As JPMorgan European Smaller Companies Trust approaches its 30th ‘pearl’ anniversary, Francesco Conte discusses his approach for uncovering pearls in the European Smaller Companies sector and stocks to consider.
Did you know that some of Europe’s most established companies in the luxury goods and technology arena started life in the small-cap universe?
Over the years, the most important lesson we have learned is that human ingenuity is unlimited. Invention is a constant feature of the European small-cap universe. Time and time again, I’ve had the privilege of observing the creation of many new technologies, new consumer brands and new service models.
The pandemic has reinforced our need for better healthcare, the need for technology and we’re seeing what impact reduced human activity is having on air quality. These three themes – wellness, technology and the environment – already serve as the foundation for much of our investment thinking. We’re on the search for well-managed and innovative companies, with strong balance sheets, that can address these themes in a sustainable manner.
According to data from the United Nations’ World Population Prospects, by 2050, one in six people in the world will be over the age of 65 (16%), up from one in 11 in 2019 (9%). During the same time period, one in four people living in Europe and Northern America could be aged 65 or over. These statistics highlight that the need for wellness brands and products will only accelerate.
Amplifon, a global leader in hearing healthcare, is a good example of a company offering personalised and distinctive hearing solutions for a rapidly growing ageing population. With rising revenues and its free cash flow reaching the 150-million-euro mark last year, we believe the Italian company has strong reserves for it to continue to thrive in current market conditions.
We believe that technology will continue to be a dominant investment theme, offering huge potential over the long term. Although the US market is associated with high-quality tech companies, investors often overlook the fact that the two largest consultants of R&D in the world, Altran and Alten, are both French companies and advise many of the largest companies in the world.
But there are also other European tech leaders. For example, the specialised software company, Nemetscheck. The German company is leading the digitalisation of the building industry, through highly efficient software used by architects and civil engineers. With the company reporting a strong and consistent rise in organic revenue growth to €556.9 million in 2019, we believe that Nemetscheck is well placed to continue its consistent performance streak in these current times of uncertainty.
We believe that reducing pollution, plastic, and our carbon footprint is key to better welfare. There are many ways to invest in this via companies producing sustainable packaging or companies manufacturing recycling machines, or renewable energy companies, for example. These trends should accelerate further as European companies prepare to adopt new rules that will require them to disclose their environmental, social and governance risks from 2021.
There are several companies in Europe spearheading the drive to sustainability, including Tomra, the leading reverse vending machine producer for the recycling of plastic based in Norway, while Encavis, Falck, Solaria, lead the renewable space in Germany, Italy, and Spain, respectively.
A long-term mindset is key
Despite weaknesses in economies and market conditions remaining volatile, we continue to find attractively valued European smaller companies that are leaders across these investment themes, able to offer high-growth potential. Although past performance is not an indication of the future, we can apply lessons learned through previous downturns to weather this storm.
Through various economic crises, this asset class has continued to keep pace with some of the best indices in the world such as the US Russell 2000 Index, the American small-cap index. The JPMorgan European Smaller Companies Trust has achieved an annualised return of 10.38% in its 30 years since inception, above the Russell 2000 Index at 9.10%.
Over the past 30 years, we have learned that the key to investing in smaller companies is our ability to engage with companies in the early stages of their development, when their growth is the highest. While economies are weak and markets are volatile, we continue to find some attractively valued European smaller companies that are leaders in these high-growth themes.
For investors focused on the long term, we believe the sector continues to offer positive growth prospects and is well positioned to continue its high-growth development.
Francesco Conte is lead investment manager, JPMorgan European Smaller Companies Trust.