JPMorgan Emerging Markets (JMG ) has promised to launch a 25% tender offer in five years’ time if its performance does not beat the MSCI Emerging Markets index.

With its managers’ quality growth style having fallen behind the benchmark over the past three years, the trust said it would allow investors to sell up to a quarter of its shares back to the company if the portfolio’s net asset value (NAV) does not exceed the MSCI index in the five years to July 2029.

Adrian Lisser, chair of the £1.1bn trust, said in half-year results last week the tender offer would allow shareholders to sell their shares at a price 2% below NAV. This is substantially lower than the 12.6% discount at which JMG currently trades and provides protection against the rating slipping further.

Lisser said the board ‘remains focused on high standards of governance and operating in the interests of shareholders’ and noted the ‘increased incidence of tenders and other forms of redemption, which are additional mechanisms to assist with discount management’.

Leading value investors City of London Investment Management and Lazards, which both own 10% of the shares, making them the biggest shareholders according to Refintiv data, are likely to have pushed for the move.

If the tender offer is triggered, it will be subject to shareholder approval of the continuation vote at the 2029 annual general meetings. The trust faces its next triennial vote in 2026 as well and passed its last one in November.

The interims showed an underlying total NAV return of 3.2% in the six months to 31 December with the shares returning just 2.8% as the discount widened. Both lagged the 4.4% delivered by the benchmark.

The latest data from Deutsche Numis shows that over three years to 28 February, NAV has fallen 10.9% with the shares down 21.6% against a 9.3% decline in the index.

The share price fall is marginally behind the declines of rivals Fidelity Emerging Markets (FEML ) and 2.9% worse than Templeton Emerging Markets (TEM ) but a long way from its sector’s leaders, Mobius (MMIT ) and BlackRock Frontiers (BRFI ), which have returned an impressive 26.5% and 48.1% respectively.

Insufficient India domestic exposure 

To explain the half-year fall, lead manager Austin Foley (above) said ‘we need look no further than the company’s two most significant markets in terms of investment, India and China’.

India is the trust’s largest weighting at 25%, followed by China at 17%. Foley said India has been ‘the right destination’ but his larger investments had ‘failed to keep pace with an increasingly euphoric stock market’.

‘Some of our larger investments in India are exporters, especially of IT services, and these companies depend not on the Indian economy, but on global business conditions, which have been more subdued,’ he said.

On top of this, HDFC Bank, which is the second largest holding in the fund at 5.9%, has been ‘digesting its merger with its parent HDFC Ltd’.

‘While this should prove a temporary phase, investors in India have looked elsewhere for exposure to the strong domestic economy,’ he said.

China shadow

China, which had ‘another annus horribilis’ in 2023 has been blighted by an economic slowdown and regulatory uncertainty’.

‘The drag on the entire asset class from China threatens to obscure the fact that other emerging markets have come through a challenging few years in relatively good economic shape,’ argued Foley.

He noted the emerging market governments offered less pandemic support than developed countries, avoiding the build-up of debt, allowing central banks to be more decisive in the management of inflation and providing more scope to lower interest rates.

‘That is not a bad backdrop for domestic business profits and for growth,’ he said.

‘If it combines with a global cycle in which developed economies avoid recession or see only a mild downcycle, then we may look forward to a period in which export businesses in emerging markets can expect some improvement in customer demand, while at the same time domestically-focused companies also see easier monetary conditions and a potential cyclical recovery.’

Forey, who runs the portfolio with John Citron, did not make excuses for the three-year underperformance, which he said was partly due to the wider market and ‘some to do with our own judgements’.