JPMorgan European Discovery Trust (JEDT)) aims to generate long-term capital growth from a portfolio of high-quality, reasonably valued, smaller European equities. The scale of opportunities in a relatively inefficient market gives active managers an excellent opportunity set for outperforming and delivering good long-term investor returns, and JEDT has a strong long-term investment track record but has been a little more challenged of late. The trust currently offers a 1.7% dividend yield.
Why invest in European smaller companies now?
European smaller companies have proven themselves to be a fruitful market for investors over the past 20 years. As an asset class they have outperformed European large caps and most other major markets including global small caps. This has been due to the combination of high earnings growth driven by ongoing innovation and disruption in secular growth sectors. European smaller companies have historically performed well after economic disruption and so there is potential for the asset class to further outperform as the global economy recovers from the COVID-19 pandemic. With the recent correction seen in global markets year to date, European smaller companies are trading in line with long-term averages. However, investors will be hoping that secular growth tailwinds continue to drive returns.
The analyst’s view
JEDT could appeal to those investors wishing to diversify their large-cap Europe ex-UK exposure or those wishing to access higher-growth markets and industries. JEDT provides investors with a large and liquid option within this dynamic market. The combination of an experienced and well-resourced management team and a proven and repeatable investment process gives this trust the potential to outperform through a variety of market conditions.
Valuation: Scope for the discount to narrow
Currently JEDT is trading on a discount to cum income fair net asset value (NAV) of 15.7%, which is outside the five-year average of 12.3%. These headline figures mask some quite extreme moves, with the shares trading at a discount to cum income fair NAV of 25.5% in March 2020 and 8.9% in November 2021. Arguably, as the largest, most high-profile option for investors in the sector, with an established manager and good long-term performance, the trust deserves to be trading closer to NAV.
Fund objective
JPMorgan European Discovery Trust (JEDT) aims to provide capital growth from a diversified portfolio of smaller European companies (ex-UK). With JEDT's focus on capital growth, shareholders should expect the dividend to vary from year to year. The company can borrow to gear the portfolio within a range of 20% net cash to 20% geared in normal market conditions.
Bull points
■ A well-resourced and experienced team with access to the vast resources at JPMorgan.
■ The largest vehicle in the sector.
■ Focused on stock specifics with a balanced stylistic approach.
Bear points
■ This is a volatile market requiring a suitable attitude to risk.
■ Current valuations are only in line with long-term averages.
■ Could be an element of key person risk.
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