JPMorgan European Growth & Income plc (JEGI) Earnings Call Transcript & Summary

Good afternoon, and welcome to the webinar update for JPMorgan European Growth & Income, also known by its ticket, JEGI. I'm joined this afternoon by Tim Lewis, who is one of the 3 portfolio managers for the trust. The Board and manager were delighted to announce that it had agreed [indiscernible] heads of terms with the Board of European Opportunities Trust at the end of May. The agreement is expected to grow the net assets of JEGI, which will have a number of benefits for shareholders with a larger investment trust leading to lower management fees, lower ongoing charges, greater liquidity and increased marketability of the remaining investment trust. For further information, documentation and timelines [indiscernible] are expected to be released around this transaction at the -- at the start of July. The focus for today's webinar [indiscernible] is to very much focus on JEGI and to understand the current opportunity for investing in Europe, the investment approach of JEGI and take a closer look at what's been driving the impressive performance. As [indiscernible] every of these webinars, we have lots of time set aside for your questions and you can do that by the [indiscernible] Ask Your Question box, which is at the bottom of your screens. So with that, I will bring in Tim and perhaps given the large number of people on the call, we'll start with a brief reminder in your own words, term of the trust and what you're trying to achieve.

Great. Thanks, Nick. Good afternoon, everyone, and thank you for joining us to talk about JEGI. And as Nick said, I'm Tim Lewis. I'm one of the portfolio managers on the trust working alongside Alexander and Zenah [indiscernible] who are featured in this slide. So ultimately, what we are trying to achieve from this portfolio is consistent, it's risk controlled [indiscernible] generation, a diversified group of European companies, excluding those listed in the UK. So we want that to be one that is [indiscernible] balanced and can outperform in different market cycles and conditions. It isn't independent on [indiscernible] some sector or a [indiscernible] style to the forum, whether it's value or grow stock fees in the market, more cyclical, more [indiscernible]. And we think that is reflected in the performance chart on the right-hand side at a time when we experienced a number of these cycles, we're changing market leadership throughout that period and consistent performance. And along with that balanced consistent performance is a portfolio that adopts an enhanced income policy. So that is we pay a 4% yield based off NAV at the start of the year. So really how we position ourselves is if you want to extrapolate a positive view in Europe or even just diversify your portfolio globally, we think JEGI offers a real core exposure with demonstrable [indiscernible] outperformance versus the benchmark.

Great. Thank you, Tim. After a long time in the wilderness, investor sentiment towards Europe rebounded strongly in 2025. And as we can see on the slides here with data provided by Morningstar that translated into significant inflows for European equities and from 2025, which has sort of continued into this year. Why should investors continue to look at Europe today? And specifically, why should they use JEGI as their access to this market?

Yes. Thanks, Nick. If you please go to the next slide. So why -- what do we believe is still the case for Europe and for JEGI, I think is [indiscernible] I've outlined here. So firstly, top down, we are seeing positive [indiscernible] macro tailwinds that are supported for growth, and I'll come to that, Nick. Secondly, we believe that market volatility, emerging long-term beams are shuffling the winners and the losers, which is making active management even more important than it ever has been. It helps you to bring balance and to exploit these opportunities by performance. And finally, we just see some really exciting themes and catalysts that are driving company fundamentals, creating these sort of idiosyncratic opportunities for [indiscernible] high performance. We are portfolio managers who build their investment case on stocks from the bottom up. We then control for risk from the top down, but in the period, we're really excited about the different stock level opportunities that we see ahead of us. So please switch to the next slide, where are we seeing these positive signals for Europe. The first is that the fiscal stimulus impact in Europe is [indiscernible] and it's only just beginning. [indiscernible] to boost domestic growth in 2026 and over the medium term, we're accumulated [indiscernible] to explore some of the companies that we believe are set to benefit from [indiscernible]. Secondly, Europe is showing signs that they are and long last, finally waiting up to the loss of competitiveness in the region. I think we believe efforts to remedy that are set to boost the earnings and to build higher quality companies in the region. And lastly, these tailwind for earnings growth are being reflected in valuation. So the market is still trading in line with its long-term history despite what we believe is a much improved outlook. We believe these factors will support European equities over the coming years, and I think we're seeing that inflows into the region, but it's not necessarily immediate nor is it a straight line. I think it's sort of an understandable hesitancy sometimes from investors to believe that Europe is turning a corner at any point, there is some conflict in one part of the region or political instability or election in another, there's always a reason to kind of defer investing in Europe. But if we look at the chart on the next page, please, I think this illustrates that these reasons are the norm, and the performance has been achieved despite these reasons always been there. The clients have never fully parted, but this chart shows how, in the purple, the trust total return over the past 5 years of over 100%, strong returns in an absolute extent and relative to our benchmarking [indiscernible] yet. Important for us, that [indiscernible] performance that's achieved consistently in a stable, moderate despite a volatile macro environment. And we always like to point out, please, on the next slide, that consistency of returns has also allowed us to outperform the S&P 500 over that period.

Thanks, Tim. So you've touched a couple of times there just on the process and the approach that you take, which is differentiated. Can you spend a little bit of time just talking through how you and the portfolio managers actually run the money?

Of course. So what do we look like or rather what we look for when we're assessing an individual company. So at a high level, we ask ourselves 3 questions. And to be clear, these ideas, they're very simple. Everyone wants good businesses on [indiscernible] good prices and things are improving. We believe the difference is in how we analyze these. So we're not relying on good meetings or compelling narratives, we're looking for hard evidence in the numbers and what the business is actually delivering. So let's take each of these in turn. First of all, we want to invest in quality companies. Companies that generate good and sustainable returns on invested capital, companies where the earnings per share translates into free cash flow, companies where [indiscernible] we will invest behind management teams and are making good [indiscernible] central capital allocation decisions for the long run. We look to assess the duration of these attributes and how resilient is their business model, how resilient and what's the big market opportunity ahead. In terms of valuation there, it's important for us to work out when all of that has already been discounted by the market. It's just still an opportunity to make money. It's all very good identifying the best quality companies that's actually very easy to do. It's easy to identify the attractive market themes, but we need to find where these have already price of [indiscernible] perfection because then there's no differentiated and such. Instead, we want to find where our research is showing us ideas that the market is in correcting [indiscernible]. And then lastly, we do look to invest behind companies that are already performing well. So we look both at operational and share price momentum. And in our experience, companies that are improving also continue to improve for a period of time and the opposite can also be true. If you turn to the next slide, please, Nick. Yes, as you'd expect, we're supported by the broader resources of JPMorgan. And that's a real strength of us because we can access both our global sector specialist analyst teams are on the ground in local markets. It's fundamental insight and also all the technology tools that we have to help us make better informed investment decisions. And we believe the combination of these quantitative and fundamental analysis to be one of our key strengths. So those quantitative tools allow us to assess over 1,000 companies daily in a rigorous and repeatable way. It helps us to screen for companies that require -- that might require more fundamental work to assess our existing holdings, which I think is especially important to assess those holdings in an unemotional and unbiased way. So the quantitative really allows to have a disciplined -- to the decision-making and it also supports the view that our processes on our performance is the [indiscernible] future. On the other hand, the fundamental research which is done both by the analysts and by us as the portfolio managers. That allows us to dig deeper. It can be more forward looking, it can be more context aware, really it's better understanding the why behind the numbers. So we want to be disciplined in the numbers, but we also need to understand the why behind them, especially where data is less clear cut. So it helps us recognize changing business models to assess one-off or binary risks. For example, you [indiscernible] again something like an upcoming drug trial within a health care company. And then on the next slide, please, Nick. Ultimately, we then need to bring these ideas together to form a portfolio which balances our stock insight with appropriate risk [indiscernible] on. So we talk again, we go in a range wanting to have consistent and balanced performance. And so this is incredibly important. Here, we combine both our proprietary and external tools to view our portfolio from a multiple perspective and it helps us to manage our macro exposures to run scenario analysis and want to be very disciplined in how we [indiscernible] run.

So here, obviously, we can see that consistent long-term performance which is obviously indicated on the charts on the screen here. But Tim, I wonder if you could focus a little bit on that significant alpha over the sort of shorter term and your sort of outlook going forward, just any sort of particular stocks or names do you want to talk through? And any themes really that are coming through in the performance of the portfolio?

Sure. So I think Slide 12 shows the drivers of performance over the past 12 months. And if we look -- start by looking at the chart on the left-hand side, which shows our sector attribution that our contribution relative to the benchmark. But I think this is a typical view for us, which is the yellow bars dominating. That is our stock selection with any [indiscernible] sectors that dominate the performance rather than taking large positions in the sector [indiscernible] 1. So I think that's true of most years. In other ways, this year, there were, at least the past 12 months, have been quite different. And I think that reflects the wide dispersion we have seen in performance in general. So there's been some very dominant themes in the market, [indiscernible] sell year-to-date around, for example, AI transformational impact on the economy and to a lesser extent, Russia or rather the U.S. conflict with Iran. And so if we look at the right-hand side with our contributors and attractors [indiscernible], we see both on what [indiscernible] we have owned that have worked with the portfolio and what we haven't owned that have detracted from management performance [indiscernible]. A lot of that is coming from stocks that are positioned towards this AI transformational impact, whether that be often in different sectors, whether it be an industrial company focused on power demand or in cabling or renewables business as our top 3 are or on the other side, [indiscernible] detractors like Nokia. But what's exceptional that we see this year is the sort of scale of the -- or the unusually large returns on [indiscernible] stocks up 170% both ones that we [indiscernible] benefit from and those that we missed. So in an absolute sense, there's been quite a big deviation from the winners and losers, but it's one where in aggregate, we have been on the right side. And probably more interesting, if we look ahead the themes and the stocks that we're excited about, especially as many of those are touching on some of the themes that we've already seen. So here on this slide, I've mentioned already about the improving fiscal landscape in Europe. And I think many of you will already be aware of the significant change of direction we've had in that [indiscernible] particular in Germany and that is really very meaningful from a regional perspective. So the largest economy with the broader shoulders in terms of their [indiscernible] debt position, signaling a far more -- far more supportive physical standards. And you'll see from the chart on the left-hand side that this is badly [indiscernible] meaning. So here, we show government investment over the past few decades excluding the extraordinary period around the GFC in [indiscernible] code. So this is really what we think of as the underlying fiscal support from the regions. You see that Europe has trailed the U.S. in that regard, that is set to change. In fact, that strategic shift is already coming through in numbers. And we believe the respective balance sheet positions and signaling from politicians support discontinuing for the next decade at least. So on the right-hand side, we've identified some companies that we see as a beneficiary. So for example, for 2 decades, Europe is systematically underspent on defense, relying heavily instead on the U.S. security and [indiscernible] and continually missing its major commitments. That era is clearly over. And the [indiscernible] Europe plans to increase defense spending by EUR 800 billion through to 2030 and crucially that 1/3 in spending is designed to favor European manufacturers as part of the desire to rebuild the industry and rebuild strategic autonomy in the region. Thales is a French company that makes the technology there of modern defense [indiscernible] defections, radar systems and watch disguise, communication systems for soldiers in the field, cybersecurity from government. It's not tanks and fighter jets, but it's the technology that supports armed forces. What we've seen in recent trading update at Thales reporting orders up 27% year-on-year, specifically calling out large contracts from European governments. Those are contracts signed today, which become revenue for years to come. So that order book is a hugely important number, and it continues to grow. Another area of historic underinvestment [indiscernible] opinion to our energy infrastructure. So you -- actually, Nick, if you just stay on the last slide, please, I'll just touch on ABB because it's been our top contributor to performance last year, but one which we still think is particularly well positioned. So every new factor built or rather every new factory that's built under [indiscernible] the Europe reindustrialization push, every [indiscernible] point that's upgraded or new data center, none of that work there getting reliable [indiscernible] power. I think a critical part of achieving any of our wider economic goals is that the underlying electrical infrastructure has to be rebuilt, it has to be expanded, it has to be fit for purpose essentially. And that's the opportunity for ABB. So this is a Swiss industrial that have [indiscernible] keeps electricity flowing. So make circuit breakers, switchgears, grid automation systems. Everything that sits between the national grid and whatever needs powering, ABB fits within that. And I think they frame it very simply themselves but the world has just got a much greater thirst of the power now and the infrastructure hasn't kept pace. And so we're seeing extraordinary demand with growing order book of company like ABB.[indiscernible]. If we switch to the next slide, please, in a related area is the green energy transition. [indiscernible] less move from sort of the base to the build-out. And it's one of the biggest long-term investment projects probably than we see in the global economy, and you can see the changing shift in that from the chart on the left-hand side. And at the core, the change is very simple. We're shifting from a system reliant on fossil-fueled power to one where a lot more of our electricity is going to come from wind, from solar or potentially even gas. And that creates issues. Wind and solar are often produced far away from where that power is used. And they're also more variable. So it's not just about generating clean power to the [indiscernible] by keeping the grid stable, it's about preserving it in many cases. So that's why the big opportunity isn't only in pure renewables. It's not just about buying [indiscernible] players. A lot of the value sits [indiscernible] transition. Some of the [indiscernible] build the equipment and the networks that keep the system running reliably. So on the bottom of this, we have Siemens Energy. I think that's a great example. We are exposed to that practical buildup. Wind and new grid technologies connect new supply, move power over long distance as [indiscernible] stability. But they also have a gas turbine business. And [indiscernible] it the transitioning economy. Gas Connect as a bridging and a balancing source of power of providing flexible generation as of new renewables come up to speed and that's because of their engineers are helping reliability while [indiscernible]. The other name there, E.ON is another important position within the transition. It's moved itself from being kind of a traditional Europe utility into a -- to a digital play make, so focusing on modernizing and digitalizing the distribution grid. They're investing billions and the German government is giving them billions to invest on the physical grid to handle two-way flow of energy from, say, solar panels and EV chargers. If we switch maybe to the final slide that we have on some of these market opportunities and to give you [indiscernible] often given [indiscernible] this chart on the left-hand side, which is a bit confusing. But I do think it is one of the most remarkable capital expenditure curves in modern history. So it's worth going through it. What this shows us essentially is the annual infrastructure spend of hyperscalers, so names like Amazon, Meta, Google, Microsoft. And the wiggly lines on this chart are showing how those CapEx estimates for the respective year evolved over time. So I think the simplest way is to look at just 2 of them. Look at the purple line at the bottom. What I'm saying is roughly at the start of 2021, analysts started to forecast what these hyperscalers would spend on CapEx in 2023 and it was about $120 billion. And ultimately, that was pretty accurate, came in at around $150 billion. What we are seeing now is a rapid acceleration in spend and one that wasn't anticipated by the market. Take, for example, the orange line. 2 years ago, the market expected 2026 CapEx would come in around $250 billion. That number is now $650 billion and it's still growing. So I think critical insight for investors here to benefit from this, you don't need to own a hyperscaler or we don't need to predict which LLM will all be using in 2 years' time. And if I go from the smarter play is to own the companies that are providing the essential tools that are the components, equipment that's needed to make it [indiscernible] that possible that it's all this money is being spent on. So take, for example, a semiconductor [indiscernible] chain. Before [indiscernible] chip compare an AI model before it can even be built, someone has to print it. And that process printing the microscopic circuitry onto a piece of silicon requires one of the most complex machines ever made. And that machine is almost only made by ASML, which is a Dutch company with a complete monopoly and most advanced versions of these machines. Each one of them cost upwards of $200 million. It takes months to assemble. You have a waiting list stretching over years. So every advanced AI chip is being made using these machines. When you look at that CapEx curve on the left-hand side, this is a company that benefits regardless of which hyperscale [indiscernible], regardless of which AI model comes out on top. ASML is getting a piece of them all because without their machines, none of that gets built. Another that we have Legrand at the much more glamorous end. Legrand is a French company that make physical infrastructure that keeps data center running. So the rack that hold the servers, the units that distribute power to them, the systems that stop them from overheating. Think of that as kind of the plumbing and the wiring behind sort of AI and the data center revolution. And I think what we're seeing is more data centers and more demanding ones. And because of that, we're seeing these facilities aren't just expanding, they're [indiscernible] being fundamentally redesigned. They're being upgraded and Legrand is designing likely the next-generation solutions that are needed for that rebuild and that [indiscernible] upgrade. So it's not nearly as glamorous business as ASML, but because it's still an essential one, it's a profitable one and it's a fast-growing one and it can be found at a more attractive valuation because of that [indiscernible].

Great. Tim, for that [indiscernible]. Maybe just sort of conclude all of those points, just the concluding slide here. So the top left, our portfolio management team, really well-established team. [indiscernible] We've worked together for a number of years and have all spent their entire careers at JPMorgan and enjoyed the lots of resources available to them. Clearly really strong long-term performance that Tim's spoken are delivered in a really consistent and repeatable fashion throughout different market environments. It's an all cap portfolio, so the portfolio managers really can't take advantage of opportunities across the market cap spectrum and using the investment trust structure in that way. In addition, the 4% of NAV enhanced income policy which was adopted in 2022, again, using the investment structure the ability to pay income from capital reserves allows the portfolio managers to invest in a total returns basis, not having to worry and chase income for the benefit of shareholders. And bringing this all together, that's been recognized in the industry with numerous awards, which were often [indiscernible] too polite to shout about, but we have put them on here as it has been a very well-regarded strategy.

We'll now move to audience questions. We have had a number through. But just as a reminder, doesn't ask a question box at the bottom of your screen, and we'll try and get through as many as we can. Just the first one, Tim, around the natural yield from the portfolio. Just thinking about that enhanced income point there [indiscernible] where obviously, we can use capital reserves. But in reality, how much are you using?

Yes. So I think we're fortunate that Europe is quite naturally a good [indiscernible] yielding markets. I think the portfolio is around 3.1%, 3.2% today, so it's not far from that 4%. But as you mentioned at the end, where because of the investment trust structure, I think we're very lucky that we're really agnostic about where we are finding [indiscernible] total return opportunities. So we don't have to change yield. If [indiscernible] that fell to 2.8%, we wouldn't worry if that at 4.5%, we also don't worry. It reflects where we are seeing opportunities in the market. And often we fit, we think to fit around a 3 -- maybe probably 3.2% towards the low end to 3.5% or 3% to 3.5% are where we usually sit.

How many holdings does the portfolio have today? And how does that compare versus history? And also just a bit on your sort of small cap holdings, sort of off benchmark element?

Yes. So we have 110 today, which has been growing. It's maybe not at its highest point, and we typically think of maybe 85 to 120 being the number. I think -- and I think you're right to put that with [indiscernible] cap because one of the reasons why our name [indiscernible] going to be growing is because we're seeing far more opportunities in small [indiscernible] cap names and to access those opportunities, we typically take small active positions across a number of names. I think we hold about 30 stocks that are off benchmark for us, which is usually the best proxy of kind of small cap names. And I think it's really important for us to put this across that -- that doesn't mean that we are benchmarking, it doesn't necessarily change our active share, it doesn't suggest anything around the conviction we have in names. It often just means that we've reduced the positioning in a very large cap or [indiscernible] and reinvested it into 5 or 6 more caps [indiscernible] doesn't really change our conviction or the general structure of the portfolio.

You mentioned it earlier, but could you just reiterate on the upper limits on the size of holdings from your sort of risk control parameters? And how often you sort of come into contact with those parameters, I suppose?

Yes. So I think we have it on one on the slide, yes. But basically, it's around -- it's like 2%. How often do we come up against this. We are very comfortable running up to 2%. We're not close to it at the moment necessarily on individual names, but it isn't something -- [indiscernible] that's a limit that we don't ever foresee getting to, but I think important for us is we are looking to balance all the risks in our portfolio. And we recognize that often with these names as other opportunities and other stocks that again, doesn't show lower conviction in what we're doing, but helps to diversify some of the risk that we have, diversified [indiscernible] and credit risk and the way that we've been [indiscernible] are quite successfully for the past few years. Sorry, Nick, I think you're on mute.

Has the deployment of German fiscal spending or the pace of it surprised you and that you haven't yet seen it come through too much or perhaps you would have something to [indiscernible] see it.

No, it's a very fair question. In one regard, it hasn't surprised us because when we've talked about this as a theme or when we've seen the company [indiscernible] and we've either spoken to them or watched the numbers [indiscernible] consider. We've been very skeptical that the pace would be too fast, but it probably has even [indiscernible] then this continued little bit [indiscernible], but we are still finding lots of individual opportunities in part, whether it be [indiscernible] a net in energy infrastructure, whether it be into data center CapEx, whether it be into a smaller cap company that can do well regardless because they're improving market share. So we're still seeing lots of opportunities that are correlated [indiscernible] to. And I think it is fair that the market was potentially getting ahead of itself in these opportunities. And we've been very cautious to avoid those where we thought that estimates for 2026, 2027 around too far because actually we think that this will be a slower curve through '28, '29, '30 and beyond.

Great. And just a couple of questions just on the transaction with European Opportunities Trust, which I covered at the beginning, but just to do so again. So [indiscernible] heads of terms were agreed at the end of May between European Opportunities Trust and JPMorgan European Growth & Income. The result of that should see JEGI as a larger, more liquid vehicle, which will be more marketable and has benefits for shareholders in terms of reduction in management fees and ongoing charges. Further information on that should be out at the start of July, which will have the sort of timelines and information and next steps from there. But really exciting time for the company, but there'll be more information to come out in in the next few weeks. I don't know if you want to add anything to that, Tim?

No. As you say, it's really a really exciting time for us. We're keen to get out and see anybody and portfolio [indiscernible] story and we think structurally this we won't change anything in how we are running the portfolio and you see the benefits to shareholders through, as you mentioned, to lower feed and through a more liquid trust [indiscernible] hopefully, over the long term need to a tighter discount.

I just got 2 quick questions. One, what are your sort of key short-term risks? And then two, obviously, you did very well from European banks. Could you give a bit more of your outlook there?

Yes. So taking them in reverse order. We're still overweight European banks, and we still see -- we still see a strong opportunity there, but it is different to what it was going back 5 years, 3 years ago and simply because of the performance of these names, the thesis has changed, slightly -- what we still see a compelling valuation opportunity. We still see disciplined capital allocation. And now we're starting to see more loan growth, partly boosted by this need to -- the fiscal stimulus in Europe and the banking sectors roll within that. So still overweight bank [indiscernible] is positive. The near-term risk, I think, would be the kind of AI CapEx. We spoke a lot about that, we benefited from that in the portfolio, and we're still positive on it, but it is a risk that we are controlling because if there was a sudden step back if we had a sort of DeepSeek moment like we had before, which led to change in expectation of some of the CapEx spend and I think that would be a near-time risk [indiscernible].

Great. We are just passed the half hour mark. We do try and keep these to around 30 minutes. So I think I will draw stumps there. Any questions that we didn't answer, we will come back on e-mail. Thank you for the time and joining us this afternoon. And what's a really exciting time for both European equities, but also for this investment trust as well. There's a really short feedback survey, which will pop up on your screens at the end of the call. And we do really appreciate you taking the time to share your thoughts on today's webinar. But with that, enjoy the rest of your week. Thank you.

Thanks, everyone.