Despite the gloomy moody music that has prevailed in recent years, Europe remains one of the world’s wealthiest regions. And the continent is home to some of the globe’s strongest, most resilient companies.
Europe remains vulnerable to energy price shocks, as the conflicts in Ukraine and the Middle East illustrate. And the threat from rising inflation hasn’t gone away. However, strong flows into European equities demonstrate a positive shift in overall investor sentiment towards the continent.
Even after a period of strong performance, European equity valuations remain attractive. And the key drivers behind Europe’s resurgence have further to run. These range from higher defence spending to an improvement in the quality of banking to the electrification of the economy.
When UK investors think of Europe, names such as Dutch chip equipment manufacturer ASML (AMS:ASML), French cosmetics giant L’Oreal (EPA:OR), or Danish weight-loss drug maker Novo Nordisk (CPH:NOVO) spring to mind. These European champions are great companies. But they have already been largely discovered by investors.
There is also a case to be made that their most exciting growth years are behind them. And that is precisely why growth-focused investors shouldn’t ignore the European smaller companies sector.
Elephants don’t gallop
This is an overlooked part of the stock market that plays host to many ‘hidden gems’ with the potential to become the European champions of tomorrow. And as legendary British investor Jim Slater once put it: ‘Elephants don’t gallop. To double the earnings of a £10 billion company takes years of hard work. To double a very small company is a much easier task.’
Small caps tend to be nimbler than large caps. Their flatter management structures enable them to capitalise more quickly on new opportunities. Investors in this part of the market should also benefit from the so-called ‘small cap effect’ – the proven long-term outperformance of smaller companies versus their large cap peers.
Bulls of European small caps argue this is a compelling entry point for growth and value-seeking investors. European small cap valuations remain attractive relative to their larger peers. This valuation gap, combined with increasing interest from private equity and strategic buyers, should increase M&A activity in the space. In turn, this should boost the net asset values (NAV) of the specialist funds investing in the space.
Buy the double discount
Investors seeking professionally-managed exposure to the asset class should consider the Association of Investment Companies’ European Smaller Companies sector. Why is this? Well, the closed-ended structure of investment trusts makes them especially well-suited to investing in small caps, which are often illiquid.
Unlike open-ended funds, trusts are not forced sellers in periods of outflows. And this allows their managers to take a long-term view and hold more illiquid positions without the pressure of redemptions.
All three dedicated European small cap trusts have seen their discounts to net asset value (NAV) narrow in recent years. But their share prices continue to trade below the value of their underlying portfolios. And they hold assets that are also discounted by the wider market, which means there is a double discount on offer.
Their portfolios are packed with exciting, and in many instances, cheap companies with exciting growth potential and re-rating scope.
JPMorgan European Discovery Trust
A 7.4% share price discount to NAV on JPMorgan European Discovery Trust (LON:JEDT) shows there is still value on offer at this trust. With roughly £665 million in total assets, JPMorgan European Discovery aims to provide capital growth from a diversified portfolio of high-quality smaller companies in continental Europe.
The fund also has a strong long-term performance record. JPMorgan European Discovery has outperformed the MSCI Europe ex UK Small Cap Index over three, five and 10 years. And Sharesify thinks the fund offers investors a great way to tap into a long overdue rebound in European small caps.
We particularly like the trust’s focus on high-quality companies with resilient business models and attractive long-term growth prospects. Managers Jon Ingram, Jack Featherby and Jules Bloch remain highly optimistic about the prospects for European small caps. They argue the asset class is ‘overdue a resurgence as Europe enters a new phase of investment and growth’.
| Share price: 629p | Discount to NAV: 7.4% |
| Total assets: £664.2 million | Ongoing charge: 0.88% |
Source: The AIC/Morningstar
As the managers argued at the FY26 results in June: ‘Smaller cap companies are uniquely positioned to benefit from the major investment themes playing out in European markets, as a result of their strong domestic focus and agility in adapting to changing market conditions.’
As at 30 June 2026, the top 10 included Glanbia (LON:GLB), the Kilkenny-headquartered ‘better nutrition’ company, and Scandinavian financial services company Storebrand (FRA:SKT). JPMorgan European Discovery also offers exposure to turbocharging-to-fuel injection leader Accelleron (SWX:ACLN) and Denmark’s AL Sydbank (CPH:ALSYDB).
The European Smaller Companies Trust
Measured by share price total return, the sector’s best one, three and 10-year performer is The European Smaller Companies Trust (LON:ESCT). Managed by Janus Henderson Investors’ Ollie Beckett, Rory Stokes and Julia Scheufler, European Smaller Companies boasts a strong long-term track record.
We also like the fact the trust is reassuringly diversified across 125 holdings, which limits single-stock risk. Lead manager Beckett and his team find opportunities across the business cycle from early-stage growth to mature compounders and turnaround situations.
| Share price: 236p | Discount to NAV: 9.2% |
| Total assets: £967 million | Ongoing charge: 0.68% |
Source: The AIC/Morningstar
Income investors should note the trust pays an enhanced dividend. Set each year at 5% of NAV and paid quarterly, it leaves the managers free to focus on generating capital growth. To keep the NAV discount in check, the board deploys a three-yearly continuation vote, a performance-related tender offer every three years and a share buyback that targets a single-digit discount.
European Smaller Companies’ top 10 includes Swedish listed podcast platform Acast (STO:ACAST), which helps host, distribute and monetise podcasts through advanced advertising technology. Other notable positions include Dortmund-based Elmos Semiconductor (ETR:ELG) and Dutch wealth manager Van Lanschot Kempen (AMS: VLK). Trading at a 9.2% discount to NAV, European Smaller Companies carries the lowest ongoing charges of the trio at 0.68%.
Montanaro European Smaller Companies Trust
On a one-year view, Monatanro European Smaller Companies Trust (LON:MTE) is the performance laggard in the sector. However since launch in 2006, the trust’s share price and NAV have both comfortably outperformed the benchmark.
And we think sentiment towards Montanaro European Smaller Companies should recover once the quality growth style swings back into fashion. Manager George Cooke seeks to handpick the very best of Europe’s smaller companies and his investment process has remained unchanged for years. Basically, he invests in well managed, high quality, growing companies and buys them on sensible valuations.
Cooke and co-manager Stefan Fischerfeier conduct thorough research. This includes detailed company analysis and wearing out the shoe leather via site visits. The managers also integrate ESG fully into company analysis and take a conservative approach to valuation.
| Share price: 174.5p | Discount to NAV: 8% |
| Total assets: £228.3 million | Ongoing charge: 1% |
Source: The AIC/Morningstar
For 2026, the portfolio’s forecast earnings per share growth is an impressive 30.5%. Top country allocations are to Sweden, Italy, Germany and Switzerland. Top 10 positions include Technoprobe (BIT:TPRO), an Italian manufacturer of probe cards used in semiconductor testing. And Kitron (FRA:KP5), a Scandinavian electronics manufacturer seeing strong demand from defence and data centre customers.
The trust also offers exposure to the fortunes of Brembo (BIT:BRE), an Italian manufacturer of braking systems. Another interesting position is Plejd (FRA:3CA), a Swedish developer of smart lighting and electrical products sold primarily to professional electricians.
| 1-year share price total return (%) | 5-year share price total return (%) | 10-year share price total return (%) | |
| European Smaller Companies | 13.45 | 53.82 | 263.39 |
| JPMorgan European Discovery | 9.38 | 36.45 | 158.52 |
| Montanaro European Smaller Companies | -0.86 | -8.38 | 215.23 |
Source: The AIC/Morningstar
