World-beating ovens, engineers and hidden gems: Why European small caps could be a boon for investors

German oven manufacturer Rational AG sells its Icombi oven to restaurants and caterers worldwide.

Ovens aren't as flashy as AI chatbots, hi-tech drones or cutting-edge software systems, and they certainly don't get investors excited in the same way.

For Jack Featherby, portfolio manager of JPMorgan Discovery Trust, this doesn't matter.

He told This is Money: 'We're looking for companies with a superior product that has a long tenure… to give you an example of one of the best performing stocks in Europe over the past 20 years, its Rational.'

JPMorgan Discovery Trust, or JEDT, holds Rational as part of its portfolio of 'undiscovered gems', and it is clear to see why.

Notwithstanding a rocky few years beset with ups and downs, Rational shares have still grown more than 800 per cent since 2005.

The firm, Featherby says, 'has good capital returns, but also has a product which is under-penetrated and really superior to everything out there.'

Rational essentially makes a few products exceptionally well, and sells them on a global basis.

Featherby said: 'If you go into a restaurant kitchen or food truck, many will have a Rational oven.'

This approach underpins JEDT's strategy. The trust aims to find 'hidden gems' that have good products, good business fundamentals, and most importantly have the ability to grow over the long term.

Some of these hidden gems, like Rational, are leaders in one product.

Others, Featherby says, have a dominant market share in their local market. He calls these 'national champions'.

Featherby said: 'They tend to be able to earn excess returns and be able to grow consistently. They can be more in control over their own fate, rather than it being dictated by the competition in the market.

'They have optionality to expand abroad if they wish, but they could stay within their borders and satisfyingly grow.'

It is from these two criteria that JEDT selects companies that have potential for long term growth, balancing the value the company offers, its quality as a business and the momentum it has behind it.

'The operational momentum side of things is shorter term, it allows us to point in the direction of where the market is going.'

Featherby says this framework strategy meant it stayed invested in defence stocks, which in 2025 have seen strong growth.

'Performance [in defence stocks] has been phenomenal over the last year, but valuations are becoming quite steep.'

JEDT has began to cut its defence allocation as these firms become more expensive, which it says is less attractive to the trust.

As defence stocks becoming increasingly expensive as more investors continue to pile in, many will be looking for the next growth prospect that still provides good value.

For JEDT, the answer lies in electrification, which Featherby describes as 'the real long-term driver in Europe'.

Featherby said the sector, covering the replacement of traditional energy forms in everything from transport to infrastructure and industry, will benefit from environmental changes that mean Government and institutional spending in this way is unavoidable.

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He said: 'It's forced by the natural world, with rising sea levels or increasing temperatures.'

Featherby added: '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].'

JEDT's portfolio, he said, is exposed to electrification across the board, including in green infrastructure and electric vehicles.

For example, the trust invests in German engineering firm Bilfinger SE, which it says is benefiting from a shift away from traditional energy sources in Germany

Featherby says large firms in Germany are contracting businesses like Bilfinger to support their shift to green energy sources.

In an uncertain world, Featherby says, what makes these 'hidden gem' companies so attractive is their micro focus.

'When you're meeting management teams, it isn't uncertain. A lot of these companies are still doing the same thing they've always done,' he said.

'They have a smaller focus, or they just have that one superior product.'

He added: 'Small caps are an asset class that should be pretty insulated, if not a beneficiary of today's world, and at an attractive valuation.

'People think the only way to invest is in AI, but they are investing in a market with record high valuations in the world's most global companies.

'We're in a world where de-globalisation is not a cool word to say… de-globalisation is better for domestic companies, so it should be better for small caps.'