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JPMorgan’s Forey: digitisation, not disease, drives dynamic emerging markets

13 October 2020

JPMorgan Emerging Markets fund manager Austin Forey says returns in sector increasingly driven by same dynamics as developed markets, a trend he labels ‘very encouraging’.

Austin Forey, manager of JPMorgan Emerging Markets (JMG ), the top-performing global emerging markets investment trust, has said returns in the sector are increasingly driven by the same dynamics as in developed markets, a ‘very encouraging’, he says, as a new breed of company has come to the fore. 

Forey, who has run the now £1.3bn listed fund since 1994, noted recent performance had been tightly correlated with how well individual emerging markets countries had handled the coronavirus pandemic. That explains, in part, why China had been one of the best-performing global stock markets this year after getting to grips with Covid-19 following a bothed initial response to the oubreak in Wuhan in its Hubei province.

But as Chinese internet giants, and leading bets, like Tencent (0700.HK) and Alibaba (BABA.N) have forged ahead, Forey ascribed more importance to the special attributes those companies shared with developed market rivals rather than the regional fluctuations of the virus.

‘Value creation in the corporate sector is being strongly driven by very similar factors in both areas,’ he said.

‘Digitalisation, the development of internet-based business models, the creation of intangible value rather than reliance on physical assets and large amounts of investment in fixed assets - these are far more widely seen in emerging markets today than in the past, as, as can be seen simply by looking at the trust’s ten largest investments.

‘In fact, the majority of the portfolio is invested in sectors which broadly fit this characterisation - software services, internet services, gaming, consumer brands, even stock exchanges. This is important because companies that do not have to invest large amounts of capital tend to generate higher returns on capital, require less leverage, and ultimately generate more cash for shareholders, all highly desirable qualities in an equity investment.’

In that vein, the trust’s weighting to software developer and outsourcer EPAM Systems (EPAM.N) and Mercardolibre (MELO.O), the leading light in Latin American e-commerce, has increased since the start of the year. They had become 5.5% and 3.9% positions respectively by the end of August.

Sea Limited (SE.N), a rising power in gaming and online retail in Asean countries, was a new buy. It has now entered the trust’s top 10 holdings, rising to a 2.8% position at the end of August. The company is also the top position in Pacific Horizon (PHI ) and has been a major factor in the Baillie Gifford trust’s frenetic 59% NAV growth this year. 

As Forey (pictured)’s favoured areas have been buoyant, the trust delivered relatively strong performance in the financial year to the end of June.

Shareholder total returns were 0.7% over the year and 2.7% regarding net asset value (NAV), compared to the 0.5% slip for the MSCI Emerging Markets index, its benchmark. From the end of June to 1 October, the trust’s NAV rose a further 11.2% versus 5.6% for the benchmark, according to stockbroker Numis Securities.  

Forey also argued the intellectual property developed by these capital-lite businesses was difficult to replicate, something which should drive above average returns longer term.

‘By contrast, businesses which have low value-added and are capital-dependent will always, in my view, see their returns trend towards the price of capital, which today is lower than ever,’ he said.

That underscores his conviction in the trust maintaining no exposure to ‘capital-intensive industries’ like basic commodities, real estate, utilities and heavy industry.

Forey had little comment to make on the financials sector, however, which weighs in at nearly a quarter of investments, and has likely held the trust back from even stronger recent returns. 

Portfolio turnover was low during the year, at just over 10%, which the manager said reflected their long-term approach.

To see off the possibility the manager might have to sell holdings during volatile crisis conditions, in April the board implemented a temporary amendment to the restriction that no more than half of assets could be invested in a single region. The limit is now the greater of 50% or 10% higher the weighting in the benchmark, with the change becoming permanent, a pragmatic move which Numis analysts approved of.

The board also plans a 10-for-one share split, with the shares closing yesterday at £11.56, reflecting strong gains since listing at £1 in 1991. The directors hope that will make the trust more attractive for retail investors buying in smaller amounts or using dividend reinvestment programmes.

In addition to share buybacks, that could be another spur to narrow the 8% discount to NAV at which the shares currently trade, which is in line with its one-year average but narrower than the near 12% average of the sector.

Over the last five years, the trust’s shareholders have enjoyed a 122% total return, beating its benchmark’s 76% rise and ahead of the 113.5% returned by its closest rival, Templeton Emerging Markets (TEM ).
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