JPMorgan European Discovery Trust recent strong returns reflect the portfolio managers’ focus on the potential for individual stocks to grow their earnings and increase their share prices over time. This investment process works well for European small cap companies, many of which are niche businesses that can thrive domestically, even in an uncertain macroeconomic environment.
Small companies grow faster
Small companies can grow faster than large companies simply because they are starting from a smaller base. A good example in the JEDT portfolio is Puuilo*, a Finnish retailer seeking to grow its revenues by doubling its stores from 40 to 80 in the next five years. For a smaller retailer like Puuilo, that pace of growth would mean opening one store every two months; for a giant retailer like Walmart, it would have to open eight stores per day.
With this advantage, smaller companies have grown their earnings faster than large companies by more than 2% per year, on average, for the past few decades. The compounding effect is enormous and underpins the cumulative outperformance of European small caps vs. most other major asset classes since 2000.
In addition to this structural growth story, European small caps have potential to benefit from Germany’s massive fiscal spending. The largest economy in continental Europe will spend an additional one trillion euros in the next decade, including 500 billion just on infrastructure and defense. Much of this spending will likely benefit smaller businesses that are more geared to the European economy—a theme that is already playing out in the portfolio’s recent strong performance.
Valuations at a “double discount”
While the growth story for European small caps is compelling, the market is also currently trading at a rare “double discount”. First, the European equity market continues to have a wider-than-usual discount to the US market. In addition—and highly unusually—European small caps are currently trading at a discount to European large caps. Typically, small caps trade at a premium to large caps because they're growing faster, which makes current valuations particularly compelling.
However, the JEDT portfolio managers know that attractive valuations are not enough to drive share prices higher, so they also focus on buying stocks once the outlook improves. JEDT’s holding in the Italian bank BPER Banca* is a good example of how stronger earnings growth and an improving outlook can drive a stock to re-rate to a higher valuation. The portfolio managers initiated a position in the bank three years ago when the stock was trading at five times earnings. That extremely low valuation reflected investor sentiment since the 2008 global financial crisis that banks were structurally bad businesses. In reality, banks were suffering from 0% interest rates and once rates began to normalise, BPER Banca started beating expectations by a significant margin. With earnings growth and a re-rating, the stock tripled in value and JEDT exited the position when the market cap reached EUR 10 billion.
Key sectors: Technology, industrials and health care
Looking at past winners in the portfolio, 80% have come from the technology, industrials or health care sectors. These sectors remain high priorities for the JEDT portfolio managers and continue to drive performance in the current portfolio.
Among the largest contributors to JEDT’s returns over the past 12 months through 28 February 2026 were: Bilfinger*, a German industrial services company; Tecnicas Reunidas*, a Spanish engineering company focused on the oil and gas sector and power infrastructure; and Koninklijke Heijmans*, a Dutch construction company. Bilfinger had been a poorly managed company with a lot of construction exposure. The new management team has refocused the company on the high-margin industrial services business and is now a major beneficiary of the German fiscal stimulus from the company’s high infrastructure exposure. Tecnicas* has a massive pipeline of projects, and has a margin that has increased from around 2.5% to 5%, leading to rapid earnings growth. JEDT took a position in the stock when the valuation was very low, so the combination of growth, value and momentum have all contributed to performance. The position in Heijmans reflects a similar margin improvement and valuation re-rating story.
Looking through macro uncertainty
Markets are currently reflecting several themes contributing to uncertainty, including conflict in the Middle East and concerns about the impact of AI on some businesses. The portfolio managers believe that many of the long-term trends JEDT has exposure to, such as a relocalisation of supply chains in Europe, and improving domestic growth due to German fiscal stimulus and decarbonisation, remain intact.
Kitron, a Norwegian electronic manufacturing services business, and Alzchem*, a German chemicals company, both have high exposure to the defense industry in Europe. Kitron had already been benefiting from the relocalisation of supply chains and is now seeing strong growth in its defense business. Alzchem has two key products: Creatine, which is used in sports recovery and building muscle, and Nitroguanidine, a propellant used in ammunition.
Higher oil prices might actually help businesses tied to decarbonisation, but in the meantime the portfolio also has a position in Saipem, an Italian oilfield services company, which is benefiting from the sharp oil price rise, supported by an inexpensive valuation and improving operations and margins.
At the same time, some strong businesses are facing headwinds and the portfolio managers must assess whether the impacts are likely to be temporary or longer term. For example, Gategroup*, an airline catering business, has been gaining market share and growing its business but has exposure to the Middle East, where air travel has been severely impacted. Similarly, two software stocks in the portfolio, Innocripta* and Temenos*, have declined on concerns that AI will have a negative impact despite both businesses performing well. The portfolio managers continue to engage with these companies to monitor whether the issues they face could prove long-lasting. In the meantime, low valuations help limit the potential for derating and the portfolio managers try to limit macro risk; for example, JEDT is currently underweight software companies.
JEDT’s recent strong returns reflect the portfolio managers’ focus on the potential for individual stocks to grow their earnings and increase their share prices over time. This investment process works well for European small cap companies, many of which are niche businesses that can thrive domestically, even in an uncertain macroeconomic environment.
*The companies above are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell. The portfolio is actively managed. Holdings, sector weights, allocations and leverage, as applicable, are subject to change at the discretion of the investment manager without notice. Past performance is not a reliable indicator of current and future results.
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