Pockets of value despite currency pain

A reason for this has been the weakness of emerging market currencies, which nosedived against the US dollar in January as investors became increasingly pessimistic about the effects of China's slowdown. As a result, sterling strengthened against emerging market currencies, adversely affecting the trust's performance.

Its manager, Omar Negyal, says the impact of volatile emerging market currencies has been painful, but that he is now starting to see pockets of value within the sector. Nevertheless China's slowdown, the resulting collapse in commodity prices and disappointing earnings across emerging markets continue to raise concerns for international investors, he adds.

The trust's negative performance was also affected by its stock selection and underweight position in South Korea. Traditionally, it has shied away from the country citing a poor dividend payout culture and ratio, as well as a high number of family controlled companies. However, following Samsung Electronics' (Kor:005930) decision last year to start paying a greater proportion of free cash flow to shareholders, through dividends and buybacks, Mr Negyal has added the stock to the portfolio while maintaining its underweight position to the country overall.

Mr Negyal is also underweight China, citing the continuing build-up of debt in the system, particularly within financials, as a cause for concern.

The trust is overweight South Africa, but this has proved detrimental in the short term due to the weakness of the rand.But Mr Negyal believes South Africa continues to offer good opportunities.

"The positive case for South Africa primarily reflects the strength of the listed companies, many of which offer high returns on capital, decent management and healthy dividend payout ratios," he says.

Mr Negyal has been taking advantage of recent volatility to add to the trust's positions in Taiwan. Holdings include Siliconware Precision (TAI:2325), Vanguard International Semiconductor (TT:5347) and Taiwan Semiconductor Manufacturing (NYQ:TSM), which is one of its top holdings.

Mr Negyal says: "In Taiwan, we tend to see good free cash flow, robust dividend policies and solid company fundamentals supported by the country's strong current account surplus, protecting it from currency vulnerability."

Part of the trust's approach is to invest in a portfolio of relatively high-yielding stocks to receive dividends from across sectors and countries, but, with emerging market earnings weak and dividends under pressure, this is proving tricky. Mr Negyal points out that in 2015 dividends across emerging markets fell by a hefty 12 per cent. This was driven by the dividend cancellation of Brazilian energy giant Petrobras (SAO:PETR3), which saw Brazil suffer an astounding 44 per cent fall in dividends and a sharp decline in its currency, the real. The fund does not own Petrobras, but Mr Negyal is making a contrarian play in Brazil via other shares.

He says: "Many investors overlook the fact that the Brazilian government has mandated that companies pay out 25 per cent of earnings in the form of dividends to shareholders. An example of an attractive stock is AmBev (NYQ:ABEV), which is aligned with the interest of its minority shareholders and offers a 5 per cent dividend yield with the prospect for continued growth."

Weak earnings across emerging markets has increased the risk of value traps, he adds. These are companies that look like they may be high yielders but which fail to deliver on their promise and are susceptible to earnings downgrades. Last year he sold Wynn Macau (HKG:1128) and China Shenhua Energy (HKG:1088) for this reason. The fund will also sell stocks that fail to deliver on dividends; last year these included Industries Qatar (DSM:IQCD).

2015 was undoubtedly difficult for JPMorgan Global Emerging Markets Income Trust, say analysts at Winterflood Securities.

"Conditions have become more difficult over the past year: while payment ratios are being maintained, earnings across emerging markets have deteriorated. However, there are a number of moving parts, not least Sterling's recent weakness," they say.

"The critical period for emerging market dividend receipts is between May and July each year and therefore the next few months will be crucial in determining the trust's revenue for its current financial year."

They also point to the fact that the trust has built up a revenue reserve, which could be used to mitigate a worsening outlook if necessary. The trust has a revenue reserve of around £4.57m which equates to dividend cover of 0.32x - about a third of what it paid in dividends over its last financial year.

Despite the stormy conditions, Mr Negyal is quietly confident.

He says: "Even in this challenging environment, we are still finding many opportunities in stocks with attractive dividend yields. We will maintain our philosophy and our disciplined approach, looking for dividend-paying stocks with decent profitability, strong cash generation, and clear and understandable dividend policies."

Source: Morningstar as at 13/05/16, *JPMorgan

Source: Morningstar as at 13/05/16