Sharesify Podcast with Jack Featherby of JPMorgan European Discovery Trust

In our latest Podcast special, Steven Frazer and James Crux are joined by Jack Featherby of JPMorgan European Discovery Trust (LON:JEDT). The fund aims to provide capital growth from a diversified portfolio of high-quality smaller companies in Continental Europe.

Our special guest explains why the investment trust structure is the best way to capture the small cap illiquidity premium. Jack talks us through his process for uncovering some of the most attractive, yet lesser-known investment opportunities across the Continent.

He also walks listeners through the bull cases for the trust’s three largest positions. These are Scandinavian financial services company Storebrand (FRA:SKT), turbocharging-to-fuel injection leader Accelleron (SWX:ACLN) and Denmark’s AL Sydbank (CPH:ALSYDB).

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Disclaimer: This content is for information only and is not investment advice. Always do your own research before investing.
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Transcript

SPEAKER_01 0:07

Hello and welcome to another special edition of the Shares Fi podcast. Today we're delighted to be joined by Jack Featherby, one of the managers of JP Morgan European Discovery Trust. Jack, thanks for your time today.

SPEAKER_00 0:18

Well, thank you for having me on. It's a great pleasure.

SPEAKER_01 0:21

Now, the trust is looking for lesser-known investment opportunities across the continent. Can you just give us a high-level intro to the trust?

SPEAKER_00 0:28

Well, I think the first thing you should be aware of with the trust is the name. And we call ourselves the European Discovery Trust. And this is an evolution from the European Small Cap Trust. We used to be known as say JP Morgan European Small Cap became the JP Morgan European Discovery Trust. And we really found ourselves as portfolio managers as really just identifying those sort of fantastic, growthier but smaller names within the European small cap space. We often found with our if if we spoke to larger cap investors, you know, everyone in the world will know what NVIDIA does, what Apple does. But on the small cap side, do you know what Doenco do? Do you know what Glambia do? Do you know what uh Automatica do? And we that's why we changed it because we really found ourselves as part of our investment process is uncovering these really you know these hidden gems. And it's actually one of the things we've done over the last couple of years is we slightly changed our focus because there's a growing awareness that within small cap companies there's a real e-symmetry out there. Um companies don't go up just 10%, 30%, companies can do 10x. And actually, there's one name within our universe, uh Fort Nox, where in its listed period we're now nearly uh 200%, uh 200 times uh in its lifted time lifetimes. And if you compare that to actually Namidia, Fort Knox outperformed Namidia during its listed lifetime, which I think is very impressive. So, yes, we are the European Discovery Trust, uh, so emphasizing the discovery, uh, but we focus on Europe, excluding the UK, smaller companies, so companies typically under 7 billion, and they typically typically go all the way down to say 300, 400 million euros.

SPEAKER_02 2:11

It reminds me, Jack, of um that Jim Slater comment about elephants don't run but freeze can jump. That seems to be uh very much the kind of ethos there.

SPEAKER_00 2:20

Yeah, and I I think it's really important to look for a um a sort of a manager in small cap space because it's hard to do yourself, right? We can do it because we have access to a whole host of technology, we have access to research.

SPEAKER_02 2:33

Yeah.

SPEAKER_00 2:34

Yeah, outside the um the sort of the bubble I have, it it's hard, right? It's hard to get access to these graphic growth opportunities. You might be able to identify one or two, but you wouldn't be able to buy a portfolio of 70 stocks, 80 stocks.

SPEAKER_02 2:46

Yeah.

SPEAKER_00 2:46

Uh and that's well, that's where we're at. We are, you know, we are a portfolio of fleas to take your your expression for some.

SPEAKER_02 2:53

So I mean you you focus generally on three core questions. You know, is it an attractive company? Um, is it attractive valued, and is there share price upside? Um give us a bit more detail about how you assess the attractiveness.

SPEAKER_00 3:07

Yes, well, so I have to say I don't think there's anything unique to say that you are looking for attractively valued, good quality companies with a good momentum story. I I always say find your manager who's looking for expensive companies, low quality, and have a terrible momentum. You know, there's not a single person out there who does that. But what we do is, well, first of all, think of those three questions as trying to build a superstock. If you look at our portfolio, our portfolio will always be better than average than the benchmark, cheaper than average than the benchmark, and better momentum than benchmark. And what I mean by that, you know, you think about metrics such as P, returns on capital, uh the quality of management, etc. That's a top-down basis. But what we really do differently at JP Morgan, and this is not just the small cap team, this is the um the broad array of investment trusts who always use our same investment process. We combine those uh questions with quantitative metrics. And this is really useful in small cap because it allows you to filter a universe of over a thousand stocks, about I think it's about 1500 stocks, into a far more manageable pool to which to fish on uh fish in. So rather than fishing in the Atlantic Ocean, you're fishing in the English Channel, and it makes things a lot easier. And this is where, again, where we really separate ourselves is one of the benefits of doing small cap in such large organizations is you benefit from tech spend. I I think you know the why the JP Morgan spend, uh I don't want to be, I don't want to put some grossly out data numbers out there, but close to 20 billion of tech. And within asset management and within equities itself, you know, it filters into the hundreds of millions. And we really benefit from the investment spend you need for those large cap portfolios in the US, these large cap portfolios in Europe. We benefit because a lot of those metrics on the quantitative side in large cap space work even better in small cap space. So we really benefit from these sort of these synergies of tech, um, our ability to analyze companies in the smallest detail, even just identify new trades, new opportunities that come on. And in today's world with AI, you can just imagine now the power we have. You know, we we can condense our entire day of morning research, you know, say the morning news flow comes out. By the time I get to my desk, I already have it succinctly ready, ready, and I can press refresh every five minutes to see if anything's changed. And so what we really do is we use that sort of power of being a bigger organization, that tech spend, to help us answer those three questions. And so when we're finding a company, we are saying, okay, well, does this company tick one, two, or three of these boxes? Preferably three, that would be great. Uh if not strong and two. Uh, and then we end up building that super portfolio I mentioned at the start.

SPEAKER_01 5:51

Excellent. No, thanks, Jack. And given the trust nature, I mean many of our listeners and viewers will be unfamiliar with some of your holdings. So can you give us a maybe a quick snapshot of, say, the top three holdings? I think Storebrand, Acceleron, and SID Bank.

SPEAKER_00 6:04

Okay, well, I will first actually um answer a different question, which is why you want a trust structure in the first place. Because in small cap there's a massive illiquidity premium, as in it's harder to get access to these names. And so the trust structure is actually a really important structure to use if you want to invest in the small cap companies. Um, and it really allows us to focus on those less liquid names or it allows us to be a bit more agnostic to liquidity. And I'm not talking about private companies, we don't invest in private companies, but it means we can go down, say, the market cap struct uh market cap spectrum. So, for instance, uh one sort of fantastic name I can't yet disclose in the portfolio. Um, but we brought recently only about 300 million market cap, and I just see or we see just fantastic potential to grow going forward. It works in the um EV sector, say uh charging um boards, etc.

SPEAKER_02 6:56

Make sure we have our listeners uh emailing their uh their guesses.

SPEAKER_00 6:59

Yeah, but it's really important to just say like the structure, the closed editing of structure makes it so much um easier to invest in small caps, you just don't have these daily blades. Um but to answer your question then directly about our top holding. So, our top holding, the store brand, the Celerons, uh SIP bank, the good thing about these is they're all doing something very, very different. Uh, and they're all from our point of view, they're all driven up by their own individual bottom-up fundamentals because that's what we are at the end of the day. You don't pick a small cap manager for their ability to predict macro, they wouldn't be doing small cap, you know, clearly at the end of the day, you're there to find these new opportunities. And so you take a company like Storebrand. Storbrand are a um a transformation story, they're an asset management sort of insurance company based in the Nordics, and really what they've done is they've transformed their business over the last say decade from about I don't know, 2012 uh to now, they've gone from 60% of their business being capital-intensive um defined uh benefit pensions to now a very asset-like business, which are seeing massively improving uh return on equity. So, for instance, over the last couple of years, their return of equity have gone from something like 8% to 16%. Um, at the same time, they're giving you sort of a 7% total dividend yield, etc. So Silverland is a good example of that, one of those companies we want where it's got the value there, you know, that's a six to seven percent total return and dividend yield. It's got uh is it a good company? It's this transformation to a capital like company. And in terms of improving um momentum there, it's that improving sort of operational metric, so return on equity, and that's improving the inflection you're now seeing from things like higher bond yields and higher stock markets. So that sort of encompasses all three of the things we're trying to find, um, which funny enough makes it the biggest company in our in our benchmark, just from the growth scene on those different things. Acceleron. Acceleron is a uh sort of more interesting, sort of more spicier play. And Acceleron are one of the world leaders in turbochargers. Um, so they are based in uh Switzerland. And turbochargers are interesting because initially the investment case was all based upon dual fuel usage in uh in the shipping sector. So um people trying to make the their their either their the crude carriers comply with IMO 2020 or just trying to improve efficiency uh by using different types of fuels. So a turbocharger will largely make you far more energy efficient, but of course there's a cost associated with it. Anyway, they were benefiting from that, but they've now, over the time you've owned the company, have seen a second kicker. And the second kicker is where things get really interesting. And with data centers, data centers being huge uh energy, hugely energy intensive. Right. Well, if you're having a backup supply to your data center, you can't have your you know your AAA battery, you need to have a full solution which can power one of these, you know, almost town-sized um uh town-sized uh data centers. And so people are building on into them um adjacent generators which all need turboshivers to make them more efficient just because of the huge energy usage. And A Celeron are really seeing a huge jump in their growth uh over the um over the last couple of years. I mean they're now growing at sort of mid-teams um revenue, and that that's just going to carry on as the data center building carried on. Uh so that's a good story there. And then the third one you mentioned is uh SID Bank. So SIDBank, they are SIDBank AL now because they recently merged with uh the SID Bank are one of the smaller but um very well performing in the corporate sector, banking, uh corporate banking sector in Denmark, and they've just merged with the one of the leading retail uh banks in Denmark. And so you can imagine now you have two parts going to hold, um, very good in retail, very good in corporate, uh, and they're benefiting from first of all the synergies you can extract, but then potential growth of being the bigger market position. Um, and so we're seeing good, solid sort of runway of growth. You know, when you have lending growth at about 3.5% a year, and you combine that with the fact that you're going to get improving margins, that um that leads to like an earnings growth of say I don't know 10-15%. Uh, but then you can answer that the dividend and the potential re-rating potential. Um, so that's why those three are in our top three. And I think they can sort of, as you as I mentioned at the start, they all answer that sort of quality or that momentum or that value question that we were talking about.

SPEAKER_02 11:36

Jack, we are running short on time, but uh just uh finally, I mean, investors ultimately uh regards to the pitch, they're going to look at performance. Your performance has been pretty impressive. Um, what I find interesting is particularly is the the discount has narrowed. Now, do you think this is because people are increasingly looking for European opportunities? What's your interpretation of the narrowing discount?

SPEAKER_00 11:58

Um, well, at the end of the day, small caps have underperformed large caps over the last couple of years. So I think the discount came uh out of it because at the end of the day, small caps are a bit more sensitive to the economic environment, and we've seen two wars, we've seen inflation, etc. Um, but I think you're coming through that now. Uh, the environment is improving, you've got PMIs, small caps are very sensitive to PMIs, PMIs are improving, small caps are improving. I mean, just this weekend you've got peace or a truce, depending on what you want to call it. Um, but you can also talk to our board as well, and our board have been very proactive in managing discount in terms of buying back shares. And so there are several different kickers there which have caused discount to uh improve, and you know, we hope that carries on. And I think if it did rise in again, we would be active to uh try and reduce it.

SPEAKER_02 12:40

Again, share buyback's another great reason to invest in investment trust.

SPEAKER_00 12:45

Yes, I mean you get you get that kicker, right? Uh you're buying back shares at a discount.

SPEAKER_02 12:50

Jack, that's wonderful. Thank you very much for your time. Much appreciated. Uh, really interesting uh conversation there. Um, listeners, thank you for joining us. Uh tune in to our next podcast coming up very soon. Take care.