JPMorgan Emerging Markets 16 November 2022

JPMorgan Emerging Markets (JMG) is managed by Austin Forey and John Citron, who take a high-conviction, long-term approach to running its portfolio. They aim to identify the best companies in the region, meaning those which can consistently generate above-average earnings growth, ideally over multiple cycles. Turnover is typically very low, with the 10% recorded for the last financial year implying an average holding period of ten years.

Austin has managed the portfolio since 1994, giving him unrivalled experience of the region’s development. He was joined by John in March 2021. The managers build on the work of a team of c. 100 analysts and managers focussed on the emerging markets region, who work to a disciplined framework that aims to identify companies with strong bottom-up economics and advantages which mean those strong economics should persist, as well as good governance.

The results have been outstanding over the long run against both the closed-ended sector and the broader open-ended sector (see Performance). However, since early 2021 some economic developments have worked against the trust, chiefly rising US interest rates and regulatory interference in China. Austin and John report that their companies have generally performed well operationally, even in the sectors most hit by rallying rates, and they view the recent volatility as normal cyclical developments, albeit more extreme ones than is typical.

JMG’s Discount has moved out to 11.5%, which is wide compared to its own five-year average of 8.8%. It is also close to the sector average of 12.2%, with the trust having typically had a narrower discount than the sector in recent years.

JMG has delivered outstanding long-term returns, and has soundly beaten the market and peers over five years despite the underperformance of the past year. Clearly the strong outperformance of 2016–2020 was aided by some economic trends which have since shifted against the trust. However, the managers’ analysis of long-term returns in their markets suggests it is earnings growth which drives share prices in the long term even if valuations can be critical in the short term, and the longer the holding period the more significant this becomes. If this is true, then everything rests on the managers’ (and their analysts’) assessment of the return potential in their businesses. Their track record on this is good, and their disciplined, repeatable process provides a strong platform to build on.

In the short term the managers acknowledge the outlook is cloudy. Yet they point out that emerging markets are in a much more stable position in this current crisis, which means they are far from the ‘eye of the storm’. Additionally, the valuations on their portfolio imply good returns from here, based on their historical analysis. JMG’s current discount is wide relative to its history, and unusually is also wider than its peer group’s discount, which we think could offer a good entry point to an attractive long-term vehicle for emerging markets exposure – if investors are prepared to take short-term risk. This is because even if emerging markets are in a better position than they were in 2007, this does not imply their equities will not decline further before bottoming as the current inflation, hiking cycle and recession work their way through the world economy.