While UK small cap funds were hammered in the aftermath of the UK’s vote to leave the European Union, currency alone helped give the JP Morgan European Smaller Companies investment trust an 8 per cent boost in June, co-fund manager Jim Campbell says.
In the three months since Brexit, the trust’s NAV had returned 18 per cent compared to 19.4 per cent in the index, according to FE data.
“It’s interesting to me how well European small-cap indices have done over a 25-year period,” Campbell says.
“Typically emerging markets get all the attention. In local currency that’s fantastic, but when you convert it back into hard currency you lose it all in inflation,” adds Campbell, who joined the fund in 1995. Since the beginning of 1998, the year co-manager Francesco Conte joined the fund, it has returned 1218.5 per cent, compared to 462.1 per cent in the benchmark, according to FE. The NAV for the period has returned 1103.3 per cent.
The pair are responsible for various geographies. Conte – who is “Italian by passport” – covers Benelux, France, and Switzerland, as well as his mother country. Campbell covers Austria, Germany, Ireland, the Nordics and Iberia.
The fund’s largest position is 2.3 per cent in brewery Royal Unibrew, followed by 2.2 per cent in Datalogic. The brewery is a quality defensive, while Datalogic plays to a disruption theme, Campbell says. The company provides barcode readers for warehouses, meaning it is not necessarily a disruptor, but a beneficiary of the ecommerce boom.
Value stock Ipsos Mori, the French market research firm, rounds out the fund’s top three holdings at 2.2 per cent. The fund initiated a position six months ago when the price was suffering from a large acquisition, competition in data collection from Facebook and Google, and large exposure to emerging markets.
However, Conte felt comfortable that emerging markets were bottoming out and the firm still had a valuable role to play in data analysis, employing many doctorate-level statisticians. He was also satisfied the acquisition, Synovate, had been integrated.
Demographics make the case for the fund’s 2.1 per cent holding in Italian audiology company Amplifon, where the average customer is 72 years old. Conte says that will encompass the first Baby Boomers in two years’ time, plus he adds technology is improving in the shift to digital and hearing aids are becoming much more discreet.
In the lead up to the Brexit vote, the only change the managers made was to sell out of shipping service Irish Continental Group and reduce their position in banking software business Sopra. The latter has 29 per cent per cent of sales in the UK, but it is mostly government business. “You’ve got the currency loss, but the business isn’t going to go away,” says Conte. Another holding, camping brand Trigano, has around 13 per cent of its sales in the UK “but they’re the market leaders in France, Italy and Spain and those countries are really recovering very quickly”.
Conte argues against the contagion effect of Brexit on the EU saying being ruled from Brussels is “not an emotive issue” on the Continent. While consumer confidence on the Continent has taken a three-month hit following Brexit, Conte suggests keeping an eye on September “when Europe gets back from holiday”. Speaking on the region’s economic outlook he says: “It’s difficult to be pessimistic and it’s difficult to be excited. We’re marginally positive. If we can find the right stocks we’ll do well for our investors.”