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Get income at a discount via JPMorgan Global Emerging Markets Income Trust

JPMorgan Global Emerging Markets Income offers income and potential growth
April 15, 2021
  • JPMorgan Global Emerging Markets Income has performed well and looks well placed for a market rotation to value 
  • The trust's dividend is not guaranteed but its managers are bullish on long-term prospects

Emerging markets are not an obvious region for equity income. Countries with less mature capital markets tend to have companies with lower dividend payouts and there are only a few investment trusts with an income mandate focused on emerging markets. 

However, as dividend cuts have been most severe in the UK and Europe over the past year the case for income from further afield has become stronger. The Janus Henderson Global Dividend Index found that in 2020 the UK’s dividend payout fell by 41 per cent and Europe (ex UK)’s payout fell 32 per cent, compared with 2019. But emerging markets dividends only fell by 9.5 per cent compared with 2019.

Sarah Fromson, chair of JPMorgan Global Emerging Markets Income Trust (JEMI), recently commented: “we remain of the view that emerging markets continue to offer long-term growth potential with attractive income prospects”.

The trust has maintained its dividend since the outbreak of the pandemic last year and had a yield of 3.5 per cent, as of 13 April, according to broker Winterflood. But it did have to dip into its revenue reserves last year to maintain it, and has £7.6m left after the payment of this year's second quarterly half-year dividend, which equates to 50 per cent of annual dividends at the current level. 

Mick Gilligan, head of research at Killik & Co, says that “the bulk of the portfolio – typically 60 per cent – is invested in companies that have good potential to grow profits and dividends over the medium to long term, and have yields in the 3 to 6 per cent range.” 

He also thinks that “the dividend should be maintained for the foreseeable future unless we see another big hit to emerging markets profits in the next few years”.

However, Gilligan adds that this is not a certainty as emerging markets do not lend themselves well to progressive income generation. “Many emerging market stocks base their dividend levels on a payout ratio, for example 30 per cent of profits, rather than aiming for progressive growing dividends as is commonplace with many UK and US stocks,” he says. 

Another risk to this trust's income payments is that the dividends it receives are in emerging markets currencies and US dollars, whereas its own dividends are paid in sterling. The pound has recently strengthened against emerging markets currencies, effectively reducing the value of JPMorgan Global Emerging Markets Income's revenues and total returns in sterling terms. The trust does not hedge currency risk as that is expensive and, for many currencies, impracticable. 

 

Portfolio positioning

The trust has a value tilt, with 30.1 per cent of its assets in financials at the end of February – 12.6 per cent ahead of its benchmark, MSCI Emerging Markets Index's, weighting to them. Information technology, meanwhile, accounted for 31.3 per cent of the trust's assets, but just 21 per cent of this index, while consumer staples accounted for 13.9 per cent of the trust compared with 5.5 per cent of this index at the end of February. 

China is JPMorgan Global Emerging Markets Income's largest regional weighting at 33 per cent of assets, albeit around five percentage points less than MSCI Emerging Markets Index's weighting to it. This was a drag on performance last year, but has not been in the past couple of months. Taiwan makes up 21.9 per cent of the trust, 8.1 per cent ahead of the benchmark, and Russia 9.2 per cent – another significant overweight position. This is because these markets have been a source of more reliable dividends than other emerging markets. 

Taiwan Semiconductor Manufacturing (TAI:2330), the world leader in outsourcing semiconductor manufacturing, was the fund’s largest position at the end of February. The trust’s managers, Omar Negyal, Jeffrey Roskell and Isaac Thong, recently commented: “We remain positive on the outlook for Taiwan Semiconductor Manufacturing's earnings and cash-flow growth, and expect its management to stand by its commitment to a sustainable and steadily increasing cash dividend.” 

Surging demand for semiconductors for 5G mobile phone networks, high-performance computing and artificial intelligence applications continue to support this stock. 

JPMorgan Global Emerging Markets Income's next three largest holdings are Korea’s Samsung Electronics (KR:005930), India’s Tata Consultancy Services (IND:TCS) and Vanguard International Semiconductor (TAI:5347), a Taiwanese foundry service provider. These are well established dividend paying information technology companies.

Over the six months to 31 January, the trust's managers added to a number of existing positions in Chinese consumer-related stocks. These included Tingyi (HKG: 0322), a food and beverage manufacturer, Topsports (HKG: 6110), an apparel retailer with strong ties to international brands such as Nike and Adidas, and Yum China (9987:HKG), a restaurant operator with exclusive rights to run KFC and Pizza Hut outlets in China.

“These companies are strong business franchises offering attractive long-term dividend streams, and all have exposure to Chinese consumer demand, which is projected to grow strongly over the medium term,” explained the trust's managers.

They also increased their holding in Infosys (IND:INFY), an Indian IT services company benefiting from the acceleration in companies' digital transformation. Infosys has begun to pay out the bulk of its free cash flow as dividends and share buybacks, increasing its attractiveness as an income source.

JPMorgan Global Emerging Markets Income's managers said that one negative development, related to US-China political tensions, was a US order restricting its citizens from investing in certain Chinese companies deemed to have military links. So they sold positions in China National Offshore Oil (HKG:0883) and China Overseas Land & Investment (HKG:0688). The latter was not directly named in the list, but they thought it had become riskier.

They also sold Sands China (HKG:1928), a Hong Kong-listed resort and casino operator, due to increasing concerns on its dividend paying ability.

The trust's managers also include environmental, social and governance factors in their investment process. 

 

JEMI vs JMG

JPMorgan Global Emerging Markets Income’s net asset value (NAV) total return has outperformed MCSI Emerging Markets Index since launch. But the trust has not performed as well as JPMorgan Emerging Markets Investment Trust (JMG), a growth orientated fund run by Austen Forey for the past 27 years. Forey’s trust has returned 122 per cent over the past five years, making it the second-best performing and second-largest trust in Winterflood’s emerging markets trust sector. 

Gilligan says: “This is primarily a case of growth versus value stocks.”

Growth stocks have been incredibly strong for most of the past 10 years, helping JPMorgan Emerging Markets Investment Trust. The chart shows the divergence between growth and value stocks in 2020, and how in the past couple of months there has been a slight reverse in fortune. Value stocks may continue to do better than growth stocks in the short term if the global economy picks up.

JPMorgan Global Emerging Markets Income was on a wider discount to NAV of 6.4 per cent as of 13 April, compared with a 4.1 per cent discount for JPMorgan Emerging Markets Investment Trust. Gilligan says that JPMorgan Global Emerging Markets Income's board has indicated an intention to repurchase shares if the discount to NAV exceeds 5 per cent over any significant period of time, offering some support at current discount levels. JPMorgan Emerging Markets Investment Trust's board tends to do this when its discount is around 10 per cent – significantly wider than current levels. 

Although there is no certainty on JPMorgan Global Emerging Markets Income’s dividend, the outlook for its holdings' sales profits and cash flows are improving. The trust is weighted to financials, consumer staples and information technology companies where many of the most attractive income opportunities lie.

And JPMorgan Global Emerging Markets Income’s managers' focus on investing in sound businesses, selected on the basis of their fundamental qualities and strong balance sheets, should serve this trust well.

 

JPMorgan Global Emerging Markets Income Trust (JEMI)
Price146pGearing6%
AIC sectorGlobal Emerging MarketsNAV 156p
Fund typeInvestment trustPrice discount to NAV6.40%
Market cap£434mOngoing charge1.16%*
No of holdings78*Yield3.50%
Set-up date29.07.10*More detailsjpmam.co.uk/investmenttrust
Source: Winterflood 13.04.21, *JPMorgan Asset Management. 

 

Performance
Fund/benchmark1-year total return (%)3-year cumulative total return (%)5-year cumulative total return (%)
JPMorgan Global Emerging Markets Income share price513093
JPMorgan Global Emerging Markets Income NAV483488
JPMorgan Emerging Markets IT share price5663146
JPMorgan Emerging Markets IT NAV5350122
Emerging markets trusts average share price432684
Emerging markets trusts average NAV402477
MSCI Emerging Markets index382585
Source: Winterflood, 13 April 2021

 

Top 10 holdings (%)
Taiwan Semiconductor Manufacturing8.6
Samsung Electronics6.0
Tata Consultancy Services3.6
Vanguard International Semiconductor3.2
Sberbank of Russia3.1
Wal-Mart De Mexico2.6
China Merchants Bank2.5
Ping An Insurance2.5
China Pacific Insurance2.4
China Construction Bank2.2
Source: JPMorgan Asset Management, 28.02.21

 

Region breakdown (%)
China33.0
Taiwan21.9
Russia9.2
India6.9
South Korea6.7
Mexico6.1
Indonesia3.4
South Africa3.1
Thailand2.5
Saudi Arabia1.9
Other4.3
Cash1.0
Source: JPMorgan Asset Management, 28.02.21