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Emerging markets trust's discount set to narrow

This emerging markets investment trust is on a wide discount because its subscription shares have just expired. But this value might not last for long.
July 30, 2014

Emerging markets are still largely out of favour with investors, but investment trust discounts in the sector are starting to close. Over the last 12 months, the average discount has moved from 7 per cent to 4.8 per cent, according to Winterflood data (to 28 July 2014), suggesting investors looking to snap up a bargain might need to get in sooner rather than later.

IC TIP: Buy
Tip style
Growth
Risk rating
High
Timescale
Long Term
Bull points
  • Wide discount
  • Strong long-term performance
  • Experienced manager
Bear points
  • Volatile investment region
  • Poor one-year performance

One trust that still looks particularly cheap is the JPMorgan Emerging Markets Investment Trust (JMG). Its discount has widened to 13.7 per cent, compared with its 12-month average discount of 10 per cent. Wide discounts are often a warning that the trust is going through a tough time in terms of performance or management. However, the reason for this trust's wide discount is more technical.

Keeping its discount wide are £10m in outstanding subscription shares held by existing investors. However, these expired on 28 July 2014. Subscription shares offer shareholders the right to purchase shares at specified future dates or during predetermined conversion periods at predetermined prices. But when they expire, they have to be sold. JPMorgan Emerging Markets' subscription shares have an exercise price of 543p, and can be converted into ordinary shares, which are worth 560p each.

Some £55m of new capital could potentially be raised through the conversion of these outstanding subscription shares in issue, according to Winterflood. Simon Elliott, an analyst at the company, said: "It's normal for discounts to widen just before the expiration date of subscription shares because there's a risk the ordinary share value for new investors could be diluted. The sale of these should be a market settling process that will take several weeks. But by the end of it, we are expecting this trust's discount to narrow again.

"We think now is the time to buy this trust as it's on a wider than average discount. However, because of the high level of volatility associated with emerging markets equity, we see it as a long-term investment."

The JPMorgan Emerging Markets Trust has a solid long-term performance record under its manager, Austin Forey, who has been managing it for over a decade. Over the last five years, its net asset value (NAV) share price is up 53 per cent, compared with a 44 per cent rise for its benchmark, the MSCI Emerging Markets index.

More recently it has slightly underperformed the index (1 per cent compared with 4 per cent), partially as a result of the dilutive impact of the trust's subscription shares.

The portfolio is overweight India (18 per cent), as well as Brazil (16 per cent) and South Africa (11 per cent), although profits are being taken following a strong run in the latter two, where Mr Forey has identified attractively valued businesses with good dividend yields.

Conversely, the portfolio is underweight in South Korea (4 per cent), Taiwan (7 per cent) and China (12 per cent). Mr Forey believes that, while a fully-blown crisis in China will be avoided, it still faces a number of difficult headwinds that could hurt profits. In the region, he has a preference for private sector businesses such as retailers, while he avoids state-owned enterprises.

Sector-wise, the trust is most heavily invested in financials (30.2 per cent, compared with 26.9 per cent of the index), consumer staples (18.8 per cent, compared with 8.2 per cent of the index) and information technology (17 per cent, compared with 17.3 per cent of the index).

The turnover on the portfolio, which has just over 70 holdings, is low, and was just 26 per cent in the trust's last financial year (to 30 June 2013). The trust does not employ structural gearing, with the manager preferring to avoid market calls while taking risk through stock selection. It currently has cash of around 5 per cent of the portfolio, as it recently sold a number of stocks, including Ping An Insurance and China Mobile.

At 1.14 per cent the total expense ratio is reasonable for a trust that invests in challenging regions. If you're looking for emerging markets exposure on a wide discount, now's the time to invest in this investment trust. Buy.

Performance data for JPMorgan Emerging Markets Investment Trust

PRICE559pGEARINGNone
AIC SECTOR:Global Emerging MarketsNAV:£648m
FUND TYPE:Investment trustPRICE DISCOUNT TO NAV:13.7%
MARKET CAP:£666m1-YEAR PRICE PERFORMANCE:1.1%
No OF HOLDINGS:701-YEAR BENCHMARK PERFORMANCE:4.4%
SET UP DATE:July 19913-YEAR PRICE PERFORMANCE:-1.4%
ONGOING CHARGE:1.14%3-YEAR BENCHMARK PERFORMANCE:2.8%
YIELD:0.8%5-YEAR PRICE PERFORMANCE:53.1%
MORE DETAILS:am.jpmorgan.co.uk/investment-trusts5-YEAR BENCHMARK PERFORMANCE:44.1%
Source:MorningstarPerformance data as at28 June 2014

Sector breakdownAllocation (%)
Financials 30.20
Consumer staples 18.8
Information technology 17.0
Industrials 10.7
Consumer discretionary 8.90
Materials 4.40
Telecommunication services 2.40
Energy 2.20
Healthcare 0.60
Utilities 0.00
Cash 4.80
Source: JPMorgan, as at 30 June 2014

Top 10 stocksAllocation (%)
Housing Development Finance 4.0
Taiwan Semiconductor Manufacturing 3.5
Tata Consultancy Services 3.0
International Personal Finance 3.0
Magnit 2.7
Hyundai Motor 2.6
AIA 2.5
Weg 2.5
Cielo 2.4
Ultrapar 2.2
Source: JPMorgan, as at 30 June 2014