Should you buy JPMorgan's top emerging market trust?

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Veteran fund manager Nils Taube used to advise people “never to invest in a country where you don’t need a coat in winter”. That view came to seem antiquated when Jim O’Neill of Goldman Sachs coined the term “Brics” to cover the largest emerging economies: Brazil, Russia, India and China. O’Neill’s thesis was that these countries were emerging as central players in the world economy. They were collectively set to overtake the G6 developed economies in size on a purchasing power parity basis by 2025. The implication was that these countries would account for an increasing share of global stock markets.

Instead, Brazil has proved the old adage that it is “the country of tomorrow and always will be”. Russia has gone backwards economically and disappeared as a destination for investment. The Chinese economy is struggling to recover from a huge property bust and stocks have flatlined for 25 years. Only India is making the progress expected, while South Africa, tagged on as an afterthought, struggles with crime, corruption and anaemic growth.

There are bright spots in emerging markets, including Poland, South Korea, Vietnam and – who would have believed it – Argentina, but some of Goldman Sachs’ “Next Eleven” are either struggling (Mexico, Nigeria) or have gone backwards (Iran). The share of the MSCI All Country index accounted for by emerging markets is just 10%, no higher than when the term Brics was first coined.

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Is JPMorgan's fund the best way to invest in emerging markets?

Still, as Austin Forey, manager of the £1.3 billion JPMorgan Emerging Markets Trust (LSE: JMG) since 1994 reminds us, investing in emerging markets is about “long-term investment in really good businesses with sustainable growth”. These companies are mainly to be found “in the same sort of places in terms of sectors”. Indian companies account for 24% of the portfolio, Chinese for 20% (plus another 6% in Hong Kong), Taiwanese 17% and South Africa 7%. More importantly, 26% is in consumer stocks, 27% in financials and 30% in information technology. “The global technology revolution is powered by emerging markets,” says co-manager John Citron. “The vast majority of the world’s hardware and a clear majority of its software is built in emerging markets; hardware in Taiwan, Korea and China and software in India, but also Latin America.”

Hence the top three holdings are Taiwan Semiconductor, Tencent and Tata Consultancy, comprising 10.7%, 6.8% and 4.7% of the portfolio respectively. There are about 60 holdings in all, but the top 10 make up half the total. Turnover is low, but “interesting new ideas this year have pushed it up”. Nine smaller positions have been sold. On the aggregate numbers, emerging markets look cheap with a valuation of 11.9 times forward earnings, says Forey. But JMG believes in paying up for quality (the portfolio’s multiple is 16.4, but with a return on equity of 16.4% against 11.3% for the index, and net cash compared with borrowings of 24% of net assets).

“We weren’t cautious enough about China, but a lot has changed recently. I don’t worry about the stocks we own there.” He struggles to find value in India’s “red-hot market”, but is adding to exposure to Latin America, including 5% in Argentine firms. Performance has lagged the MSCI Emerging Markets index in the last three years (-8% versus +2%), but has picked up in the last year (+14%) and has been consistently ahead of the index longer term. This is creditable for a trust that sticks to larger companies and is wary of straying too far from the benchmark index. In addition, the shares trade at an attractive 14% discount to net asset value (NAV). Taube’s maxim would rule out investing in much of the US, while O’Neill’s focus on the Brics ignores the success of the small, geopolitically unimportant countries such as Taiwan, Singapore and Chile. With sentiment towards emerging markets at a low ebb, this could be a good time to invest in their best companies.

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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.