JPMorgan European Smaller Companies (JESC) aims to provide capital growth from a portfolio of smaller companies in developed Europe, excluding the UK. The £700m trust (in net asset terms), is managed by Francesco Conte and Edward Greaves who have a unique approach to narrowing down their 1000+ universe of companies, using a combination of qualitative and quantitative methods. The managers’ analysis helps them recognise and compare three key characteristics for new investment ideas: quality, momentum and value. Companies they select do not need to score perfectly on all three characteristics, but the resulting portfolio is expected to have a positive tilt to all three. The managers believe that their approach improves risk-adjusted returns, and enables them to outperform through the different stages of cycles (e.g. during growth rallies but also at times when value comes back into favour). JESC has a strong track record of outperforming the benchmark EMIX Smaller European Companies, and has done so in three out of the past five calendar years. Performance over the past year has been slightly more subdued, largely due to the continued political uncertainty in Europe. This has resulted in the trust spending most of the last year trading at a double-digit discount (12.5% as at 2 January 2020), which offers a potentially attractive entry point for investors looking to access some of the unique smaller companies in developed Europe.
Companies: JPMorgan European Smaller Cos Trust
As with most people, we are sick of discussing Brexit’s endless possible scenarios and how it might impact equity markets. The outlook is forever shifting, the large majority of “information” being pure conjecture. Nevertheless, the political and economic backdrop means that Europe is now one of the most out of favour investment regions. In the open ended IA sector, Q3 and Q4 of last year saw total outflows of -£1.6bn in Europe, relative to the US and Global sectors which saw inflows of £289m and £114m respectively. Only the UK saw greater outflows. The discounts on closed-ended funds also suggest an out-of-favour asset class. As can be seen below, relative to both historical averages and global peers, European investment trusts are good value. In fact, Europe is even more out of favour than the UK, judging by discounts.
Companies: HNE BRGS TRG FEV JESC
JPMorgan European Smaller Companies (JESC) aims to provide capital growth from a diversified portfolio of smaller companies in developed Europe, excluding the UK. The £667m trust (in net asset terms), is managed by Francesco Conte and Edward Greaves and utilises a high-conviction, bottom up, stock picking approach. The team focus on three key characteristics when conducting fundamental analysis on new investment ideas; quality, momentum and value. Companies they select do not need to score well on all three characteristics, but the overall portfolio should have a positive tilt to all three. Over the longer term the trust boasts a strong track record. Over the past five years to 17th April 2019 for example, according to Morningstar the trust has delivered NAV returns of 70.7%, considerably greater than the benchmark EMIX Smaller European Companies index (52.4%) and the AIC European Smallers peer group (62%). Comparing the trust to open-ended peers in the IA OE European Smaller companies sector, it has also done a good job, outperforming the IA sector average by more than 11%. More recently, as economic lead indicators deteriorated through 2018, the managers tilted the portfolio towards more defensive stocks, and de-geared. This led the managers to hold as much as 3.5% net cash in Q4 of 2018. Initially this helped them outperform a falling market at the start of Q4, but in retrospect they were too early to buy back into a falling market, which meant that overall they marginally underperformed the benchmark in a more volatile year. Despite the strong long-term track record, the discount remains wide in absolute terms, but also relative to peers, and currently sits at around 14%.
JPMorgan European Smaller Companies investment trust aims to provide capital growth from a diversified portfolio of smaller companies in developed Europe, excluding the UK. It is managed through a high-conviction, stockpicking approach which has delivered impressive results over the 20 years that Francesco Conte has been at the helm. The trust is comfortably the largest and is one of the most liquid in the AIC European Smaller Companies sector, with a market cap of close to £600m. Fund managers Francesco Conte and Edward Greaves have consistently delivered high levels of alpha over one, three and five years. In comparison to the much larger IA Europe ex UK sector, the trust sits in the middle of the pack in alpha and returns over the short and long term. Bucking their historic trend, the managers have outperformed in the current period of volatility in markets. YTD, the trust is outperforming the benchmark and its IA and AIC peers thanks to Francesco and Edward having aggressively shifted the portfolio towards a more defensive stance during the summer. Overall, the managers remain benchmark agnostic, with sector and regional allocation driven by their stockpicking. The managers search for three key characteristics among companies; quality, momentum and value. Holdings often move from the value category to the momentum category but must be considered “good quality” throughout. Last summer, the managers moved away from cyclical stocks and shifted to a more defensive positioning. This now means that pharmaceuticals (+6.4%), oil equipment, services and distribution (+5.2%) and health care equipment and services (4.8%) are the largest overweights within the portfolio. At a stock level they are invested in companies that are macro-agnostic, and less dependent on overall country GDP. The trust saw its discount narrow during 2017 but so far in 2018 the discount has widened significantly from -5.7% on the 1st of January to -13.5% on the 12th of November. This movement echoes the entire AIC European Smallers sector, where the current average is -11.2%, and reflects troubled sentiment toward the region as a whole. Looking past short term noise, however, the managers are positive about the outlook, and see plenty of exciting opportunities in European markets.
Edison Investment Research is terminating coverage on JPMorgan European Smaller Companies Trust (JESC). Please note you should no longer rely on any previous research or estimates for this company. All forecasts should now be considered redundant.
JPMorgan European Smaller Companies Trust (JESC) aims to generate long-term capital growth from a portfolio of high-quality, reasonably valued, small-cap European equities. While the European stock market, in keeping with global markets, has been more volatile year to date compared with the abnormally low levels of volatility in 2017, the managers believe that there is potential for further upside. They cite an improving European and global economy, low inflation and a benign interest rate environment, which is supportive for corporate earnings growth. JESC has a very strong investment track record, outperforming the EMIX Smaller Europe ex-UK index over the last one, three, five and 10 years. The trust currently offers a 1.7% dividend yield.
Fresh news from the Quirinal Palace on Saturday – with the Italian president effectively vetoing the government put forward by the anti-establishment Five Star Movement and the far-right League – has put Italy, and the future cohesion of the Eurozone, in the spotlight once again. Stocks and bonds were already under pressure before the announcement that the coalition’s preferred candidate for finance minister – Paulo Savona – had been rejected by the president, who put forward instead Carlo Cottarelli, a former IMF official, who some argue plays into populists’ hands as another example of the Italian establishment’s thrall to Brussels. The League and the Five Star Movement have previously called for Italy’s withdrawal from the Euro and both support policies which would ride roughshod over eurozone rules on budget deficits. The danger is that, by appearing to pander to Brussels, the president’s action on Saturday may backfire – fomenting even greater populist feeling among a population already deeply resentful of EU ‘meddling’. While this may seem like a return to form for the troubled Union after an uncharacteristically smooth patch, we think a sanguine approach makes sense. Italian politics works on compromise and backtracking, and the coalition documents suggest an exit from the euro is not on the cards. In fact, with the economic environment in Europe generally positive, any volatility in Europe generated by the headlines surrounding Italy could throw up some interesting opportunities. Viewed with a cooler head, little has changed in Europe since the weekend and the environment of low inflation and cheap money looks set to remain dominant. Unprecedentedly loose monetary policy from the ECB remains firmly in place, and the debate continues over whether the eurozone economy will be strong enough to allow policymakers to end the QE programme in September. President of the ECB, Mario Draghi, has recently announced that the interest rates on refinancing and on lending would remain unchanged at 0 per cent and 0.25 per cent respectively for the foreseeable future, providing technical support for European stock markets.
Companies: HNE JESC BRGE BEE JEO
JPMorgan European Smaller Companies investment trust aims to provide capital growth from a diversified portfolio of smaller companies in developed Europe, excluding the UK, via a highconviction, stockpicking approach which has generated proven results. Fund managers Francesco Conte and Edward Greaves delivered more alpha (a quantitative measure which shows the value a manager has added above the returns generated by the market itself) than any of their peers in the AIC Europe or AIC European Smaller Companies sector over one, three and five years and are among the top three in each of these periods versus their closed-end peers and their rivals in the much larger IA Europe ex UK sector. The trust is the second best performing vehicle among 124 funds in the AIC Europe, European Smaller Companies and IA Europe sectors over five years to the end of December 2017, having generated NAV total returns of 174%. The managers are bullish on the outlook for Europe – citing the dominance of export led companies on the continent, still reasonable valuations, and the overwhelming strength of the figures coming from the global PMI for manufacturing. It is the largest trust in the AIC European Smaller Companies sector, with a market cap of £605m, giving its shares solid liquidity, and the managers place a high emphasis on the free float of companies in which they invest, avoiding those that might become liquidity traps. When we last met the managers (July 2017) they had taken some money off the table, in anticipation of the drawdown which usually occurs among European equities at some point during a typical summer, but since September they have redeployed that cash and geared up to reflect their bullish outlook. The trust has seen its discount halved since the start of 2017 and now stands at around 8%. While there is no guarantee that this trend will continue, over the last ten years the trust has tended to see its share price race ahead of its NAV when the underlying index (Euromoney European Smaller Companies ex UK) has been in positive territory.
Active fund management has come under increased scrutiny over recent times, with a greater availability of passively managed tracker funds and a keen eye on cost have all meant groups have had to justify their fees on a consistent basis. The argument surrounding active versus passive is rather tedious, given the definitive question of ‘which is better’ will never be answered. Given you won’t find a passively managed fund in the UK-listed investment trust space, we obviously predominately focus on active management – but we fully appreciate the benefits of index trackers, exchange-traded funds and other passive offerings for certain investors. Nevertheless, our take on the debate is that while many active funds will underperform, certain managers/strategies have proven, time and time again, that they can add value. As such, while identifying a manager who can consistently outperform is challenging, but our research shows that – with the considerable caveat that the past is no guide to future returns – there are certain sectors/regions that have been more suited to an active approach that others. As we discuss below, and using rolling five-year periods for the past 25 years, we illustrate that trusts in the European sector have been the most consistent in beating equity indices across all of the major AIC and IA sectors. Again, it is worth noting that this is a review of active manager performance, not a prediction of what might happen in the future.
Companies: JEO BRGS JESC
JPMorgan European Smaller Companies Trust (JESC) was launched in 1990 and aims to generate long-term capital growth from a diversified portfolio of small-cap European equities. The investment process involves screening the c 1,500 company universe to construct a relatively concentrated portfolio of 50-75 positions in firms with positive fundamentals and reasonable valuations. JESC has a very good investment track record, outperforming its benchmark over one, three, five and 10 years. It has also performed strongly versus the average of its four peers, ranking second over one, three and five years and first over the last 10 years, where its NAV total return is 23.6pp higher than its closest peer.
JPMorgan European Smaller Companies Trust (JESC) aims to generate long-term capital growth from a portfolio of European (ex-UK) small-cap equities. Despite a period of underperformance versus the Euromoney Smaller Europe ex-UK benchmark in 2016 due to conservative portfolio positioning, JESC’s longer-term performance record remains intact. It has outperformed the benchmark over three, five and 10 years. The managers believe that the European economic backdrop is favourable, political risk has been reduced and they are finding plenty of investment opportunities, across a range of industries, including companies that are adapting in a period of rapid technological change.
JPMorgan European Smaller Companies Trust (JESC) is managed by a dedicated, highly experienced, three-man team. The ‘best ideas’ portfolio, which generally comprises 60-80 holdings, currently numbers 63. Stocks are selected on a bottom-up basis from a universe of c 1,000 companies, which constitute the Euromoney Smaller Companies ex-UK index, the trust’s benchmark. Long-term performance has been strong, as evidenced by its 10- and 20-year NAV and share price returns, which comfortably outstrip the benchmark and the MSCI Europe ex-UK index.
JPMorgan European Smaller Companies Trust (JESC) is a relatively concentrated portfolio of 60-80 stocks offering the potential for capital growth. The fund has well-established managers: Jim Campbell since 1995 and Franceso Conte since 1998, who draw on their experience to select high-quality companies with strong management teams, with positive stock price and earnings momentum, that they perceive to be undervalued. JESC has outperformed its benchmark over both short- and long-term periods and over 20 years has outperformed its nearest peer by 410pp.
JPMorgan European Smaller Companies Trust (JESC) has a 25-year track record of seeking capital appreciation by investing in smaller Continental European companies. The managers note that the sector competes for investor attention against other high-growth areas such as emerging markets, and the recent sell-off in Asia could underpin investor demand, a trend suggested by the historically low level of discount. Performance has been strong versus the benchmark over both short and longer periods, with a 20-year NAV total return of 1,173% – all of which has been achieved under the long-serving current managers – beating the nearest peer by more than 60%. The managers favour cyclical stocks in the expectation of further economic recovery in Europe, driven by domestic demand.
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AFH interim results have shown resilience in a tough period. Revenues grew by 5% yoy and Adj. EPS is up 8% yoy. We reduce our FY20 EPS forecast by 8% to reflect the wider market falls and slower new business due to the lockdown. This reduction in earnings is significantly less than peers, highlighting the defensive nature of the business and the prudent temporary cost measures being introduced in FY20. The improved FCF of the business should lead to a re-rating, particularly as AFH now trades on 9.3x CY20 P/E, a significant discount to peers. Our reduced target price of 524p implies 81% upside. Re-iterate BUY.
Companies: AFH Financial Group
Much has been written about the effects of the virus on the world and on the stock market. Here is one analyst’s take on some of the likely impacts on the way we should look at companies. This article was originally produced as a blog, “10 Changes Post Virus”, which was published a few weeks ago.
Companies: AGY ARBB ARIX DNL GDR NSF PCA PIN PHNX PHP RE/ RECI STX SCE SIXH TRX SHED VTA
Aside from its FY 19 earnings presentation, British Land has adopted a more cautious anticipation about Offices in the City of London. We share this pessimism and have been surprised by the recent share’s bump. The latter is the opportunity to turn negative, again, and update our divestment case.
Companies: British Land Company
Hipgnosis Songs Fund (SONG LN) has today announced a trading update for the full year ending 31 March 2020. The unaudited NAV has risen 13% YoY to 116.7p, up 14.3% since the last published NAV of 102.2p as at 10 January 2020. This represents a like for like valuation uplift of 11.4%. All equity has been fully deployed and shareholder approval has been sought to increase net debt from 20% to 30%. Revenue is strong with £64.7m generating an EPS of 10.7p (more than 2x the annual 5p dividend target). NAV growth has been driven by revenue statements which were up 2%, and an increase in streaming growth rate assumptions by the independent valuers. The portfolio comprises 54 catalogues, with 13,291 individual songs, now valued at £757m which was acquired at purchase price of £697m on an acquisition multiple of 13.9x – now valued on 15.0x historical earnings.
Companies: Hipgnosis Songs Fund
Ramsdens has reported a strong set of trading results in the last twelve months to March 2020. COVID lockdown has led to store closures, which will lead to weaker trading over the following months. However, Ramsdens has a very solid balance sheet, is diversified and is well positioned to re-open stores and continue its growth. We use an 8x multiple on last 12 months to March 2020 earnings as a reflection of a normalised earnings base which reduces our target price to 162p from 180p. At this target price Ramsdens would trade on a CY20 P/B of 1.5x. This target price offers 15% upside and we re-iterate BUY.
ULR’s finals were in line with on EPRA NAV and earnings a little better than expected. Valuations remain stable and full rent collection has been achieved for the current quarter. We see fundamental quality and resilience in the (now expanded) portfolio – ULR has already invested nearly £100m in the first two months of the new year following the £136m equity raise. We make no material changes to forecasts. Current valuation points to an 7%+ annualised return, with upside remaining from deployment of funding headroom, active management and potential for valuations to improve.
Companies: Urban Logistics REIT
TCS has confirmed it will pay the previously announced interim dividend of 3.25p. A number of mitigating actions to preserve cash ensures that this is affordable. We estimate the £1.7m payment is less than 10% of cash and available facilities, which should be little changed from the April update. Rent collection levels of 75%, or 86% including deferrals, is resilient under the circumstances. There are also optimistic signs from Europe that people will be shopping in material numbers from 15 June. TCS will have all locations safely open from that date. We lower our NAV forecasts c.2%, mostly for the dividend payment, but also for a tougher outlook for CitiPark. Official guidance understandably remains withdrawn. The shares currently price in a c. 30% decline in underlying property values, which we think is excessive. On this basis, we see upside to the share price, setting it at 235p, still a c. 25% discount to NAV while short-term visibility is low. BUY
Companies: Town Centre Securities
Burford has announced its results for 2019. As previously indicated, these were lower than in the previous year. Revenue fell 17% from $430m in 2018 to $357m. Profit after tax, on Burford’s basis, declined 31% from $329m to $226m. As announced earlier, there will be no final dividend so only the interim dividend of ¢4.17 was paid for FY19. Unusually, Burford has also released a trading update for early 2020 alongside its main figures. Court results and arbitral awards have been obtained that would generate some healthy profits. Most notable is $200m in income ($300m in cash receipts) regarding which further legal review is unlikely.
Companies: Burford Capital
The covid-19 pandemic has had a devastating effect on the share price of property companies, with 31% wiped off the value of their total market capitalisation during the first quarter of 2020.
Companies: AEWU CREI CSH BOOT INL HLCL THRL SUPR RESI RGL DIGS GR1T SOHO PHP BOXE ASLI UTG AGR UAI BLND UANC CAL SHED CWD WHR EPIC WKP GRI YEW HMSO PCA INTU NRR
Today’s FY update reports that the decisive action taken at the outset of the COVID crisis has protected returns. Revenues held up through to the May year end. Aided by cost savings, adj. EBITDA is expected to be 20% ahead. We expect a more modest final dividend to protect the capital surplus. Additional savings have been outlined, which we overlay on a conservative “flat market/fewer new clients” scenario for FY21e – where we hope outperformance is possible. Updating EPS forecasts: FY20e +25%, FY21e -10% and FY22e -7%; also incorporating the Hurley Partners acquisition (+8%). We consider MW a high quality core holding with long term potential.
Companies: Mattioli Woods
Tetragon Financial Group (TFG, Tetragon) achieved a 13.6% NAV/share total return and a 13.4% ROE in FY19, in line with its long-term target of 10–15%. The main driver of Tetragon’s performance was its asset management business (TFG Asset Management), which comprises managers with a total AUM attributable to Tetragon of US$27.4bn and generated an EBITDA of US$59.5m in FY19 (up 51% y-o-y). The late-2019 investment activity left Tetragon with a relatively low net cash position (4.1% of NAV at end-April). The shares trade at a three-year average discount to NAV of 44% (currently at 62.7%), which is relatively wide compared to peers given the company’s track record of delivering a 16% NAV TR pa over the last 10 years. The recent market sell-off has so far resulted in a 5.1% decrease in NAV (ytd to end-April 2020).
Companies: Tetragon Financial Group
A number of REITs have the ability to thrive in current market conditions and thereafter. Not only do they hold assets that will remain in strong demand, but they have focus and transparency. The leases and underlying rents are structured in a manner to provide long visibility, growth and security. Hardman & Co defined an investment universe of REITs that we considered provided security and “safer harbours”. We introduced this universe with our report published in March 2019: “Secure income” REITs – Safe Harbour Available. Here, we take forward the investment case and story. We point to six REITs, in particular, where we believe the risk/reward is the most attractive.
Companies: AGR CSH ESP DIGS IHR LXI PHP RESI SIR SUPR THRL SOHO BBOX SHED WHR
MJ Hudson has confirmed that it expects to achieve profits in line with expectations for FY20E. This is a good result linked to new client wins during the COVID-19 disruption and timely cost management. Whilst much of the group's activities are proving resilient, uncertainty remains and in line with most of the peer group, MJ Hudson is withdrawing guidance for FY21E. We similarly withdraw our FY21E forecasts until visibility improves, moving our rating to Under Review. Meanwhile, the shares are now down 30% since their pre-COVID-19 highs, which is beyond that seen at outsourcing peers (Sanne, JTC). Whilst COVID-19 is presenting challenges for many businesses, we believe that: 1) the structural growth drivers in alternatives that underpin MJ Hudson's growth will continue to remain highly relevant, and 2) its strong balance sheet gives it a relative advantage.
Companies: MJ Hudson Group
Today's update confirms Equals delivered another quarter of significant revenue growth YoY, delivered by organic and acquisitive means. Performance across the product range has varied unsurprisingly and we expect these trends to continue over Q2/20E. Given the great uncertainty over the duration and severity of COVID-19's impact on the group, we withdraw FY20-21E forecasts and place our recommendation Under review, awaiting further clarity. Equals is supported by a strong, debt-free, balance sheet and is undertaking measures to further conserve cash.
Companies: Equals Group
In the past month the group has made significant progress in pivoting its business away from its traditional face-to-face model. Although lending levels remain appropriately subdued, it has achieved an impressive collections performance, with its largest business running at about 90% of pre-lockdown levels. This, combined with the group’s high risk-adjusted margins has enabled it to generate £3m of FCF in the first three weeks of April, taking its net cash position to £38.7m as of 21 April. This strong financial position, combined with the group’s innovative approach to product development puts it in an extremely strong position to serve its clients and win share when the current government restrictions are eventually lifted. Reflecting this positive outlook we reiterate our BUY rating.
Companies: Non-Standard Finance