JPMorgan Fund Manager’s ESG Bets Win Spot in U.K. Midcap Gauge

(Bloomberg) -- A JPMorgan Chase & Co. fund run by one of the firm’s longest-serving investment-trust managers has won promotion to the U.K.’s midcap equity index by riding the wave of environmental, social and governance stocks.

JPMorgan European Smaller Companies Trust Plc -- which wagers on firms with market capitalizations of up to 6.3 billion pounds ($8.2 billion) -- will join the FTSE 250 index on Monday after its holdings in everything from green energy producers to online drug and nutrient retailers helped it outperform a peer group and spurred a rally in its share price.

“If you look at our year-to-date performance, the biggest driver has been our renewables exposure,” said manager Franceso Conte, who has run the trust for 22 years and overseen a return of 9.9% so far in 2020. Those stocks were “really, really cheap” when the fund began investing in the sector two or three years ago, which helped alleviate concerns that they would require more capital to continue growing, he said in an interview.

Many of JESC’s best-performing holdings this year are clean energy producers, such as Spain’s Solaria Energia y Medio Ambiente SA, which has more than doubled in value, as well as France’s Voltalia S.A. and Germany’s Encavis AG, which have added 63% and 55%, respectively. Its focus on renewables is paying off amid an accelerating shift toward solar and wind power, with a report in June saying more than $2.7 trillion has been invested in building up renewable energy capacity over the past decade.

‘So Much Demand’

“Think of some of those enormous tech companies in the U.S. that have announced they want to go either carbon neutral or even carbon negative,” said Conte, JPMorgan Asset Management’s joint third-longest serving investment trust manager. “Of course, the only way to do that is to have renewable energy, so there’s so much demand for this stuff.”

The focus on renewables also feeds into the fund’s investments in the semiconductor sector. One of its largest holdings is ASM International N.V., a Dutch-listed maker of machines used to manufacture chips, whose shares are up 20% this year. “The amount of electricity that you can produce with a solar panel will keep rising, as long as semiconductors become more and more efficient,” Conte said.

Wellness Bets

But it’s not just renewables and chips that have contributed to the trust’s move to the FTSE 250, a promotion that will attract index tracker funds. The firm also has stakes in “wellness” stocks like online pharmacies Zur Rose Group AG and Shop Apotheke Europe N.V., whose share prices have doubled and tripled, respectively, in 2020.

Other environmental winners include Norway’s Tomra Systems ASA, a maker of bottle and can recycling machines that’s gained 33% this year.

Stock Outperformance

JESC shares are up 8.1% this year, outperforming the 19% decline in the FTSE All Share Index, of which it is a constituent. That largely matches the fund’s rate of return, which slightly exceeds a peer group’s 7.8% gain, according to data compiled by Bloomberg.

While 2020 has been a tougher year for many, that’s not the case for Conte’s fund, which in recent years had underperformed. Its 19% boost in 2019 was lower than a 24% return for peers, while its 21% negative return in 2018 compared with an 8.4% loss for the peer group.

“What affected performance was the fact that we were investing a good part of the assets in value stocks -- cheaper stocks -- which has been a style of investing that has been very out of favor,” Conte said. “If we had been 100% growth we would have done better in the last two or three years.”

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