“It’s not just what companies do; it’s also how they do it.”
This principle has been a key part of the investment process for the JPMorgan Emerging Markets Investment Trust since its launch in 1991. The investment team firmly believes that well-managed businesses with strong governance and sustainable business models, that can compound earnings consistently over time, have the greatest potential to deliver long-term returns. This strategy has indeed generated a strong long-term performance track record: the Trust has outperformed the MSCI EM Index for the last 10 calendar years.
The focus on high-quality growth has also resulted in a portfolio of companies across the emerging markets with strong environmental, social and governance (ESG) characteristics; this is not a coincidence nor is it surprising when considering the core elements of the Trust’s investment philosophy and process.
Grounded in governance
Finding high quality businesses in the emerging markets with the potential to produce attractive long-term returns has always required a strong focus on ESG factors, starting with governance. The Trust has a well-established process for considering a wide variety of governance factors, which has long been critical to investing in emerging markets, where legal, corporate and accounting practices have not always met standards in the developed markets.
Many governance considerations are also intertwined with social and environmental factors – employment practices at any company can involve both governance and social issues; governance at a commodity producer could have environmental consequences, such as weak oversight of safety protocols resulting in an oil spill. As a result, companies with good governance are often associated with better social and environmental performance, which partially explains why the companies in the Trust score well on ESG factors. The Trust has earned an “A” ESG Rating from MSCI based on an ESG Quality Score of 6.5 out of 10; the peer average is 5.6. It ranks within the 94th percentile of the Equity Emerging Markets Global peer group and within the 70th percentile globally (100 is the best).
Respect and reputation
One important element of governance relates to the treatment of minority shareholders – which is what the Trust and most other investors are considering when they own a company’s stock. When a company management respects its minority shareholders, it bodes well for how it will run the business and focus on shareholder returns. This relationship is particularly important for long-term investors, such as the JP Morgan Emerging Markets Trust, who are more likely to engage with the company over time on many issues.
Company managements that are mindful of governance and relationships with shareholders are also likely to care more about their reputations, which can impact their business prospects and stock prices. Increasing investor focus on ESG is likely to further differentiate corporate reputations, benefiting those companies who carefully manage all aspects of their business, including interactions with the local community or environment. Many companies in the portfolio responded to the pandemic with positive social and economic actions: Walmex1 committed to paying micro and small goods and services suppliers within seven days; Infosys partnered with healthcare providers to organise Covid vaccinations for all employees and their families and covered all associated costs; Yum China donated RMB 3 million to support hospital workers.
The trust’s longstanding focus on governance has proven useful for adapting the investment processes over time to further incorporate social and environmental considerations. For each of the companies that ultimately make it into the portfolio, the team of sector analysts – close to 40 people in eight locations – completes a 98-question risk profile; two thirds of the questions relate specifically to ESG issues and the rest consider broader aspects of risk, such as financial risk and regulatory risk. The team also uses a materiality framework that identifies the most material ESG factors in over 50 specific industries. Companies are scored only on the ESG issues that are likely to be financially material to the industry in which they operate.
Assets to ideas
In addition to good governance and favorable reputations, the portfolio is fundamentally exposed to a trend associated with strong ESG characteristics: company business models that are increasingly based on ideas rather than assets. Emerging market economies are transitioning away from heavy industry and commodity extraction, which require significant investment in physical assets, towards technological innovation and businesses built on intangible value creation. These innovative areas, such as digitisation, healthcare and other services industries, offer strong growth potential, while their asset-light business models tend to have higher returns on capital and are very cash generative – this makes them attractive investments for the Trust. Similarly, companies with asset-heavy business models often fail to meet the portfolio’s sustainable growth criteria.
Owning more companies that are ideas-based rather than asset-based – for example, a software developer instead of a mining company – winds up tilting the portfolio towards companies and industries with better ESG metrics than comparable funds, as noted earlier. Trust’s carbon footprint is also significantly smaller at 54.7 tonnes of CO2 emissions per USD 1 million in sales, which MSCI considers “low”, versus the peer group’s “high” 215.22
The portfolio’s strategy has yielded strong overall results that have been validated with a number of prestigious awards and recognitions. The JPMorgan Emerging Markets Investment Trust has a five-star overall rating from Morningstar and is the only trust to hold a Gold Morningstar Analyst Rating. Portfolio manager Austin Forey, with 27 years at the helm, has won the Morningstar Outstanding Fund Manager Award3, which distinguishes managers who are remarkable in terms of their style and approach, and who stand above their peers with exceptional returns over the long term.