JPMorgan European Discovery Trust plc (LON:JEDT) has announced its unaudited half year results for the six months ended 30th September 2024.
Highlights
• NAV total return of -0.5% compared with +1.0% for the MSCI Europe (ex UK) Small Cap Index (the ‘Benchmark’), The share price return was +2.2% due to a narrowing of the discount at which the Company’s shares traded relative to its NAV.
• For the ten years ended 30th September 2024, the Company comfortably outperformed the Benchmark with a NAV total return of +163.5% compared to +140.1% for the Benchmark. The share price increased by 183.7% over the same period.
• Interim dividend of 3.0 pence (2023: 2.5 pence) per share, which will be paid on 5th February 2025 to shareholders on the register as at 20th December 2024 (the ex-dividend date will be 19th December 2024).
• A total of 6,734,095 shares were repurchased into Treasury in the six months to 30th September 2024.
• Earlier in the year, the Company undertook a Tender Offer resulting in the repurchase of 15% of the issued share capital (excluding Shares held in Treasury).
The Chairman of JEDT, Marc Van Gelder commented:
“The outlook for European small caps, and for your Company, is positive, despite the recent upsurge in global political uncertainty. Easing inflation pressures, declining interest rates and more buoyant consumer sentiment will continue to provide favourable economic tailwinds.”
“We share the Investment Manager’s conviction that innovative and nimble small cap companies are by their nature best placed to capitalise on emerging trends, such as the rapid adoption of artificial intelligence (AI). 2025 looks set to be an interesting and remunerative one for your Company, and one which should serve to extend its long-term track record of strong gains and outperformance. “
JEDT’s Portfolio Managers, Jon Ingram, Jack Featherby and Jules Bloch commented:
“Macroeconomic developments over the review period have been decisively positive. Looking across the asset class, we expect the easing of monetary headwinds and improving economic growth indicators to be favourable for economically geared smaller companies.”
“We anticipate that the combination of attractive valuations, supportive macroeconomic conditions, and long-term thematic drivers will serve as significant catalysts for European smaller companies. This sector of the market has outperformed most other major public asset classes globally over the past two decades, and after a protracted period of underperformance, these stocks are overdue for a resurgence. As we said in our last report, the outlook has rarely been brighter, and we look forward to reporting the Company’s progress on capturing this recovery as it unfolds. “
CHAIR’S STATEMENT
I am pleased to present the Company’s results for the half-year ended 30th September 2024.
Investment Performance
The improvement in the market environment which I noted in the Annual Report continued in the half year to 30th September 2024. Inflationary pressures continued to subside, the European Central Bank (ECB) initiated a monetary easing cycle and real wage increases are lifting consumer confidence. These developments were generally supportive of small cap companies. The Company’s benchmark, the MSCI Europe (ex UK) Small Cap Index, returned +1.0% over the six month period. However, the Company’s performance lagged, recording a total return on net assets of -0.5%. The total return to shareholders was +2.2%, due to a moderate narrowing of the discount at which the Company’s shares traded relative to its NAV, from 10.6% to 8.3%.
This recent underperformance in NAV terms is disappointing, but it follows a period of outperformance for the financial year ended 31st March 2024. As the Company adopts a long-term investment strategy, it is important to also consider performance over a longer timeframe. Over the past five years, the total return on net assets was +32.4%, compared to the benchmark total return of +39.2%. Over the past ten years, the total return of +163.5% was high in absolute terms and comfortably above the benchmark return of +140.1%.
The Investment Manager’s Report that follows provides a review and outlook of markets, as well as more detail on the performance drivers within the portfolio.
Revenue and Dividends
The Company’s net revenue return for the six months to 30th September 2024 was higher than the corresponding period in 2023, at 10.72 pence per share (30th September 2023: 10.42 pence). The Board has decided to increase the interim dividend to 3.0 pence (2023: 2.5 pence) per share, which will be paid on 5th February 2025 to shareholders on the register as at 20th December 2024 (the ex-dividend date will be 19th December 2024). When determining the final dividend for the current financial year, the Board will take into account the income received over the year as a whole, and the level of the Company’s revenue reserves, which stood at £24.47m as at 30th September 2024.
Discount Management and Share Repurchases
The Board continues to monitor the level of the share price discount and believes that its ability to repurchase shares to minimise the short-term volatility and the absolute level of the discount is of prime importance to shareholders. A total of 6,734,095 shares were repurchased into Treasury in the six months to 30th September 2024. A further 2,015,144 shares have been repurchased since the period end. At the time of writing, the share price discount was 12.2%.
Tender Offer
As previously announced, during the year, the Company undertook a Tender Offer providing shareholders with the opportunity to tender up to 15% of the issued share capital in the Company (excluding Shares held in Treasury). 21,160,028 shares were validly tendered pursuant to the Tender Offer.
The Board
In line with the Board’s succession planning on the retirement of Nicholas Smith at the 2024 Annual General meeting, in July, the Board undertook a search to identify a new Director. Following the successful conclusion of this search and as announced, James Will was appointed as an independent non-executive director with effect from the conclusion of the 2024 Annual General Meeting.
James brings a wealth of Investment Trust industry experience, his other Non-Executive Director roles include being the Chair of Asia Dragon Trust plc and the Senior Independent Director at Herald Investment Trust plc.
Environmental, Social and Governance (‘ESG’)
The Board has continued to engage with the Manager on the integration of ESG factors into its investment process. These issues are considered at every stage of the investment decision. The Board shares the Investment Managers’ view of the significance of financially material ESG factors, both when making initial investment decisions and throughout the period of the investment. To this end, it seeks to maintain a meaningful and ongoing engagement with investee companies.
For more details, please refer to pages 30 to 32 of the 2024 Annual Report which can be found on the Company’s website at: www.jpmeuropeandiscovery.co.uk.
Change of Registrar
As mentioned in the 2024 Annual Report, following a competitive tender process, the Company transferred the management of its share register from Equiniti Financial Services Limited to Computershare Investor Services PLC (‘Computershare’), with effect from 16th September 2024.
A notification letter from Computershare was sent to all registered shareholders advising of this change. The letter included an invitation to shareholders to create an online account which will provide access to the details of their shareholdings and an opportunity to participate in the Company’s Dividend Reinvestment Plan (DRIP). Please visit www.investorcentre.co.uk. for further information.
Outlook
The outlook for European small caps, and for your Company, is positive, despite the recent upsurge in global political uncertainty. Easing inflation pressures, declining interest rates and more buoyant consumer sentiment will continue to provide favourable economic tailwinds. In addition, lower rates combined with tempting valuations, are likely to reignite interest in M&A activity in the sector. Some of the Company’s portfolio holdings may be direct beneficiaries. We share the Investment Manager’s conviction that innovative and nimble small cap companies are by their nature best placed to capitalise on emerging trends, such as the rapid adoption of artificial intelligence (AI). Also, after an uncharacteristically long period of underperformance, European small caps are ripe for a rebound. In conclusion, 2025 looks set to be an interesting and remunerative one for your Company, and one which should serve to extend its long-term track record of strong gains and outperformance.
On behalf of the Board I would like to thank you for your ongoing support.
Marc van Gelder
Chairman
INVESTMENT MANAGERS’ REPORT
As we reflect on the first half of the financial year, we observe a dynamic landscape that has significantly influenced the performance of Europe’s smaller companies. Key developments, such as inflation stabilisation, interest rate cuts by the ECB, and rising consumer confidence have shaped market and stock performance. These factors, alongside political events, have created opportunities for investors like us who focus on uncovering overlooked companies (‘hidden gems’) across continental Europe.
In this report we will discuss how these elements have affected the Company’s performance, and we outline our strategic approach moving forward. We will also highlight some of the hidden gems in the Company’s investment portfolio and share our views on European smaller companies.
Macroeconomic Review
Three main factors influenced the performance of Europe’s smaller companies over the past six months: inflation stabilisation, central bank rate cuts, and increased consumer confidence.
• Inflation: In the Euro area, the Consumer Price Index (CPI) fell from 2.4% in March 2024 to 1.7% in September 2024, down from highs of +10% in 2022. Core inflation has fallen to 2.7%.
• Financial Conditions: Lower inflation has allowed central banks to cut interest rates. The ECB has so far reduced rates three times this year, from 4.00% to 3.25%.
• Consumer Confidence: Rising real wages in Europe have boosted consumer confidence, benefiting domestically focused smaller companies.
While political developments can influence market sentiment and risk perceptions, recent elections in the UK and France are only likely to have moderate long-term impact on company fundamentals.
The same can be said about the severe bout of weakness in Japanese stocks during July, after the Bank of Japan raised interest rates and warned of further tightening ahead.
The Chinese government’s array of stimulus measures, announced in September, have led to a rally in Chinese equities, although their success remains uncertain.
Additionally, the result of the US election is expected to add more volatility to global markets as investors react to potential policy changes, though as with the other regions, we believe the long-term performance of stock prices will ultimately be driven by company fundamentals.
Portfolio Performance
Table 1: Performance of JPMorgan European Discovery Trust versus major markets
| Company/index name | 31st March –30th September2024(%) |
| JEDT (NAV) | -0.5 |
| NAV relative to benchmark | -1.5 |
| JEDT (Price) | 2.2 |
| End of period discount | -8.3 |
| MSCI Europe (ex UK) Small Cap | 1.0 |
| MSCI Europe (ex UK) | -0.4 |
Source: JPMorgan Asset Management and Bloomberg.
Relative to the MSCI Europe ex UK Small Cap index, the Company’s investment portfolio underperformed by 1.5% over the period. The portfolio’s intra-period performance volatility was relatively muted, with an equal number of outperforming months and underperforming months. Portfolio underperformance was driven by some major political and macroeconomic events during the period, including the announcement of the French legislative elections in June, the sudden unwinding of the Yen carry trade in early August, and the announcement of Chinese stimulus measures over September. Each of these events led to a significant increase in the stock market’s risk premium, and this subsequently weighed on the performance of Europe’s Smaller Companies.
Table 2: Sector Performance – Top 3 and Bottom 3 sectors contributing to performance
| Account | Benchmark | Attribution | ||||
| Avg Wgt | Return | Avg Wgt | Selection | Allocation | Total | |
| Group | (%) | (%) | (%) | (%) | (%) | (%) |
| Real Estate | 6.27 | 19.32 | 7.85 | 0.45 | -0.17 | 0.27 |
| Consumer Staples | 4.43 | 6.82 | 4.80 | 0.27 | -0.05 | 0.23 |
| Communication Services | 7.55 | 2.98 | 4.51 | 0.32 | -0.10 | 0.22 |
| Financials | 13.91 | 3.17 | 14.24 | -0.41 | -0.02 | -0.43 |
| Consumer Discretionary | 11.67 | -8.67 | 8.30 | -0.29 | -0.30 | -0.59 |
| Industrials | 32.31 | -2.21 | 25.99 | -1.39 | 0.12 | -1.27 |
Source: JPMorgan Asset Management.
Analysing the Company’s performance by sector, the Real Estate sector was the largest positive contributor to returns. Here, performance was principally driven by increasingly positive sentiment around ECB rate cuts. Within the sector, TAG Immobillen, a German residential building owner and operator, contributed most, on the back of its initially depressed valuation and a stabilisation in property valuations.
The Company’s exposure to Consumer Staples and Communication Services also enhanced returns, with individual stock specifics driving performance in both sectors. Within Consumer Staples, returns were driven by Swedish specialty vegetable oils and fats producer, AAK. This company has benefited over the last six months from a dramatic increase in the price of cocoa butter, which has driven demand for substitutes, including AAK’s palm oil-based products. Within Communication Services, performance was supported by the Company’s investment in CTS Eventim, a German-based online ticketing platform for the entertainment industry. CTS is doing well thanks to rocketing demand for live entertainment. Activity is surging due to changing monetisation trends in the music industry which have led to a rise ‘mega’ tours by artists such as Taylor Swift and Adele.
The Company’s largest sectorial detractors were Industrials, Consumer Discretionary and Financials. The industrial sector underperformance was primarily the result of a ~7% overweight to the sector. Over the review period, the Company exited several of its largest Industrial sector holdings to reduce this overweight. Otherwise, negative performance within Industrials was driven by the continued weakness of the German industrial economy (see ‘Portfolio Changes’ section for further details). Financial sector holdings have been adversely impacted by expectations of a decline in net interest income (NII) now the ECB has begun cutting rates. Despite this headwind for NII, we think the current mantra of ‘higher for longer’ interest rates, coupled with still deeply discounted valuations, should support share price performance in Financials going forward. Finally, Consumer Discretionary names have suffered from a weak automotive market, as well as broader weakness in consumer spending across the US and Europe. Within all these sectors, negative performance was primarily the result of our sector allocation, rather than stock specifics.
Table 3: Investment performance – Top 3 and Bottom 3 investments contributing to performance
| Account | Benchmark | ||||
| Avg | Avg | Wgt | Total | ||
| Wgt | Return | Wgt | Diff | Effect | |
| Security Name | (%) | (%) | (%) | (%) | (%) |
| Nexans | 2.12 | 35.04 | 0.41 | 1.71 | 0.50 |
| Unipol Gruppo | 1.94 | 38.35 | 0.44 | 1.50 | 0.46 |
| Bonesupport | 1.66 | 33.04 | 0.16 | 1.50 | 0.43 |
| Scor | 1.01 | -34.87 | 0.44 | 0.58 | -0.51 |
| Stabilus | 1.01 | -35.50 | 0.14 | 0.87 | -0.52 |
| Kion | 1.55 | -33.26 | 0.34 | 1.22 | -0.67 |
Source: JPMorgan Asset Management.
The top three contributors to performance over the period were Nexans, Unipol Gruppo, and Bonesupport.
Nexans, a French company, is the world’s second largest supplier of high voltage cables. This investment contributed strongly to performance thanks to continued massive demand for their high voltage cable solutions. Nexans provide the high specificity cables needed to connect offshore wind farms to the electrical grid. Their cables are also used as transnational interconnectors to connect power grids in one country to those of other countries. Through these businesses Nexans play a key role in the transition to renewable energy. We believe their investment thesis is just starting to play out, and we have a high conviction for Nexans’ investment proposition going forward.
Unipol Gruppo is an Italian insurance provider and financial conglomerate. The stock contributed strongly to returns following the company’s decision to streamline its operating structure by merging its Hold-Co structure with its listed subsidiary, Unipol Sai. In addition, results have been consistently strong throughout the year.
Bonesupport, a Swedish healthcare company specialising in orthobiologics, also contributed positively following their expansion into the US market. FDA clearance of the company’s spinal fusion treatment was also received sooner than expected.
The top three detractors were Scor, Kion and Stabilus. We have subsequently exited all three positions.
Scor, a French reinsurer, underperformed due to missed expectations driven by US mortality claims. This led to a profit warning which raised questions around the potential volatility of future profits. Kion, a German manufacturer of forklift trucks, also faced a weak start to the year. Poor order intake delayed the potential for recovery and left no indication of when a recovery could start. Stabilus, a German manufacturer of gas springs and power risers, also issued a negative profit update citing lower demand for automotive and commercial vehicles. This also led us to believe the recovery we expected would continue to be delayed.
Portfolio Changes
Table 4: Top 3 investment portfolio buys and Top 3 sells
| Change | Trade | ||
| Security Name | Sector | PRT (%) | Type |
| Nexans SA | Industrials | 1.7 | Topped up |
| Banco Comercial Portugues | Financials | 1.5 | New buy |
| Cairn Homes PLC | Consumer Discretionary | 1.4 | Topped up |
| Kion | Industrials | -2.7 | Sell out |
| Scor | Financials | -2.4 | Sell out |
| Hensoldt AG | Industrials | -1.8 | Sell out |
Source: JPMorgan Asset Management.
During the period, we increased the Company’s investment holdings in Nexans and Cairn Homes, an Irish home builder, and initiated a new position in Banco Comercial Portugues (BCP).
The boosted position in Nexans followed its recent strong performance, as discussed earlier, which increased our confidence in the business’s strong market position. We also like Nexan’s ability to drive shareholder value through higher margins and through cash flows, thanks to extraordinarily strong global demand for high voltage cables in a tight supply market.
The decision to invest in BCP, a Portuguese retail bank, was driven by confidence in its investment case following a turnaround in business performance supported by persistently high interest rates.
The Company’s third largest portfolio position change was the increase in holding of Cairn Homes. Cairn are currently benefitting from improved housing demand in Ireland. We also received positively their announcement to extend their share buyback programme. We increased our position when the ECB began lowering rates as this should, on a fundamental level, support further demand for new housing.
The Company exited positions in Scor, Kion, Stabilius and Hensoldt. We felt uncertain about the future earnings prospects of each of these investments (the reasons for the disposal of the first three names are discussed earlier). With Hensoldt, a key supplier of sensor technologies to the defence industry, the decision to sell was motivated by our concerns about domestic political support for further German defence spending, given the country’s fiscal challenges.
As a result of the above portfolio changes, the Company’s investment portfolio sector positioning has evolved as shown in the 2024 Half Year Report of the Company.
Over the half year, exposure to Communication Services grew to become the Company’s largest sector overweight. This growth was driven by strong performance from the Company’s investments in businesses such as the previously mentioned CTS Eventim.
Industrial sector exposure contracted, becoming the second largest sector overweight. We continue to see a significant number of opportunities within this sector, and we believe industrials should do well as Europe recovers from the effects of inflation and the European energy crisis. We have, however, decided to reduce the portfolio’s sector weighting based on stock specific decisions.
The Company’s exposure to the Real Estate and Healthcare sectors, both sectors sensitive to interest rates, increased over the period. We feel that the ECB’s rate cuts should support specific areas of the Real Estate sector, especially German residential real estate investment, over the coming months. In Healthcare, we have increasing conviction in several companies offering unique technologies, which have so far been overlooked by the market. For example, we have built a position in Camurus, a Swedish drug development company with proprietary drug delivery technology that we believe is at the beginning of a multi-year growth cycle. Top performer Bonesupport, mentioned above, also falls into this category.
Materials remain the portfolio’s largest underweight due to their cyclical nature and poor track record in value creation. Although post-pandemic demand and energy price spikes boosted materials sector margins, recent declines in gas and electricity prices pose challenges for the sector.
Outlook
When considering the outlook for European financial markets, one uncomfortable reality is that political uncertainty is escalating, especially given the perceived binary nature of many national elections occurring around the region and world. However, we cannot second guess the impact of political events on financial markets. The Company’s investment strategy remains focused instead on identifying Europe’s ‘hidden gems’ – great companies with strong fundamentals that have escaped the attention of most investors.
Macroeconomic developments over the review period have been decisively positive. Looking across the asset class, we expect the easing of monetary headwinds and improving economic growth indicators to be favourable for economically geared smaller companies.
In addition, after a period of subdued deal flow, lower interest rates in concert with attractive valuations, are likely to catalyse an uptick in M&A within the European smaller companies space. We believe this should benefit both the asset class and the Company. Private equity investors and other participants in M&A activity tend to seek out the same kind of overlooked businesses that we seek, and we expect some of our portfolio holdings to be targeted by these investors. Please refer to the charts in the 2024 Half Year Report of the Company.
The portfolio’s exposure to structural themes will be another driver of portfolio returns. We continue to hold a strong conviction that many of the companies that will be most successful in harnessing the AI revolution, pharmaceutical advancements, and other emerging structural trends, are likely to originate from the smaller companies space within Europe. Many of these future leaders are yet to be identified (or even conceived), but we are always on the lookout.
We anticipate that the combination of attractive valuations, supportive macroeconomic conditions, and long-term thematic drivers will serve as significant catalysts for European smaller companies. This sector of the market has outperformed most other major public asset classes globally over the past two decades, and after a protracted period of underperformance, these stocks are overdue for a resurgence. As we said in our last report, the outlook has rarely been brighter, and we look forward to reporting the Company’s progress on capturing this recovery as it unfolds.
Jon Ingram
Jack Featherby
Jules Bloch
Investment Managers
JPMorgan European Discovery Trust is an investment trust company. The Investment Trust JEDT objective is to achieve capital growth from a portfolio of quoted smaller companies in Europe, excluding the United Kingdom.
