European investment trusts dominate the top performers in the first half of the year
In the ever-evolving landscape of global investments, European investment trusts have emerged as one of the standout performers in 2025. Particularly, European small caps have secured the top spot in the Association of Investment Companies' (AIC) performance table, with returns of 24% in the first half of the year.
According to Morningstar's analysis, European small caps are trading at a 20% discount to fair value, suggesting potential for further growth. This discount is not only in comparison to their larger-cap peers but also to their own long-term history, as noted by George Cooke, manager of the Montanaro European Smaller Companies Trust.
The strong performance of European small caps can be attributed to several factors. Monetary easing and interest rate cuts by the European Central Bank (ECB) have lowered borrowing costs and stimulated demand domestically. Increased fiscal spending, notably Germany's large stimulus efforts, has supported economic recovery and growth in the eurozone.
The attractive valuations of small-cap sectors have enticed investors looking for growth opportunities. Robust earnings growth among smaller European companies and improving investor sentiment, especially in countries like Spain, Poland, and Greece, have also contributed to this strong performance.
Sector allocation and responsible investment approaches have played a significant role. Funds like EdenTree European Equity, which focus on ethical investment screens and strong stock selection, have outperformed even without exposure to high-performing sectors like defence and energy.
Comparatively, European small caps and banking stocks have outperformed other sectors and regions. The FTSE World Eurozone Banks index has risen 64.7% in sterling terms so far in 2025, while the Indian equity trusts and Latin America sectors, though formerly strong, have faced more challenges.
In contrast, top-performing sectors in Europe include banks and aerospace & defense, both domestic-facing industries. Sectors like luxury, healthcare, and semiconductors are expected to catch up in the second half of 2025.
Jules Bloch, co-manager of the JPMorgan European Discovery Trust, believes European small and mid caps could be more sheltered from Trump's tariffs given their domestic focus. The sector has bounced back this year due to interest rates starting to come down, strong rental growth, and an increase in M&A activity.
Lower inflation could help matters, given small caps are generally more interest-rate sensitive than their large-cap counterparts. The average investment trust (excluding venture capital trusts) is up 7% over the past six months in share price terms.
Meanwhile, UK investors withdrew £622 million from North American equity funds in May, while European equity inflows accelerated over the same period, hitting £435 million.
The UK commercial property sector has been another strong performer, coming second in the AIC's rankings in the first half of 2025. It is up 18% so far this year. Chinese equity trusts are up 15% over the past six months.
In conclusion, European investment trusts, particularly those focused on smaller companies, have delivered robust returns due to a combination of supportive monetary policy, fiscal stimulus, attractive valuations, and resilience to global trade tensions, setting them apart positively from other sectors and regions so far in 2025.
[1] AIC Performance Tables: https://www.theaic.co.uk/performance-tables [2] Morningstar: https://www.morningstar.co.uk/ [3] EdenTree European Equity: https://www.edentree.co.uk/products/equity/european-equity/ [4] AIC Sector Performance: https://www.theaic.co.uk/sector-performance [5] FTSE World Eurozone Banks: https://www.ftse.com/products/indices/world/equity/world-eurozone-banks-index
- Investors looking for growth opportunities might find interest in European investment trusts, especially those focusing on small caps, given their attractive valuations and potential for further growth, as suggested by Morningstar's analysis.
- Tariffs imposed by President Trump could potentially have less of an impact on European small and mid caps, as they tend to have a more domestic focus compared to other sectors, according to Jules Bloch, co-manager of the JPMorgan European Discovery Trust.
- In the second half of 2025, sectors like luxury, healthcare, and semiconductors are anticipated to catch up to the strong performance of sectors like banks and aerospace & defense in Europe, as noted in the AIC Sector Performance analysis.
