JPMorgan Global Emerging Markets Income, in a refreshingly direct way, reports that its last financial year (to end July 2015) has been tough, particularly in the second half. The Company recorded a total return on net assets of -7.8%. This compares with a return on the benchmark index, the MSCI Emerging Markets Index with net dividends reinvested (in sterling), of -6.3%. The total return to shareholders including dividends was -14.4%, as the Company’s share price decreased from 122.0p to 100.3p over the financial year. Since year-end the share price has fallen further to new lows. The dividend has been maintained at 4.9p. The Chairman explains what happened in four bullet points:
- The currencies of these developing economies have depreciated relative to sterling.
- Emerging equity markets have fallen.
- Investment performance has lagged the benchmark index.
- The share price has moved from a premium to the cum income net asset value of +2.3% at 31st July 2014 to a discount of -4.9% at 31st July 2015.
Following a review of the fee arrangements the Board has agreed with the manager to remove the performance fee element from its fee arrangements and to change the basis of the management fee from the end of the Company’s current financial year, being 31st July 2015. With effect from 1st August 2015 the Company’s fee arrangements comprise only a management fee, which is charged at the rate of 1.0% per annum on the Company’s total assets less current liabilities. Loans that are drawn down under a loan facility with an original maturity date of one year or more are not classified as current liabilities for the purposes of the management fee calculation.
The manager says, in terms of country allocations, an underweight exposure and conservative positioning in the Chinese market was the biggest negative contributor to relative performance. The decision to avoid low quality cyclical stocks and property companies was detrimental as the Chinese market was lifted by a sharp upswing in domestic A shares through most of the year under review. However, the correction later in the year helped from a relative performance angle and began to reverse some of the earlier underperformance.
The Company’s underweight position in Korea was the biggest positive contributor from a country allocation perspective, as Korea significantly underperformed the broader market. As an income-focused portfolio, it can be difficult to find attractive dividend stocks in Korea, so they have tended to avoid the market. Nevertheless, the Company did benefit from holdings in three Korean stocks that do meet their investment criteria, offering decent returns, good free cash flow and attractive dividend policies, as these stocks significantly outperformed both Korea and the broader market.
Their positioning in Brazil also contributed positively in an environment of continued political uncertainty and deteriorating economic news. Investors reacted negatively to the re-election of president Dilma Rousseff due to worries over a lack of economic reform. A slump in commodity prices, a slowdown in China, political scandal and disappointing GDP growth all added to downward pressure on Brazilian stocks. In this environment, Brazilian stock selection was positive. They avoided many of the larger index stocks, which declined significantly, and were rewarded by a focus on mid cap opportunities, which performed better than the market and therefore helped relative performance.
An overweight position in Taiwan detracted from relative performance. They have a large exposure to Taiwan due to its established dividend culture, particularly among the market’s large technology sector, where they believe the outlook for long-term return on capital is positive. Taiwan’s technology sector struggled in the year under review due to an inventory correction, as global demand for computer equipment, smartphones and semiconductors fell. They see this as a short-term issue and have used share price weakness to add to positions. The dividend streams from these companies remain strong, which is supportive of the investment case.
Unfortunately the report makes no mention of the individual stocks that contributed to these returns.
JEMI : Fee cut for JPMorgan Global Emerging Income