JPMorgan trust points to European small caps as potential value plays, citing oven maker Rational and engineering firms

JPMorgan Discovery Trust is increasing its emphasis on European small-cap companies that have narrow, market-leading products or strong domestic positions, arguing they offer attractive long-term growth and valuation opportunities even as some larger sectors become expensive.

Jack Featherby, a portfolio manager at the trust, highlighted German oven maker Rational AG as an example of a niche company that has delivered outsized returns by dominating a specific product category. He told This is Money that Rational’s Icombi oven is "under-penetrated and really superior to everything out there," and noted the shares have risen more than 800% since 2005 despite recent volatility.

Featherby said the trust screens for what it calls "hidden gems" and "national champions": small firms that either lead globally in a single product or control significant share in their local markets. The strategy balances assessments of value, business quality and shorter-term operational momentum, aiming to identify companies that can grow steadily over many years.

The trust has held onto defence stocks through a recent period of strong performance, Featherby said, but has started to reduce exposure as valuations climbed. "Performance [in defence stocks] has been phenomenal over the last year, but valuations are becoming quite steep," he said, adding that the trust has begun trimming allocations where prices make the sector less attractive.

Featherby identified electrification as a primary structural theme for future investment in Europe. The trust’s portfolio is exposed to companies tied to the shift from traditional energy sources across transport, infrastructure and industry, a transition the manager described as inevitable because of environmental pressures and government spending commitments.

"It's forced by the natural world, with rising sea levels or increasing temperatures," Featherby said. "It needs trillions of dollars' worth of investment, and the nature of infrastructure is that you can't build these things overnight. You can't build it all in a year, it's going to take a very long time [which allows the sector to grow in the long term]." He cited engineering group Bilfinger SE as an example of a German firm benefiting from contracts tied to the energy transition, noting that large corporations are hiring contractors to support moves to green energy.

The trust’s approach places emphasis on meeting management teams and finding companies with a clear, narrow focus. Featherby said that many of these businesses are "still doing the same thing they've always done," which can reduce uncertainty around strategy and operational execution. That micro focus, he added, can allow such companies to earn excess returns and expand either domestically or abroad over time.

Featherby also argued that broader economic trends, including a move toward de-globalisation, can favour smaller, domestically oriented firms. He said investors often concentrate on large, highly globalised companies and themes such as artificial intelligence, which can push valuations to record highs, while missing opportunities in smaller-capitalised businesses trading at more attractive prices.

The trust uses a combination of qualitative and quantitative analysis to identify opportunities, considering product superiority, market position and momentum indicators to time entries and exits. While the manager highlighted pockets of strength in defence earlier in 2025, he said the trust is actively reallocating into areas where growth prospects remain underpinned by structural demand and reasonable valuations.

JPMorgan Discovery Trust’s focus on specialised European small caps reflects a broader investor search for sectors that offer durable demand and lower correlation with megacap growth stocks. By targeting companies with strong product franchises or dominant local positions and exposure to long-term themes such as electrification, the trust aims to capture steady returns while avoiding segments where prices may no longer compensate for risk.

Analysts and investors tracking European small caps will likely watch corporate earnings, order books and contract announcements for signs that the selected niches, from commercial kitchen equipment to engineering services, can sustain growth. For the trust, the combination of focused market positions, structural tailwinds and selective trimming of richly valued sectors remains central to its investment case.

The manager’s remarks underscore a patient, bottom-up investment style that prioritises product quality and market position over thematic hype. Whether that approach will continue to outperform depends on company execution, broader macroeconomic conditions and how quickly markets reprice sectors such as defence and electrification-related services as capital providers reassess long-term demand and risk.