JPMorgan European Smaller Companies

With a rebalanced portfolio, JPMorgan European Smaller Companies (JESC) offers a balanced portfolio poised for rising market volatility...

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Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by JPMorgan European Smaller Companies. 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 Smaller Companies

JPMorgan European Smaller Companies (JESC) aims to provide capital growth from a diversified portfolio of smaller companies in developed Europe, excluding the UK.

The £667m trust (in net asset terms), is managed by Francesco Conte and Edward Greaves and utilises a high-conviction, bottom up, stock picking approach. The team focus on three key characteristics when conducting fundamental analysis on new investment ideas; quality, momentum and value. Companies they select do not need to score well on all three characteristics, but the overall portfolio should have a positive tilt to all three.

Over the longer term the trust boasts a strong track record. Over the past five years to 17th April 2019 for example, according to Morningstar the trust has delivered NAV returns of 70.7%, considerably greater than the benchmark EMIX Smaller European Companies index (52.4%) and the AIC European Smallers peer group (62%). Comparing the trust to open-ended peers in the IA OE European Smaller companies sector, it has also done a good job, outperforming the IA sector average by more than 11%.

More recently, as economic lead indicators deteriorated through 2018, the managers tilted the portfolio towards more defensive stocks, and de-geared. This led the managers to hold as much as 3.5% net cash in Q4 of 2018. Initially this helped them outperform a falling market at the start of Q4, but in retrospect they were too early to buy back into a falling market, which meant that overall they marginally underperformed the benchmark in a more volatile year.

Despite the strong long-term track record, the discount remains wide in absolute terms, but also relative to peers, and currently sits at around 14%.

Kepler View

JPMorgan European Smaller Companies offers investors a diversified exposure to some of the highest quality smaller company growth opportunities in developed Europe.

The trust has an outstanding long-term track record, largely due to the highly experienced, well embedded, management team. Their active management approach meant they started to re-position the portfolio during 2018, a process that continued into 2019. The managers report that they currently have a more balanced stance, representing their cautious but positive outlook. The defensive tilt should give the trust an additional edge in any market volatility, while still giving investors exposure to the strong idiosyncratic growth that the manager’s picks offer.

In our view, the wide discounts seen in the European smaller companies sector are a consequence of investor aversion to all things Europe. As we highlight in this article, Europe offers exposure to sectors and companies that one might struggle to find in the UK, and often command premium ratings in the US. Currently trading on a discount of around 14%, we see this moment in time as a potentially attractive entry point for investors.

BULL
BEAR
Versatile investment approach allows for quick repositioning of the portfolio, with a very experienced management team
The trust is vulnerable as a result of its euro exposure to a resurgent sterling, which is possible if 'good Brexit' materialises
Strong long-term performance
Political uncertainty in Europe is unlikely to go away any time soon, so volatility is likely to remain an issue
Wide discount offers an attractive opportunity

William Sobczak
William joined Kepler Partners in February 2018 as an investment trust analyst. Prior to joining, William graduated from the University of Western Australia, with a BSc in Psychology.

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This report has been issued by Kepler Partners LLP.  The analyst who has prepared this report is aware that Kepler Partners LLP has a relationship with the company covered in this report and/or a conflict of interest which may impair the objectivity of the research.

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