Holding steady for next leg of small-cap bull run
JP Morgan Euro Small Co Trust Plc (LONDON:JESC) aims to achieve capital growth by investing in smaller companies in continental Europe. Actively managed with a bottom-up approach, the managers are currently positioned with a bias towards stocks that will benefit from economic recovery. In spite of a strong record of both absolute and relative performance, the trust’s shares remain on a discount of more than 10%. A five-for-one stock split has been proposed to facilitate investment through platforms and regular savings.
Investment strategy: Focus on positive change
JESC aims to provide diversified exposure to a portfolio of continental European small caps. Managers Jim Campbell and Francesco Conte at JPMorgan Asset Management have worked together on the trust since 1995. It typically holds 70-90 stocks from a universe of around 1,000, and the managers aim to spot attractively valued stocks whose good growth potential is under-appreciated by the market. Sector and country weights are largely an output of stock selection and gearing is actively managed in the range of 20% net cash to 20% geared. The investment process looks to capture change in operating momentum, focusing on improving businesses with a catalyst for re-rating.
Market outlook: Index highs temper enthusiasm
While anti-EU parties took a majority of European Parliament seats in a handful of the 28 EU member states in the recent elections, the ‘protest vote’ was less significant than opinion polls had suggested and markets largely took it in their stride, with the small-cap Euromoney index static over three months to the end of May. Improving economic sentiment and an uptick in corporate earnings could feed through into further gains, with valuations in many local small-cap indices not looking stretched in relation to history or to large-cap indices. Policy action from the ECB to address the strength of the euro and tackle the spectre of deflation should provide further support, although with the Euromoney Smaller European Companies (ex-UK) Index close to a 10-year high, the strong gains of recent years may not be repeated in the short term.
Valuation: Discount drifting out as market pauses
The current cum-income discount of 13.4% is broadly in line with the one-year average of 11.9%, but has widened recently following a contraction at the end of 2013, as market sentiment has favoured larger companies and those less exposed to the strong euro. There is significant scope for it to narrow again should the small-cap bull run resume.
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