Research by the firm shows the Euromoney Smaller European Companies index has outperformed other major indices including the Russell 2000, S&P500, MSCI Europe, MSCI Emerging Markets and Topix on a cumulative basis over the past 20 years.
Active stock-pickers to the fore
JPMAM believes one of the attractions of the universe of more than 1,500 European small-caps is that they are under-researched. A smaller number of analysts looking at stocks leads to a less efficient market and a broader opportunity set. While each European large cap stock is covered on average by 17 analysts, just four typically cover a European small-cap company. This, says JPMAM, provides a real opportunity for active investors to add value.
The firm also highlights the attractive valuations currently attached to European small caps. In addition, for the first time in several years fund managers can focus on stock-picking without looking over their shoulder at the impact of an impending eurozone crisis. The average Sharpe ratio for the small-cap sector also goes some way to dispelling the myth that they are higher risk than blue-chip stocks.
“The speed of change in the European periphery, both at the macro and the micro level, is impressive,” said Francesco Conte, co-manager of JPMorgan European Smaller Companies Trust and JP Morgan Funds – Europe Dynamic Small Cap fund.
Conte said he and co-manager Jim Campbell generally seek three characteristics when buying stocks.
Europe: a recovery story
“First, we buy companies that can demonstrate secular long-term growth. These companies tend to have leadership positions in their markets and the ability to grow earnings.” He cites German financial services and technology company Wirecard and Italian online luxury retailer Yoox as two examples of stocks with strong organic growth and market opportunity.
“Secondly, we buy companies benefiting from a cyclical recovery,” Conte continued. “In some cases, these companies used the economic recession to cut costs and become more competitive and profitable. Irish building materials company Kingspan and Trigano, the French manufacturer of camper vans, are two shares that are poised for cyclical margin recovery.”
The pair also buy companies that represent a corporate restructuring story.
“These companies often have reorganised after a downturn to regain significant success with new management,” said Conte. “Spanish wind turbine maker Gamesa and Italian footwear producer Geox are two stocks where new company leadership is streamlining products and operations for improved growth.”
