The JPMorgan European Discovery Trust plc (JEDT) mines the universe of small cap European stocks for hidden gems—rapidly growing companies with the potential to deliver the returns that have boosted European small cap performance over the last few decades.
The JPMorgan European Discovery Trust plc (JEDT) mines the universe of small cap European stocks for hidden gems—rapidly growing companies with the potential to deliver the extraordinary returns that have boosted European small cap performance over the last few decades.
Small caps that glitter and might turn into gold
Over the last 25 years, European small cap companies have grown about 2% faster than European large caps on an annualised basis. As that growth compounded, it drove outperformance of the MSCI European (ex UK) Small Cap Index vs. the major equity indices over the past 25 years—including the S&P 500 Index and small cap indices in the US and UK.1
A small number of companies with exceptionally high returns have been key to that outperformance: over the past 20 years, more than 50 European small companies experienced greater than a 10x increase in value. The JEDT portfolio managers have identified several common characteristics of these hidden gems. First, these companies produce profitable growth for a long period of time. Second, 80% of the companies are in the technology, industrials or healthcare sectors—home to many high-growth companies.
Mergers and acquisitions (M&A) are another source of growth and value creation for many smaller companies. Small bolt-on acquisitions of highly synergistic businesses can provide growth, while maintaining high returns on invested capital, and help consolidate fragmented markets.
Boost from defence spending and less tarnished by tariffs
Successful small companies in Europe often grow to become national champions in their home markets—and then often stay focused on serving those markets rather than going global.
Indeed, companies in the MSCI Europe Small Cap index, in aggregate, have over 50% of revenue coming from Europe vs. about 30% for the MSCI Europe. Similarly, the European small cap companies have less than 20% of their collective revenues coming from North America vs. roughly 25% for larger European companies.
That combination of geographic exposure leaves smaller European companies well-positioned to benefit from the planned increase in German spending on of infrastructure and defence and less exposed to US tariffs than larger European companies.
Despite the catalyst of increased spending and the buffer of less exposure to the US, European small caps are trading below historical valuations and even at a discount to European large caps vs. the typical premium.
A portfolio of long-term growth with near-term catalysts
JEDT has significant exposure to the near-term and long-term growth potential of European small caps. Bilfinger, a German industrial company, is a large holding and was a top contributor to performance over the past year as new management turned around the business. Going forward the company is well positioned to benefit from Germany’s planned increase in infrastructure and defence spending. Spie, a French electrical installation specialist, is another large active position in the portfolio that is likely to get a boost from infrastructure spending on the European electrical grid. Alzchem, a German specialty chemical manufacturer that is the sole western supplier of a chemical used as a propellant for missiles, may also benefit from a bigger defence budget.
Some industrial companies will participate in the longer-term trend of increasing digitisation. JEDT has a position in Accelleron, a Swiss manufacturer of turbochargers that provide back-up power for data centres. Two German companies in the portfolio, CTS Eventim, an online ticketing platform, and Scout24, a real estate platform, are also well positioned for increasing digitalisation and enjoy the higher margins of online businesses. Lottomatica, an Italian gaming company, has also benefited from this trend and was a top contributor to JEDT’s returns over the past year.
Healthcare innovation is another driver of growth for many from small companies. The portfolio has positions in RaySearch, a software company that helps find the optimal level of radiation for patients being treated for cancer, and Bonesupport, a maker of bone cement that incorporates antibiotics, reducing surgical and recovery time.
Review and outlook
JEDT outperformed the MSCI Europe ex UK Small Cap Index (Net) by more than 9% over the past year ending 30 June 2025. Importantly, stock selection drove the outperformance. Areas where the portfolio underperformed the benchmark largely reflected macro themes or sector positioning.
The macro environment remains dynamic and volatile. The portfolio managers have modestly increased the number of stocks in the portfolio to the higher end of the 60 to 90 range in an effort to mitigate increased headline risk. In this environment, European investors have been repatriating assets from the US to Europe and the JEDT portfolio managers are seeing more interest in Europe than in recent years, especially in small cap stocks. Flows back into European stocks could be provide a meaningful tailwind—even if it’s just a fraction of the hundreds of billions of euros that left the European market over the last decade.
In the meantime, JEDT offers access to leading small cap European companies exposed to long-term structural growth trends and near-term catalysts.