JPMorgan Global Emerging Markets Income (JEMI) aims to offer investors an income from a portfolio of emerging market equities. The managers also aim to generate capital growth and are aided in this dual mandate by the sectoral make-up of their market, their disciplined stock selection process which prizes quality growth characteristics, and their use of modest structural gearing.
Technology makes up a large part of the emerging market index and the trust’s portfolio. JEMI owns some hardware companies which offer very high yields from their cash-generative businesses, as well as owning lower-yielding companies as part of the managers’ barbell approach (as discussed under Portfolio). However, one of the trust’s largest sector exposures is to financials, a typical value sector, while JEMI has minimal exposure to e-commerce. These positions mean its recent performance has been correlated to value, and the trust has correspondingly done very well this year. As we discuss under Performance, the trust has now outperformed over the past five years, despite some headwinds. JEMI’s discount is 7.9%, with the share price not keeping up with the rising NAV in a recent rally.
JEMI is managed by Omar Negyal, Jeffrey Roskell and Isaac Thong of the JPMorgan Emerging Markets and Asia Pacific Equities team. They draw on the stock analysis of a team of around 50 professionals, who seek to identify the highest-quality companies in their sectors or countries. The managers then aim to maximise the quality growth characteristics of the portfolio, while meeting their internal income hurdle of 130% of the yield of the index. Despite a fall in portfolio income last year, JEMI’s board held the dividend, using revenue reserves to do so. The historical yield is 3.2%, although this is reduced by strong performance since last year’s final dividend.
JEMI offers attractive diversification for an income investor. This is not just in the geographical dimension, but also through the current heavy exposure to the technology hardware industry, which we think is supported by secular growth trends. The past five years have actually been pretty tough for the managers stylistically, with huge outperformance by e-commerce companies to which they have little exposure and growth dominating value more broadly. We note that JEMI has performed creditably during this period, which we attribute to the balanced sectoral and stylistic approach that stems from the concern for quality growth at the heart of the stock selection process.
We also think that the coming five years are unlikely to see the same headwinds. The managers in fact believe that this is an attractive time to buy on a multi-year view, although there are near-term issues. The pandemic is not over globally, with emerging markets potentially seeing more restrictions or at least voluntary behaviour changes due to the current wave of the Covid Delta variant. However, the managers point to improving corporate governance (importantly also meaning improving dividend cultures), high dividend growth potential and high economic growth potential as reasons to be bullish on their region and strategy in the medium term.
JEMI’s abilities, as an investment trust, to use dividend reserves to smooth income and to run structural gearing to enhance total returns have both added value in recent years, adding to the attractions of the trust.
|Offers good diversification to income investors||May underperform in growth rallies|
|Well-resourced management team with disciplined, consistent approach||Structural gearing will increase downside exposure as well as upside|
|Offers more growth potential than the typical UK equity income portfolio
||Dividend culture not as developed in some of its markets, so managers may have to work harder to maintain the dividend