When it comes to investment opportunities, smaller companies often present unique growth prospects that larger corporations simply can’t match. The JPMorgan European Discovery Trust plc (LON:JEDT) is a testament to this potential, focusing on European small and mid-cap stocks that have demonstrated impressive long-term performance. In this article, we explore why JEDT is well-positioned to capitalise on the opportunities within Europe’s smaller company universe and why now may be an ideal time to consider investing in them.
Long-Term Success of Smaller Companies
Over the past two decades, smaller companies have consistently outperformed their larger counterparts across major global regions. European small caps, in particular, have delivered approximately 2% higher returns per year compared to large caps since 1999. This seemingly small margin translates into a substantial cumulative outperformance of 16 percentage points, underlining the resilience and growth potential of this segment.
But what makes smaller companies so attractive? One of their key advantages is the ability to grow faster than larger organisations. After all, doubling a €1 billion revenue is much more achievable than doubling €100 billion. Moreover, smaller firms tend to be innovative, nimble, and responsive to market changes—qualities that contribute to their overall success.
While investing in smaller companies can carry higher risks, the portfolio managers at JEDT rely on active management to monitor and adjust their positions, seeking to mitigate risks while enhancing growth opportunities. This strategy, they believe, allows investors to benefit from the dynamic world of small caps while keeping risks in check.
An Attractive Environment for Takeovers
Another attractive aspect of investing in smaller companies is their appeal to larger corporations and investors, often leading to merger and acquisition (M&A) activity. M&A can benefit shareholders significantly, as takeover offers are typically made at a premium to the current market valuation. This trend has been evident in Europe this year, with two companies in the JEDT portfolio—Kindred and Sabadell—receiving takeover offers. Over the past two decades, these types of takeovers have contributed to the steady outperformance of European small caps over their larger peers.
The relatively low coverage of small caps by market analysts also plays a role in enhancing their appeal. Roughly 70% of European small cap stocks are covered by fewer than five analysts, which gives well-resourced investment teams, like those at JEDT, an opportunity to gain an information advantage in stock selection. This advantage can be crucial when identifying companies with strong growth potential before they capture broader investor interest.
Current Discount Presents an Opportunity
Despite their impressive long-term performance, European smaller companies have underperformed large caps in recent years. Economic factors, such as high inflation, rising interest rates, and cautious consumer confidence, have weighed on this segment. Additionally, the European small cap market tends to have a greater focus on cyclical sectors, which has created a headwind in an environment where large cap technology companies, especially those linked to artificial intelligence, have garnered most investor attention.
This recent underperformance has caused a rare shift: small caps are currently trading at a 20% discount compared to large caps, based on cyclically adjusted price-to-earnings (CAPE) ratios. This is the most significant discount since the global financial crisis of 2008-2009, presenting what the JEDT portfolio managers see as an attractive opportunity for investors. Importantly, they believe that the current economic environment is nowhere near as challenging as that of the GFC era, and they point to three key improvements: growing real wages, likely interest rate cuts by central banks, and signs of recovery in global purchasing managers’ indices (PMIs) for manufacturing.
A Diverse Portfolio Aligned with Key Themes
The JEDT portfolio is thoughtfully diversified, with companies ranging in market capitalisation from €350 million to €10 billion. The average market cap of the trust’s holdings is €3.8 billion, reflecting a focus on mid caps, which have consistently been significant drivers of outperformance.
The portfolio also aligns with several key investment themes, particularly around sustainability and electrification—areas that are central to Europe’s goals of decarbonisation. For instance, JEDT holds Bilfinger, a German industrial services company with a focus on heavy industries, and SPIE, a French company involved in electrification projects like installing electrical cables and HVAC systems. SPIE is currently providing infrastructure support as Germany connects its offshore windfarms to the national grid, a massive project driving growth across related sectors.
JEDT also invests in companies with distinctive business models outside of these themes. CTS Eventim, for example, is the largest online ticketing platform for live events in Europe, benefiting from a highly profitable, incremental margin-driven business. Similarly, Zealand Pharma, a Danish pharmaceutical firm, is developing an innovative weight-loss treatment, while De’Longhi, known for its premium coffee machines, continues to leverage its strong brand presence to expand its market reach.
Experienced Portfolio Management
Earlier this year, a new team of seasoned portfolio managers took the reins at JEDT—Jon Ingram, Jack Featherby, and Jules Bloch, who collectively have 40 years of experience investing in European small caps. Their focus is on stock selection, targeting high-quality companies with strong fundamentals that the trust can hold over the long term. This emphasis on stock picking aligns with the team’s belief that long-term value is best captured through in-depth research and an active management approach.
On a Final Note
The JPMorgan European Discovery Trust plc is strategically positioned to take advantage of the potential within the European small and mid-cap market, focusing on long-term growth while navigating the challenges of the current environment. With experienced portfolio managers at the helm, a commitment to key investment themes, and an approach rooted in active management, JEDT offers an exciting opportunity for investors seeking exposure to the growth potential of smaller companies in Europe. The current valuation discount makes this an especially intriguing time to consider JEDT as part of a well-balanced investment portfolio.
