Long-term gains still strong for out-of-form investment trust

Against a backdrop of a year of elections for many emerging market countries and largely successful battles to control inflation, there was varied performance across emerging nations.

Overall, however, the 12 months to the end of June 2024 were strong for emerging markets. The MSCI Emerging Market index rose over 13%.

However, for JPMorgan Emerging Markets Ord (LSE:JMG) returns disappointed, with a NAV return of just 7.2% and share price return lower at 4.6% as the discount to NAV widened to -12%.

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Below, we drill into the annual results for the Super 60 fund.

The numbers in detail (for financial year to 31 January 2024)

Share Price Return: +4.6%
Net Asset Value (NAV) Return: +7.2%
Benchmark Return: +13.2%
Premium/Discount: -12% (-2.3% vs prior year)
Dividend: 1.9p (+15.2% vs prior year)
Gearing: 2% (vs 0% prior year)

Performance

While the effects of buybacks and currency were small buffers for performance, it was stock selection during the period that detracted notably.

To pull out some examples, while India’s stock market continued its rise throughout the year, JMG’s holdings, especially across IT and banks, failed to keep pace with the market.

In addition, Chinese markets were weak throughout the year, and JMG found that its consumer sector exposure particularly dragged on returns as the fund managers underestimated the decline in consumption.

The recent failure to outperform warranted the board to request a deep dive into performance. The results provided assurance that the management team were sufficiently skilled and well-resourced to meet the trust’s objectives in future and the investment process was sound. Longer-term returns for JMG remain strong and convincingly ahead of index and peers.

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Austin Forey, who has managed the trust since 1994, heads the global emerging markets fundamental team. Support is provided by an extensive team of approximately 90 dedicated emerging market and Asia-Pacific portfolio managers and analysts.

Outlook

Emerging markets have had a difficult ride over the past few years, but it is noted that there has broadly been resilience in navigating a dynamic environment of changing global interest rates.

The potential for lower US interest rates and a weakening dollar could well be supportive for emerging markets alongside good earnings growth prospects and overall lesser relative valuations versus the US. The demographic, socioeconomic and technological strengths of emerging economies remain the long-term attributes that compel investment outside developed regions.

Discount

The discount ended the period at -12%, widening from -9.7% at the end of the prior period. Shares were bought back during the period, slightly supporting returns. However, the discount continued to widen post-period end to a current depth of -12.8%.

Portfolio

The portfolio retains its previous biases, still being overweight India and Latin America and underweight China.

The key focus on quality remains a driving factor in stock selection.

Portfolio changes included trimming across India, China and Taiwan, in favour of adding to Latin America and Europe.

In India, valuations on aggregate have risen to historic highs thanks to a buoyant domestic economy. Management note that this has made for some challenges in finding investment opportunities at rational valuations, but that the abundant and diverse market still offers areas where valuations “make sense” given companies’ outlooks.

On the flip side, China’s valuations are weak, which presents investment opportunity, but management perceive challenges for Chinese businesses due to a potentially less attractive growth outlook.

New additions to the portfolio include OTP, a Hungarian bank operating in Eastern Europe and Banco Bilbao Vizcaya Argentaria SA (XMAD:BBVA), which, while headquartered in Spain, derives a large portion of profits from emerging market regions.

Dividend

The dividend for the full-year is a proposed 1.9p, a rise of just over 15% versus the prior year. This is covered by revenues.

ii View

While returns to JMG shareholders were positive, some may be disappointed by a failure to capture the strong upside the benchmark experienced in the year.

In spite of being overweight the strong Indian market and underweight a weak Chinese market, the effect of stock selection was significantly negative to drive underperformance in the year.

Along with the trust’s weak 2021-22 period, this has made the three-year return of JMG quite some way below the benchmark return.

The board’s decision to conduct a “deep dive” into performance perhaps shows a minimal tolerance for underperformance, especially given that longer-term returns (10 and 15 years) for JMG are convincingly ahead of comparators.

There are trusts with worse relative performance where no such review has been commissioned. But throughout JMG’s many years, it has been quite rare for the trust to underperform over a three-year period, so a closer look can be seen as a prudent check-up.

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The deep dive affirmed the board’s confidence in the management team, resourcing and investment process. A key takeaway was that the recent phenomenon of management’s contribution being negative is fairly anomalous in the wider history of the trust, with Forey consistently adding substantial value over various periods. Forey was joined by John Citron in March 2021 as co-manager.

The process is one of taking patient and long-term positions, with a keen focus on quality-growth – an approach that can be reasonably expected to leave the trust out of favour for short-medium periods.

By way of further reassurance, earlier this year a five-year conditional tender offer for 25% of share capital at NAV -2% has been introduced should the trust’s NAV underperform in the five years from 1 July 2024.

While emerging markets have the tailwinds of declining US rates and lesser valuations behind them, they are volatile markets across which political and economic change can happen rapidly.

At the time of writing, the previously out-of-favour Chinese market (represented by MSCI China) has soared near 16% in under two weeks in response to immense stimulus packages.

The heterogeneous regions of the emerging world are now traversing different points of economic and monetary cycles, both to one another and to the US.

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Emerging markets are an area where active managers have the potential to add real value in navigating these varying economic, market and geopolitical idiosyncrasies, and JMG has proven capable of doing so over time.

The trust benefits from Forey’s long tenure and both his and Citron’s substantial experience in addition to JPM’s immense analyst resource.

The revised tiered charge meant the fee for the year of 0.79% was one of the cheapest actively managed peer emerging market investment trusts or funds.