JPMorgan Emerging Markets (JMG) has more than doubled the returns of the MSCI Emerging Markets on a NAV total return basis over ten years thanks to a successfully implemented quality growth strategy, not to mention a portfolio tilt towards technology and consumer companies. As we discuss in the Performance section, 2020 has been a particularly good year thanks to stock selection decisions made in the preceding years and months.
JMG is managed by Austin Forey, who takes a long-term approach to investing, with low turnover and high portfolio concentration. As we discuss in the Portfolio section, a number of the largest positions in the portfolio have been held for over a decade, and some for over two decades. Austin aims to find companies which can compound their earnings faster than the market consistently and avoid trying to time the market by selling out and buying in again.
Austin has managed the portfolio since 1994, giving him a rare length of experience through numerous crises in emerging markets, which has proven useful during this crisis. His reluctance to take on debt at the portfolio level and to buy highly leveraged companies has helped returns, while he has also resisted the temptation to make radical changes in volatile markets. In fact, Austin believes that a portfolio like his, with strong quality characteristics, should be able to withstand the pressures of the pandemic and many companies should even be able to take advantage by winning market share from weaker competitors.
Following strong performance, the discount has narrowed to 5.6% compared to an AIC Global Emerging Markets sector average of 8.9%.
We think JMG is the premium generalist emerging markets trust. The outstanding long-term performance is one reason. The risk controls applied to ensure stock selection counts rather than geography is another. This has been particularly important in 2020, when country performance diverged markedly as the pandemic made local conditions critical. Austin’s long tenure is another key selling point. His experience of past crises has moulded his strategy and have contributed to the good performance during this one.
Probably the key risk is stylistic and sectoral; JMG is heavily tilted to technology and e-commerce, which some might worry are due a period of underperformance. However, we note some of the holdings in this area are in countries far behind the West or China in the digitalisation process. We now have a road map for these industries’ development, which means a position in SEA or MercardoLibre could be less of a risk than one in Amazon or Alibaba was five years ago.
The high valuations in these areas and the high weight in financials might explain the tendency to underperform in recent pullbacks. However, we think the high quality nature of the portfolio means that it should outperform in any sustained slump the pandemic may cause. JMG may underperform in a sharp cyclical recovery, but we are persuaded the high quality businesses are likely to be taking market share in this crisis which should help them expand faster over the next cycle.
|Long-term approach to stock-picking has led to consistent outperformance||Strong style and sector biases could lead to underperformance at times|
|A manager with vast experience in the region who has worked through numerous crises||Reticence to gear limits potential in rising markets (as it limits losses in falling markets)|
|Huge research team allows for full and detailed coverage||Yield is low, so unlikely to appeal to income-seekers|