JPMorgan European Smaller Companies Trust, chaired by Carolan Dobson (pictured), has announced its final results for the year ended 31 March 2016. During the year, the trust produced a net asset value total return of +16.6%, compared with the benchmark total return of +7.2% over the same. The share price total return for the year was +19.7%, as the discount narrowed over the year. In terms of performance attribution, the board say that the main contributor to the Investment Managers’ relative outperformance of the benchmark was stock selection and to a lesser extent asset allocation.
The three largest contributors were all French, which the managers say vindicates their overweight position in France. The managers say that Trigano, a European manufacturer of recreational vehicles, topped the contributor list once again as demand for its recreational vehicles accelerated further. Other positive contributors included Faiveley Transport, a railway equipment manufacturer, as a US competitor made an offer for the company and Ubisoft Entertainment (video game publishing), following Vivendi’s unsolicited purchase of an 11% stake.
The manager say that stocks which failed to deliver expected returns included French linen provider Elis on the break out of a price war in their domestic market, Swiss private bank EFG International on very poor results and the Italian cement manufacturer Cementir on continued weak domestic and Turkish demand. The managers comment that the biggest asset allocation contributions came from being underweight in Greece and Spain, during the market turmoil resulting from the Greek elections, and that the use of gearing made a small negative contribution to performance (they ascribe this to market volatility that made gearing changes more difficult than usual).
In terms of portfolio developments, the managers say that, at the start of the year, the portfolio had an overweight exposure to stocks they believed were likely to benefit from a global recovery (e.g. a large exposure to the industrial engineering sector). However, with the onset of the emerging market problems in mid August, the managers say that they reduced this position in favour of more defensive growth companies. These included NetEnt, a Swedish provider of gambling software and IMCD, a Dutch specialty chemical distributor predominantly to the food and pharma industry. The managers also added companies they felt would benefit from a recovery in European consumer spending. These included OVS, the apparel retailer in Italy, Moleskine, the Italian provider of premium notebooks, Sopra Steria Group, the French IT services company and Alten, the French research and development consultant. The portfolio remained underweight in real estate and pharmaceuticals as the managers felt that the valuations were unattractive. At a geographic level, the managers advise that the biggest shift was the reduction in the substantial overweight position in France which was the biggest contributor to performance during the year, by taking profits on Faiveley and Ubisoft. The managers say that they found a lot of opportunities in the Netherlands, including several attractively priced IPOs such as Intertrust (provision of trust services) and Flow Traders (liquidity provision for exchange traded products). However, they sold out of Italian company, Cementir, on a weaker outlook, and Credito Emiliano, Banca Popolare Emilia Romagna and Banca Generali as the climate for financials deteriorated. The portfolio’s weighting to Norway was increased through the purchase of two salmon farming providers, Salmar and Bakkafrost.
In terms of outlook, the managers say that, despite difficult and volatile markets, the macroeconomic outlook on balance seems to be improving and they are becoming more constructive on the global economy for several reasons. In their view, President Draghi’s additional quantitative easing has put pressure on the US Federal Reserve to keep its interest rate increases on hold. In turn this has weakened the US dollar which has been beneficial for commodities and emerging markets. This, coupled with a revival in European and Chinese lending, bodes well for an economic upturn of the global economy in the second half of this year, as evidenced from improving Citi economic surprise indices. However, they also say that a source of near term uncertainty is the referendum on Brexit. Reflecting a more optimistic stance, the managers say that they have increased the weighting to more cyclical industrial companies, whilst financing those by reducing defensive positions. As such, the portfolio is now overweight in sectors such as automobile components, software & computer services and travel & leisure, and underweight in healthcare and telecommunications.
Strong stock selection drives JPMorgan European Smaller Companies outperformance : JESC