDT primarily targets capital growth and the managers are not constrained by an income target, with the dividend policy to pay out substantially all revenue each year.
Analyst’s View
European equities have quietly been gathering momentum for some time, but it was really 2024 into 2025 that saw this rise to prominence, with strong positive inflows into European equity funds indicating a shift in sentiment among global investors. Although relatively low European equity valuations have certainly played a role in this renewed enthusiasm, there has also been a change in sentiment to Europe’s potential from a domestic perspective, with PMIs for industrial and services businesses turning a little more positive, together with signs of better consumer confidence. And Germany’s significant spending plans for infrastructure and defense have also boosted sentiment. ‘Europe’ is of course a complex patchwork, but at a high level these factors have come together to create a more constructive environment. Small-caps generally, and JEDT’s portfolio specifically, tend to have a more domestic bias than some of Europe’s mega-caps, and thus these factors lead to a more constructive environment for small-caps.
As is often the case during the first wave of a recovery, money tends to chase liquidity, for which read ‘large-caps’, which have seen the majority of flows. But recently the JEDT team report that there is increased interest in their small-cap mandates, squaring with the domestic bias and the very low valuations that small-caps continue to trade on. Consequently, we think that, even with the very strong performance recorded by JEDT recently, the environment remains constructive for European small-caps and JEDT looks extremely well-placed to capture the potential.
Bull
- Strong performance has come from a variety of stocks and sectors
- European small companies are under-owned and arguably undervalued
- High-conviction portfolio is balanced by sensible risk controls
Bear
- Smaller companies can be more volatile and can suffer in ‘risk off’ market phases
- JEDT uses gearing, which can amplify losses as well as gains
- Low dividend yield may not suit some investors
See the full research on JPMorgan European Discovery Trust >
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.
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