Volatile markets can be uncomfortable for investors and portfolio managers alike. As investors for decades in the emerging markets, the portfolio managers of the JPMorgan Emerging Markets Investment Trust plc (JMG) have found that anchoring around a sound strategy is key to navigating choppy markets.
For JMG, that anchor is its focus on sustainable growth over the long term. Regardless of the market environment, the portfolio managers are constantly looking for great businesses – those with strong competitive positions, sustainable business models and robust governance practices.
Sometimes, these sustainable growth characteristics support near-term performance as well as long-term results; other times, cyclical macroeconomic factors may dominate near-term returns. Recently we’ve seen a mix of impacts across the portfolio.
Top of mind: Russia and energy prices
State-owned enterprises (SOEs) present an interesting example. This structure is relatively common across the emerging markets, often in sectors such as energy and banking. In many cases, these companies serve a variety of interests, other than those of minority shareholders, and may not run as efficiently or profitably as companies in the private sector. As a result, the Trust tends to have limited exposure to SOEs because the business model often is not aligned with minority investors and governance issues can arise when the state is overly involved in the management.
The high number of SOEs in Russia, combined with some additional governance concerns about the involvement of the state in the private sector, has contributed to historically fewer Russian companies in the Trust. The portfolio’s limited exposure to Russia before the Ukraine conflict has contributed positively to performance in recent months.
Our view on the governance and profitability of SOEs also contributes to our underweight position in the energy sector in the emerging markets, but there is more to it. Our focus on long-term sustainable growth tends to result in limited exposure to volatile commodity-related companies, where corporate earnings and share prices are often highly influenced by the commodity prices. Furthermore, many energy companies also face risks from the transition to a low-carbon environment. As a result, the Trust has long-standing underweights in cyclical sectors, such as energy and materials. In the near-term, however, with energy prices spiking to recent highs, shares of energy companies have also risen sharply, which has been headwind to the portfolio’s performance.
Long-term positioning: Financials, consumer products and information technology
Our focus on strong, sustainable business models has resulted in structural overweights across three broad categories: financials, the consumer and information technology (IT), each accounting for about 25% of the portfolio.
Across the financials sector we see many fast-growing, nimble private sector companies competing against SOEs in the sector, which have low levels of credit and insurance penetration. And while our positioning is based on companies with strong long-term prospects, the Trust is benefitting from a macro tailwind – rising interest rates are positive for most financial services businesses.
We have found many consumer businesses to be excited about across the emerging markets. Our positions tend to be in iconic, local brands across consumer staples, food producers and pharmacy retailers, as well as e-commerce companies with long runway for growth.
Our positioning across the IT sector ranges from semiconductor manufacturers and data centres to asset-light IT service providers that provide software development for big multinational companies.
The remaining 25% of the portfolio spans the health care, media and communications sectors, where innovation and asset-light business models are creating new companies serving a rapidly growing consumer base across the emerging markets.
Sustainable growth incorporates ESG considerations
Environmental, social and governance (ESG) has always been a clear input into the Trust’s focus on finding companies with sustainable growth. ESG factors are considered in the initial phase of research through the team’s checklist of 40 questions related to ESG issues and a materiality framework.
Equally important to the process is the team’s presence in the markets they cover – close to 40 sector analysts are based across eight locations. At times, this local presence has provided unique insight needed to make an investment decision. One example is our investment in the largest condiment producer in China. The company had a relatively low rating from an external provider, based on the view that the company lacked a sufficient strategy and guidelines for its sourcing of soybeans. However, our Mandarin-speaking analysts based across Asia had a different view, having spoken at length with the company and learned that the products are extensively tested for quality and do not use genetically modified organisms (GMOs). These insightful conversations gave the portfolio management team the confidence to invest in the company based on the team’s proprietary views.
Volatility is inherent in stock markets, especially in the rapidly growing and changing emerging markets. While we cannot control volatility, we can manage a portfolio through it by focusing on high-quality companies capable of producing sustainable long-term returns.
This Company aims to maximise total returns from Emerging Markets and provides investors with a diversified portfolio of shares in companies which the manager believe offer the most attractive opportunities for growth. The Company can hold up to 10% cash or utilise gearing of up to 20% of net assets where appropriate.
Exchange rate changes may cause the value of underlying overseas investments to go down as well as up. Investments in emerging markets may involve a higher element of risk due to political and economic instability and underdeveloped markets and systems. Shares may also be traded less frequently than those on established markets. This means that there may be difficulty in both buying and selling shares and individual share prices may be subject to short-term price fluctuations. Where permitted, a Company may invest in other investment funds that utilise gearing (borrowing) which will exaggerate market movements both up and down. External factors may cause an entire asset class to decline in value. Prices and values of all shares or all bonds and income could decline at the same time, or fluctuate in response to the performance of individual companies and general market conditions.
This Company may utilise gearing (borrowing) which will exaggerate market movements both up and down. This Company may also invest in smaller companies which may increase its risk profile.
The share price may trade at a discount to the Net Asset Value of the Company. The Company may invest in China A-Shares through the Shanghai-Hong Kong Stock Connect program which is subject to regulatory change, quota limitations and also operational constraints which may result in increased counterparty risk.