The manager of JPM Emerging Markets trust is optimistic about the future.
Austin Forey, manager of JPM Emerging Markets trust (LSE: JMG), has a warning for those trying to find the perfect moment to buy into emerging markets (EMs) after their weakness over the last year. Returns in sterling over the last 20 years, he says, have compounded at 10.8%, but for those who missed the ten best days, the figure falls to only 5.2%, and for those who missed the best 30 days, just 1%. "I can't tell you which will be the best days," he says, but it is common for the biggest jumps to be seen when markets turn.
Returns for JMG have been better; a compound 12% for net asset value (NAV, the value of the underlying portfolio) and 13% for the share price. Performance over one, three and five years is the best in the sector, while over the year to the end of October net assets were down just 4% as the MSCI emerging markets index was down 9%. Despite this, the shares of this £1.1bn trust trade at a 12% discount to NAV.
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Focus on the long term
The key to Forey's record is that he doesn't change the portfolio very much. "We have only traded one of the top-ten holdings in the last twelve months." This is the consequence of four principles: staying invested; long time horizons; a focus on companies rather than countries; and "it's not just what companies do, it's also how they do it".
"In the long term, currency effects wash out and valuations change little, so we worry about sustainable long-term earnings growth," he says. As for geography, "it's a great temptation to fall into the trap of talking about countries", though the context of inflation, politics and the legal framework cannot be ignored. This accounts for zero exposure to South Korea, where Forey believes corporate governance to be a major problem. As for China, "market forces are in a generational struggle with the communist party, and market forces are steadily winning".
Plenty of earnings growth
The importance of looking at "how companies do it" is shown by the contrasting fortunes of different companies in the same sector and country. While the share price of state-controlled China Life Insurance has multiplied five-fold since 2005, that of Ping An has multiplied 23-fold. Among South African banks, Capitec is up 300%, while Nedbank is up just 15%. Hence the portfolio's overlap with its benchmark index is under 25%.
Compared with that index, the 59-stock portfolio is relatively expensive, trading on 18.7 times forward earnings against 11. Yet return on equity (a measure of profitability) is 18.7% against 13.9%; portfolio companies have net cash while the index has a debt-to-equity ratio of 31%; and long-term earnings growth is higher. "I don't worry particularly about the valuation of the market overall," says Forey, though his charts show markets to be inexpensive and currencies "slightly on the cheap side in aggregate".
This year has been tough for EMs, thanks to dollar strength, US trade disputes (notably with China) and sanctions on countries such as Iran. "There has been a lot more politics in equity markets than for a while, and the issues seem to be intensifying." Yet, "contrary to popular belief, there has been plenty of earnings growth, with much of the macro-effect coming out in currency movements".
JP Morgan's analysts expect earnings growth to continue at an average rate of 10% per year, but more in the healthcare and technology sectors and less in energy and materials. They forecast a five-year annualised return of 16%, almost the highest for ten years, suggesting a strong rally in emerging markets is imminent. With the JMG portfolio seeing faster earnings growth, its valuation will come down quickly. "It's quite hard not to be an optimist," says Forey. "It's a world full of opportunities."
Max has an Economics degree from the University of Cambridge and is a chartered accountant. He worked at Investec Asset Management for 12 years, managing multi-asset funds investing in internally and externally managed funds, including investment trusts. This included a fund of investment trusts which grew to £120m+. Max has managed ten investment trusts (winning many awards) and sat on the boards of three trusts – two directorships are still active.
After 39 years in financial services, including 30 as a professional fund manager, Max took semi-retirement in 2017. Max has been a MoneyWeek columnist since 2016 writing about investment funds and more generally on markets online, plus occasional opinion pieces. He also writes for the Investment Trust Handbook each year and has contributed to The Daily Telegraph and other publications. See here for details of current investments held by Max.
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