Alongside its results, the trust has announced plans for a 15% tender offer.
JPMorgan European Discovery says that over the year to 31st March 2024 its total return on net assets was 6.8%, outperforming the benchmark (MSCI Europe (ex UK) Small Cap Index) which returned 5.9%. The total return to shareholders was 13.0%, as the discount narrowed from 15.1% to 10.6%. During the year, the company repurchased 9,782,472 shares at an average discount of 11.8%.The total dividend is 10.5p, up from 9.0p and this is being paid from revenue earnings of 12.04p, up from 11.11p.
The chairman notes that the company has still underperformed the market over three and five years, returning 3.0% and 41.0% respectively over these periods, compared to benchmark returns of 6.4% and 46.7%. Longer term returns are better. The board has been very mindful of this mixed long-term performance. At the interim stage, when the current year’s numbers didn’t look quite so good (trailing the benchmark by 5.7 percentage points), the managers noted that the investment process tended to struggle during periods of high volatility. During the year, they therefore implemented some important enhancements to their process and risk management, seeking to minimise downside risk during periods of volatility and capture upside risk when volatility reduces. The portfolio management team also changed. Jon Ingram, Jack Featherby and Jules Bloch were appointed on 1 March 2024, replacing Francesco Conte and Edward Greaves. Francesco Conte decided to retire.
Tender offers
Following a consultation with a number of the company’s largest shareholders, the board has decided to undertake a tender offer for up to 15% of the issued share capital (excluding shares held in Treasury) at a 2% discount to NAV less costs associated with the tender.
In addition, the board intends to introduce a performance related tender offer for up to 15% of the issued share capital if the NAV total return does not equal or exceed the benchmark total return over the five-year period beginning 1st April 2024 and ending on 31st March 2029. Again at a 2% discount.
[This is all quite radical stuff but the narrower discount and improved performance will be very welcome and we think that the trust is now on a much firmer footing.]
Extracts from the managers’ report
Our overweight to Communication Services contributed positively to performance during the year. Our large overweight in CTS Eventim, the German online ticketing platform, delivered strong performance; the cost of live entertainment skyrocketed in 2023 due to increased demand as consumers returned to the experiences they missed out on during the pandemic. Ticketing platforms benefitted from this ‘revenge spending’ which shows no sign of abating.
The positive attribution from Materials is the result of our underweight to companies that have been hurt by energy prices, have structurally low returns on invested capital or were delivering earnings that we thought were not maintainable. Our focus on defensive companies with strong balance sheets and high cash flow conversion allowed us to outperform the sector. This includes the German producer of industrial lubricants Fuchs Petrolub, which has a robust medium-term volume growth potential because of recent capacity investments, while the deflation in base oils is a tailwind to its margins and cash flows.
Despite the volatility induced by the collapse of SVB and Credit Suisse at the start of the period, the Financial sector was one of the largest contributors to returns at the sectoral level. After it became clear that these bank failures were isolated events, this undervalued sector stabilised and reaped the benefits from high interest rates and low bankruptcy rates. Our investment in BPER Banca, the Italian banking group, performed particularly strongly for these reasons.
The largest sectoral detractor from performance was the portfolio’s stock selection in Information Technology. Our exposure to automotive semiconductor companies such as Melexis and Elmos suffered from the sharp slowdown in the electric vehicle market and fears of a broad-based destocking from automotive OEMs. Our overweight to IT consulting companies such as Alten, Reply and Tietoevry also contributed negatively as clients postponed some IT and innovation projects due to macroeconomic uncertainty.
The portfolio’s overweight to Consumer Discretionary also contributed negatively. Elevated rates of inflation and increasing interest rates eroded consumer confidence in 2023. Our overweight to auto suppliers such as Forvia and Plastic Omnium contributed negatively as they were hit by significant cost inflation, leaving their levered balance sheets under pressure. Other companies related to construction such as JM (a Swedish housing developer) or Ariston (an Italian manufacturer of heating solutions) also suffered from the impact of tightening monetary policies.
During the year our biggest contributors to performance at the stock level were: SPIE, the French technical services company, as demand for installation of electrical systems was boosted by the ongoing energy transition towards electrification; Arcadis, the Dutch engineering and architecture services company, which has benefitted from strong infrastructure investments in the US and in Europe; and CTS Eventim, as demand for live events continued to grow significantly post-COVID.
The biggest detractors to performance were Bravida, the Swedish multi-technical services company, as the sharp slowdown in Swedish residential construction led to significant pricing pressure for installers; Melexis, the Belgian manufacturer of automotive chips, as automotive manufacturers who over-ordered chips due to post-COVID supply chain constraints now have to reduce their inventories in a slowing demand environment; and Forvia, the French automotive supplier, as the company did not manage to increase prices enough, while increasing interest rates put pressure on a stretched balance sheet.
JEDT : Better second half boosts JPMorgan European Discovery