Contrary to negative perceptions of inefficient labour markets and high tax rates, European small caps have generated long-term returns that are among the best in the world.
That was the message from Edward Greaves, manager of the JP Morgan European Smaller Companies Trust, at a Sub35 event at London’s AlphaBeta Brewery. He was just as bullish on the future: “Next year, European small caps are expected to generate 10% earnings growth, once again outgrowing their large cap peers.”
The trust has invested in established companies, such as Italy’s Salvatore Ferragamo and De’Longhi, luxury goods and home appliance manufacturers respectively, and less familiar ones, such as IMA Group, which designs and manufactures automatic machines for packaging pharmaceuticals, cosmetics, tea and coffee. It is the strong long-term performance of companies like these that leads to superior earnings and share price growth.
The trust has a broad remit for gearing, one of the unique features of closed-ended funds, and can go from 20% cash to 20% geared at their discretion. This provides a good opportunity to generate additional alpha over the long term.
Key factors
Greaves and his co-manager Francesco Conte have a wealth of experience in European smaller companies.
They look for three main factors when investing: value, quality and momentum. In particular, they look for leaders in niche products or services that can compete on quality not cost and are, therefore, able to generate strong cashflows to either reinvest for growth or return to shareholders.
Environmental, social and corporate governance (ESG) factors are growing in importance in asset management and are another area of focus for Greaves and Conte: these factors can help to determine the earnings potential of companies.
Tomra Systems, a Norwegian provider of recycling solutions, is a good example of a high quality company that ticks all these boxes and has the potential to provide excellent long-term value to shareholders.
The manufacturing firm creates sensor-based sorting machines for European bottle deposit schemes, which has proven to be one of the best ways to reduce plastic waste. It has a 70-80% global market share in reverse vending machines and can outspend its main competitor by ten-to-one in research and development. Tomra’s technological advantages are growing over time and its market dominance provides clear catalysts for future growth in the environmental and food sectors.