Activist Saba added to its holding in JPMorgan European Discovery (JEDT ) after half-year results disclosed the underlying value of the smaller companies portfolio had fallen 11.4%, double the losses of its benchmark.

In the six months to 30 September the £808m European small-cap fund struggled, adding to a longer period of underperformance. Over five years the net asset value has returned 2%, while the benchmark, the MSCI Europe ex-UK Small Cap, rose 20.1%.

Following the interims Saba Capital bought more shares in the company, bringing its total ownership to 13% up from a 12% stake at the end of October. 

In recognition of the poor performance the trust’s managers, Francesco Conte and Edward Greaves, ‘enhanced risk management’ of the portfolio to better protect it on the downside during volatile markets and capture the upside in a recovery.

‘Top-down macroeconomic uncertainty has been dominating the performance of stock markets for some time,’ the pair wrote. ‘As a result we have transitioned towards a more diversified portfolio comprising companies that are benefiting from the current high interest rate environment, while adding attractively valued companies that should do well as interest rates begin to fall.’

The changes included increasing the number of holdings, many of which are in the consumer discretionary space where valuations are attractive. The sector became the portfolio’s largest overweight, with financials also increasing, becoming the second largest bet.

Italian gym equipment manufacturer Technogym and espresso machine producer De’Longhi both made there way into the portfolio alongside French reinsurer Scor and Italian bank BPER Banca.

To fund the positions the manager reduced their exposure to construction-related industrials as ‘high bond yields are adversely impacting demand for new construction and cost inflation is putting pressure on margins’.

They also sold or reduced holdings whose strong share price performance meant they were no longer small, such as Belgium holding company D’ieteren and Italian cable manufacturer Prysmian.

Heatlthcare and real estate are the managers’ largest underweights due to ‘a combination of poor momentum and expensive valuations’. The duo have their biggest bets on France and Italy with Norway and Switzerland being their lowest convictions.

Conte and Greaves said looking-ahead the ‘outlook for equities is very hard to anticipate’.

‘We suspect that earnings will dominate in the near term, keeping equities under pressure, while expectations of lower interest rates may play an increasingly supportive role next year.’  

Chair Marc van Gelder welcomed the moves and said relative performance has ‘improved in recent months, suggesting that these portfolio changes are beginning to pay off’.

JEDT’s discount narrowed during the six-month period from 15.1% to 14.8% as the board bought back 50,000 shares.

It has ramped up buyback activity since, with over 3m further shares purchased, narrowing the discount to 11.3%. 

The board will hope this, along with an increased interim dividend of 2.5p per share, up from 1.2p the previous year, will keep its shareholders happy. 

Aside from Saba, other major shareholders include Allspring Global Investments at 16.4%, another activist, City of London, with 12.1% and Lazard Asset Management holding 8.7%.

Stifel analysts recently downgraded JEDT to ‘negative’ due to its underperformance and ‘more attractive alternatives available’.

In an update on Thursday analyst Will Crighton said the discount is ‘not attractive’ when compared to its peer European Smaller Companies Trust (ESCT ). ESCT trades at a 14% discount and is the top performer of the Association of Investment Companies European Smaller Companies sector, with underlying returns over one and five years of 5.5% and 63%, with shareholders getting 2.5% and 61.2%.