Jules Bloch, executive director at JPMorgan Asset Management and one of the managers of the JPMorgan European Discovery Trust (LON:JEDT), explains why smaller European companies offer exciting growth opportunities for UK retail investors.
JEDT aims to provide capital growth from a diversified portfolio of high-quality smaller companies in Continental Europe. Investing in Europe’s smaller companies, Bloch explains, provides an opportunity to invest in young, dynamic businesses at the heart of global innovation – including companies with great ideas in established sectors, like retail, finance, consumer durables and engineering.
JPMorgan European Discovery Trust investors
Bloch explains that European small caps have a long history of outperformance, generating double-digit total returns for investors, on average, over the past 25 years. JEDT looks to capture this potential by bringing together around 75 of the very best ideas they can find across Europe’s small and mid-cap universe. As the emphasis is on capital growth rather than income, shareholders should expect the dividend to vary from year to year.
Manager’s response to supplementary questions
Several viewers were keen to understand how the trust is approaching AI?
‘This is a tricky question’, accepts Bloch. As a team, we have never experienced such disruption… the technology is changing the world, he explains. But valuations are elevated and while there’s an argument that it is ‘different this time’, it seldom is. The trust has a few small AI stock positions, and we are actively managing their risk profile.
Bloch also talks about seeing companies benefiting from using AI, and he uses France-listed Edenred (EPA:EDEN) as a good example of using AI to solve long-standing issues among its smaller and medium-sized customer base. Bloch also talks about aviation industry production improvements that portfolio companies have experienced by using AI.
Why European small caps now?
Bloch had explained various catalysts, not least economic stimulus in markets like Germany, and he goes into further detail of why domestic companies will benefit more from these factors. But Bloch also addresses valuations in Europe, going into detail about the relative cheapness versus history of small caps, and Europe versus US stocks. He talks through elevated PE and CAPE (cyclically adjusted price earnings) valuations in the US, partly because of AI excitement, and that hasn’t really filtered through to the European small caps space.
Where do you see the best opportunities right now in the European small caps space, and why do you like Financials?
Financials have already performed very well, and we have had to sell down some of our sector holdings as their relative size made them ‘too big’ and less suitable for our small caps remit. But other opportunities have emerged, Banks for example. ‘Banks have been uninvestable since the financial crisis (2008/9) because interest rates were close to zero.’ That has changed in recent years creating opportunities that did not exist before, in our opinion. Industrials and Infrastructure are other areas where we see cyclical opportunities, Bloch explains.
How many of the top European small cap performers (Slide 8) has the trust been exposed to over the past five years?
‘That’s a good question… we still own Reply (BIT:REY), an IT services company in Italy, a stock that has already gone up 70-times and is still performing well.’ Bloch explains the pervading narrative that IT consultancies will be net losers from AI, but the Trust’s conversations with several smaller specialists suggest that clients still need help.
‘It’s not so easy to set up your own LLM, to structure the data, so they’re seeing more clients coming to IT consultancies’ for AI project assistance, a theme echoed by global IT consultancies like Accenture and Cap Gemini.
Note to Sharesify users: We apologise for the heavy shadowing on the latter part of Steven Frazer’s video feed. This was because this ‘live’ webinar was recorded just ahead of, and during sunset, and as the external lighting changed, we were unable to adjust our internal lighting to compensate. We will endeavour to account for this on future ‘live’ online events.
