Emerging markets have been an asset class that’s difficult to succeed in, but JP Morgan’s Emerging Markets Opportunities fund has broken the mould and met its objective set out in the fund’s product disclosure statement (PDS): to provide long-term capital growth by investing primarily in an aggressively managed portfolio of emerging markets companies.
Capital growth over the long-term
From the outset, the Emerging Markets Opportunities fund is off to a good start with a five (out of five) crown rating. It’s co-managed by three long-standing JP Morgan employees, Richard Titherington, Anuj Arora and Sonal Tanna and benchmarked against the MSCI Emerging Markets Index.
The fund’s PDS doesn’t specify what exactly constitutes a long-term investment horizon, but suggests investors should have one in mind when investing. What’s generally suggested as a long-term horizon is at least over three years.
Plugging in the minimum investment amount, which is defined by the fund as $25,000, into FE Analytics, investing in the fund would have returned investors $27,311 over three years, and $27,225 over five years.
So, while the figures aren’t particularly high, the fund is indeed producing capital growth over what is normally seen as a long-term horizon. It’s prudent to also acknowledge that the aforementioned amount is only calculated on the income earned off the fund over those periods, and is not adjusted to growth reinvested in the fund.
Turning to the fund’s returns, it has outperformed its benchmark consistently for the last five years, three years and year to date, and has continued to do so in the six months, three months and month to date.
Chart 1: Performance of the fund as compared to the MSCI Emerging Markets Index and the ACS Equity – Emerging Markets sector average
Across five years to date, the fund returned 10.56 per cent as compared to the index, which returned 10.03 per cent. It returned 19.94 per cent across three years compared to the index, which returned 16.48 per cent, and, whilst it dropped in the year to date to 0.57 per cent, it still managed to preserve more capital than the index, which dropped to -1.52 per cent.
Exposure to EM companies
According to the fund’s objective, it must invest in only emerging markets companies.
The Emerging Markets Opportunities fund invests wholly in the fund’s underlying sub-fund, which is essentially exactly the same, and therefore to look at what this fund invests in, we must look at what the sub-fund invests in.
According to FE Analytics, the fund and its underlying sub-fund have met this requirement, with the top two holdings of the sub-fund being Tencent Holdings and Alibaba, which are both Chinese equities, and both massive players in the EM space.
Taiwan Semiconductor Co, Samsung Electronics, Ping An Insurance and AIA Group similarly feature in the fund’s top ten holding, and are all also big Asian players in the EM space.
Looking at it from a regional breakdown as well, the fund invests primarily in the Pacific basin, followed by the Americas, Europe Ex UK, Asia Pacific, the money market, South Africa, and the Middle East/Africa.
Talking strategy
The firm’s investment specialist, emerging markets and Asia Pacific (EMAP) Equities, Alexander Treves, said the defining features of the fund were its value and quality tilt, and it’s a strategy its managers don’t intend to change given their long-term approach.
At a country level, Treves said Brazil was the top contributor, with an overweight exposure to the market adding value to the fund as equities and the Brazilian Real rallied on the back of Bolsonaro, “a market-friendly candidate” winning the presidential election.
Commodity names helped performance, including the largest producer of long steel in the region, Gerdau, and oil producer, Petrobas.
At the sector level, stock selection in financials contributed to returns, with the fund’s only Saudi Arabian exposure, Al Rajhi, being the top contributor.
And the fund’s high conviction strategy is nothing short of thorough, with Treves pushing AIA as an example of the manager’s rigorous stock selection process.
“At the country level China currently fares well,” he said. “We believe the macro environment is improving: domestic policies appear to be more closely coordinated this year on both monetary and fiscal fronts.”
At the stock level, Treves also said AIA ticks boxes, given the company “meets a growing regional need for insurance as consumers become wealthier and as penetration rates for financial services rise.”
Currently, the fund is overweight China, and within China, it prefers internet and insurance stocks. Financials as a sector remain the largest overweight in the portfolio, consisting of insurers and regional banks.
“While global growth is decelerating, it is still healthy,” said Treves. “The primary risks to EM performance over the next year haven’t changed: a more rapid slowdown in global growth, led by the US; a dollar surge; and risk aversion.”
“Our analysts’ expected return signals currently suggest plenty of opportunity in our asset class. We remain constructive and continue to see opportunity in the value space and explore high quality investment ideas that fit our approach.”
Pass mark: A+
