JPMorgan European Discovery Trust's most recent full-year results showed a clear Margin over its benchmark and a record level of revenue, with a new chair now in place.

Full-year results published on 19 June, covering the 12 months to 31 March, showed a net asset value total return of 23.2%, compared with 17.5% from the MSCI Europe ex UK Small Cap index in sterling. The share price total return was 21.0%.

The trust's relative performance has also improved over longer periods. Its three-year NAV return was 35.3%, compared with 26.1% for the index, while its five-year return was 30.5% against 26.7%. Over ten years the figures were almost identical at 139.6% and 138.7%.

Net Assets stood at £584.1m at the year end, with net asset value per share rising to 632.1p from 524.0p. The trust's discount widened from 7.3% to 9.0% over the 12 months, with an average of 7.5%, and it stood at 8.3% on 17 June.

About the company

JPMorgan European Discovery Trust is an Investment trust that aims to deliver Capital growth by investing in smaller and mid-sized European companies outside the United Kingdom. Its portfolio is built by a team of managers at JPMorgan who select stocks through company analysis and meetings with management, looking for businesses with good growth prospects, sound finances and prices that appear reasonable relative to their potential. The focus on smaller companies means the trust can reach areas of the market that large funds often overlook.

As a closed-ended company, it issues a fixed number of shares that trade on the London market, and it earns returns from the performance of its holdings and from the dividends they pay. Leverage is applied in modest amounts, and the board can repurchase shares when the price is below net asset value. Its benchmark is the MSCI Europe ex UK Small Cap index measured in sterling.

The article reports a net asset value total return of 23.2% for the year to 31 March, ahead of 17.5% for the index. Net assets stood at £584.1m, Revenue per share rose 47.1% to 18.18p and the Dividend increased to 16.0p. The discount widened to 9.0% by the year end, even as the trust bought back a large number of shares.

Record income and a higher payout

Revenue per share reached a record 18.18p, an increase of 47.1% from 12.36p. The total dividend for the year rose to 16.0p from 13.0p, made up of a 3p interim and a 13p final. The final dividend was payable on 3 August, having gone ex-dividend on 2 July.

Share Buybacks have been substantial. The trust (LSE:JEDT) repurchased 19,458,212 shares during the year and a further 1,474,156 between the year end and the results announcement, a pattern which is consistent with the board's efforts to contain the discount at a time when many European trusts have been trading below asset value.

Industrials were the best sector during the year, with Koninklijke Heijmans, Tecnicas Reunidas and Kitron among the best-performing stocks. Financials such as Storebrand and Vienna Insurance, together with Saipem in energy, also contributed. Technology was the largest detractor, with Innoscripta a notable laggard, and being underweight in Aixtron and Millicom also held back relative returns.

European smaller companies in context

European smaller companies cover a wide range of businesses, from industrial engineers and shipbuilders to insurers and software groups. Their results often depend on regional demand, energy costs, interest rates and public spending, as well as on the success of individual management teams.

Many of these businesses have lower trading volumes than larger companies, so prices can move sharply when sentiment shifts. After a period when the segment lagged, the board and managers have described it as overdue for a rebound, though that view is a judgement rather than a certainty.

Because the benchmark is measured in sterling, movements in the euro and other European currencies against the pound can add to or subtract from returns.

What to watch next

The half-year report should show whether the performance gap over the index has been maintained, and how the shift from a Credit Facility to contracts for difference has affected gearing and costs. The new chair's early priorities and any changes to buyback activity will also be of interest.

Wider factors include European monetary policy, German plans for infrastructure and defence spending, and trade conditions. A record level of revenue per share has supported the dividend, so the sustainability of income from the underlying holdings is another area to follow.

Change of structure and chair

The trust (LSE:JEDT) has changed how it uses leverage. It allowed its €125m facility with Scotiabank to lapse and began using contracts for difference instead. Gearing varied between 1.1% and 8.0% through the year and ended it at 4.0%.

Marc van Gelder was due to retire as chair at the Annual General Meeting on 21 July, with James Will succeeding him. The portfolio is managed by Jon Ingram, Jack Featherby and Jules Bloch of JPMorgan, and the board said that the arrangement remained in shareholders' best interests.

The board and managers were optimistic about European smaller companies, describing them as overdue for a rebound. The chair called the trust (LSE:JEDT) well positioned for further outperformance.

Conditions in the months after the year end have been less predictable. Smaller companies tend to be more sensitive to financing costs and to the domestic economy, so tighter policy may test the optimism expressed in June, even as expectations of German infrastructure and defence spending continue to offer support across the region.

Shareholders in the FTSE 250 constituent should next hear from the board at the half-year stage, when the results will show whether the momentum has continued.