Transcript
Speaker: Welcome to the Uncovering Trusts, a podcast by Edison Group. I am your host, Neil Shah, and today I'm joined by Milos Papps, Director Investment Company Content at Edison, who will talk about JPMorgan European Discovery Trust, ticker J-E-D-T. Milos, thank you for joining us today. Thanks, Neil. and Great to be here.
Speaker: We recently published a review on the company. There seems to be a lot going on with the relatively new management team, improving performance and a European small cap market that has been out of favor for a while. ah Before we get into the details, can you start with a quick introduction to the trust and why it may be interest of interest to investors?
Speaker: Yes, of course. JPMorgan European Discovery Trust is a UK-listed investment trust that invests in European smaller companies, excluding the UK, with the aim of delivering long-term capital growth.
Speaker: The portfolio is fairly broad, typically having 60 to 90 holdings, and the benchmark is the MSCI Europe X UK Small Cap Index. ah I think there are two main reasons why investors should consider the trust. First, um European small cap stocks have been, as you already pointed out, out of favor, despite historically having been one of the best performing equity asset classes.
Speaker: In aggregate, European small cap companies have historically grown around two to three percentage points per year faster than their larger peers, ah which leads to a greater compound value effect of the long term.
Speaker: Second, the trust performance has improved under the new management team, which has been in place since the start of March 2024. So can you tell us a little bit mark more about who the new managers are?
Speaker: Yes, the team is John Ingram, Jack Federby and Jules Bloch, who are part of J.P. Morgan Asset Management's European small and mid-cap team. um The managers have clearly defined have a clearly defined investment philosophy. um They seek hidden gems as they believe that attractive valued, high quality stocks with positive with positive momentum outperform market. These are companies that can compound and potentially become the large high quality European businesses of the future.
Speaker: um The managers know that a meaningful share of long-term small-cap equity returns tend to come from a very few standout with us. So the key is to identify those businesses early, um then hold them for the long-term as their value compounds. So i mean I'm intrigued. So how do the managers identify hidden gems?
Speaker: Yeah, so essentially the managers consider three questions when evaluating potential hidden gems. but Firstly, is it a good business? Secondly, is it attractive and valued? And finally, is the outlook improving?
Speaker: um In practice, they combine quantitative screening using JPMorgan's proprietary data-driven insights, um ranking companies on valuation, quality and momentum with ah fundamental research.
Speaker: They also utilize JPMorgan's broader research resources, including its proprietary risk system, Spectrum, which provides a live view of the Trust's active risk in multiple ways.
Speaker: And what changes have been made in the way the trust is managed? Yes, and the number of holdings has increased towards the high end of the 60 to 90 stock range I mentioned, um thereby reducing single stock risk.
Speaker: Well, unsurprisingly, the top 10 concentration declined by around 5 percentage points over the last year. And the maximum active stock weight has reduced as well from around 3% to about 2%.
Speaker: um exposure to macroeconomic risk has been reduced while there has been an increased focus on bottom-up stock selection targeting companies driven by idiosyncratic stock-specific factors.
Speaker: Okay, and so now what about the investment backdrop? What are the managers' perspectives on the current environment? and The managers are very positive on the prospects for European small cap stocks. um They describe what they see as a double discount. um Europe looks attractively valued compared to the US market that appears stretched and where market leadership has been very narrow.
Speaker: And within Europe, small caps are trading at an unusually large discount to large cap stocks, despite typically having better growth characteristics. um The managers also note that the last time European small caps were were this inexpensive relative to large caps was around the year 2000 and the following five years saw significant outperformance from small cap stocks.
Speaker: Okay, we're always looking for catalysts. What do you think could chi cause a change in Centrum? Well, the managers suggest that the catalyst could be German fiscal stimulus with around 1 trillion euros planned in areas including infrastructure, defence and electricity grid.
Speaker: ah They see this as potentially very supportive for domestically exposed smaller companies. um Also, an improvement in the geopolitical outlook, specifically a potential resolution to the war in Ukraine, could lift investor sentiment.
Speaker: The managers know that ah when there has been increased news flow around the possibility of peace, small caps have tended to outperform. Thank you for the overview of the trust and the investment backdrop. um Can we now learn a little bit more about the actual portfolio?
Speaker: Of course. ah The portfolio provides exposure to several structural themes, including digitalization, decarbonization and healthcare innovation. ah The managers also like companies that can grow via disciplined M&A.
Speaker: And what recent portfolio activity has there been? The managers have been taking profits on some of the strong 2025 performers, including defense-related names that may come under pressure if there were a peace deal in Ukraine, such as Altsheim Group and Indra Systemas. They also reduced Bilfinger.
Speaker: It is a company that could benefit from the German fiscal package, but the timing of this is well uncertain, and also the company's shares had already priced in a lot of good news, making its valuation less attractive.
Speaker: Questions about the impact of AI on company business models also prompted some holdings to be trimmed, such as Reply and Scout24. In terms of portfolio exit c ex exits, CTS Eventim was sold largely on e valuation grounds and concerns about the life promotion part of the business.
Speaker: Also, the long-term holding in Bonsu Port was sold. The company is still growing strongly, but its valuation did not leave much room for disappointment. um There is a new holding in Tecnica Reunidas, which is a Spanish engineering and construction business focused on the energy sector. Historically, it was a low-margin cyclical company, but it now has a more profitable back backlog linked to LNG, decarbonization and carbon capture.
Speaker: and Growth expectations have increased as Middle East customers push for faster project completions. Okay. Now let's move on to the trust performance. How are things progressing with the new management team?
Speaker: um There is a notable improvement on the performance front. The last company report was for H1 2026, ending the 30th of September 2025, where the Trust delivered an NAV total the return of 20.7% and a share price total return of 21%.
Speaker: This ah compared favorably with the 15.4% total return for the MSCI Europe X UK small-camp benchmark. um Looking at the Trust's relative performance at the end of 2025, it had outperformed its benchmark um over the last one and three years. There are now just three funds in the AIC European smaller company sector and the Trust's NAV total return ranks first over the last one and three years, second over the last five years and third over the last decade.
Speaker: Have you any examples of stock-specific contributors to this performance? Yeah, so during 2025, some of the largest positive positive contributors were linked to the German fiscal stimulus, as we've just discussed, um as well as benefiting from the spending industrial services business. Bill Finger has other performance drivers. It is a margin improvement story as a new management team. They invested a poorly performing construction business to refocus the company on industrial services.
Speaker: Altzkemp Group is a chemical company with two main businesses, which are both performing well. um The first is creatine production. um Creatine is consumed to build muscle and improve recovery after the sports, which is in high demand. There are many new product introductions containing creatine and Altschem, the only Western producer, has the highest quality ingredient.
Speaker: um The company also produces nitroguanidine, which is used as a propellant for NATO ammunitions. Another contributor was L'Automatica, the leading gambling franchise in Italy, and the company had the foresight to realize the industry's futures online. Hence, the company has a high margin, strong and growing online business.
Speaker: Also, changing Italian regulatory frameworks are increasing the costs of doing business, which is prohibited for smaller operators, so the company is gaining market share. Looking at some of the stocks that detracted from the trust performance in 2025, there is a negative theme with the US Trump administration cancelling grants for clean energy projects. Arcadis is a consulting business specialising in environmental projects. It has a large US exposure which has been heard by transactions, so growth has slowed.
Speaker: Then, NexSense is a global leader in the high voltage cables um needed to modernise electricity grids and connect to renewable energy sources. And then Fulgru operates in the offshore wind sector and has suffered from a series of profit warnings as US offshore wind projects have been stopped. The performance improvement ah is encouraging. um Can we now focus on the other features of the trust, starting with the dividend?
Speaker: Sure. um The trust pays an interim and the final dividend, distributing the majority of available revenue to its shareholders. As the trust has a capital growth mandate, the managers are not forced to deliver some level of income, which may be at the expense of capital growth.
Speaker: And what about the discount? ah The Trust's share price discount to Kamen, Kamen AV has been in a narrowing trend since mid-2023, and the current 5.6% discount at the time of recording this episode is narrower than its historical averages.
Speaker: ah This could be due to an increased appetite for European equities or perhaps a greater appreciation of better performance since the new managers came on board. um The board actively monitors the discount and, where appropriate, repurchases shares to minimize short-term volatility and so the absolute level of the discount.
Speaker: During FY25, around 10% of the share base was bought back, the cost of around £70 million, pounds at an average 9.8% discount.
Speaker: And share repurchases have continued in FY26. Okay. okay um a Final question. Does the trust use gearing? ah The board believes gearing can be beneficial to performance and is a long-term driver of returns, as markets tend to appreciate over time. um Gearing is an investment decision made by the managers rather than a board decision. um Despite the managers' positive outlook for European small cap equities, they are mindful of market risk given the high valuation of US stocks and US dominance in global indices. Hence, the trust gearing is well below the primitive 20% level.
Speaker: ah Thank you very much, Milos. It's a really good, interesting rundown with a positive self-help story at what could be a really opportune time to consider allocations to European small cap stocks. Thanks very much.
Speaker: Thanks, Neil. You've been listening to Uncovering Trust, a podcast by the Edison Group. For more information on JPMorgan European Discovery Trust and other investment companies we cover, please visit www.edisongroup.com.
