JPMorgan Emerging Markets 26 May 2021

JPMorgan Emerging Markets (JMG) owns a portfolio of companies selected for their long-term sustainable growth prospects. JMG has been managed by Austin Forey since 1994, and he takes a high conviction, low turnover approach, trying to outperform by looking out beyond the short-term investment horizon of many market participants.

Austin has therefore made minimal changes to his portfolio throughout the pandemic, during which JMG has generated strong outperformance, as it has done consistently over the past decade (see performance section). However, in the first few months of 2021 the portfolio has slightly underperformed the MSCI Emerging Markets Index, as value stocks have outperformed growth. This market environment is not optimal for the strategy, and we note that valuations on the portfolio are now high relative to history and the market. Nevertheless, Austin remains focussed on the long-term growth prospects, believing that cyclical and valuation factors can influence returns in the short to medium term, but over the long run it is superior earnings growth that provides outperformance.

Austin’s extensive experience has included managing emerging markets portfolios through various crises and their aftermaths. This experience has led him to prefer low levels of leverage on portfolio companies, which proved helpful during the pandemic and we believe could prove helpful during any prolonged or difficult economic recovery. Doubtless this helped him resist the urge to chase performance when the crisis hit too. As a part of standard succession planning, in March 2021 Austin was joined by John Citron on the management team (see management section).

Following strong performance in recent years, the discount has narrowed to 2.7% compared to an AIC Global Emerging Markets sector average of 6%.

JMG stands out as the leading emerging markets trust thanks to its excellent long-term returns, but is also top decile when the much larger open-ended fund sector is included in the analysis. We think it stands out for other reasons too: the long tenure of the manager gives shareholders the benefit of experience that is second to none, the well designed and rigorously implemented strategy gives consistency to the stock selection process, the long holding period reduces transaction costs and should increase the chance of adding alpha, while the resources devoted to risk management, including to ESG risks, puts it in a strong position to avoid pitfalls in individual companies and to encourage positive change.

However, JMG is expensive, both at a portfolio (relative to history and the market) and a share price level (assessing the discount). Valuation expansion has driven much of the recent outperformance, and portfolio companies will likely need to meet or exceed analysts’ earnings expectations to justify current prices or move them higher. We think investors should focus on the longer-term at this point in time; Austin’s track record shows he can generate high levels of alpha over the long run (although of course investors cannot assume past performance patterns will repeat).

The market’s current preference for value over growth is a near term headwind. However, we would argue JMG’s quality growth approach is arguably more resilient to a recovery from a global crisis than a high octane growth strategy and, while there is exuberance in markets, the challenges for economies to recover from the last year remain significant.