Let's Go Bargain-Hunting in Europe

11/24/2010 9:27 am EST


Andrew McHattie

Editor, Investment Trust Newsletter

The entire continent’s on sale, and one UK-listed fund has a long track record of smart shopping, writes Andrew McHattie in Investment Trust Newsletter.

A note from Collins Stewart on Nov. 3 assessed JPMorgan European Smaller Companies (London: JESC). The broker says the [investment trust] manager has added significant value over the long term, outperforming the benchmark and broader European equities by a comfortable margin.

Although Europe seems to have disappeared off many investors’ radar screens following well-documented problems earlier in the year, Collins Stewart believes the company has strategic value, while with markets back in “risk on” mode, it has undoubted tactical value.

The manager looks to build a portfolio consisting of a combination of growth companies with strong operational momentum and value companies with a catalyst for re-rating. The universe is filtered for illiquidity, and the manager then uses a proprietary multi-factor model that incorporates growth and value characteristics, price momentum and earnings revisions. The results are then subject to a combination of fundamental and valuation analysis.

Since Jim Campbell assumed responsibility at the beginning of 1995, the compound net asset value total return is 15.5%, significantly ahead of the annualized 9.1% total return generated by the MSCI Europe ex-UK index. A high level of consistent outperformance is a feature. The manager has been able to take advantage of greater inefficiencies in his target universe, which remains under-researched relative to European large caps.

Collins Stewart says that notwithstanding the sharp recovery since March 2009, valuations remain attractive. The PEG ratio [comparing the price/earnings multiple with the investment’s forecast long-term earnings growth rate] of the investment universe is around 0.6, while that of European large caps is 0.8. A powerful recovery in earnings is underway, fuelled by aggressive cost-cutting and strong demand from emerging markets.

Despite the proven track record of an experienced management team, a board and manager committed to shareholder value and good marketability, the discount [to net asset value] remains at 16%, in line with its ten-year average. The note concludes “although it is difficult to identify a catalyst to address the current rating, we would note that the NAV total return is some 4% annualized ahead of European unit trusts over the past ten years.”

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