For the six months ended 31st January 2016, JPMorgan Global Emerging Markets Income reported a 12.9% decrease in net assets per share. This compares with a decrease of 8.7% from the MSCI Emerging Markets Index (in sterling, with net dividends reinvested). The Chairman’s statement describes this as disappointing. The company’s share price has now moved to a discount to Net Asset Value. For the six months to 31st January 2016, the total return to shareholders was -21.3%. In the company’s current financial year, the Board has declared first and second interim dividends of 1.0p each, in line with the same period last year.
The managers say the style headwinds the strategy faced in the period resulted from a meaningful downturn in the performance of yield as a style, with stocks offering high dividend yields underperforming while those with low yields outperformed. Similarly, stocks combining a high yield with high forecast growth struggled, contrary to long-term performance patterns.
The drivers of the weak performance of high yield stocks included currency exposure, with high yielding stocks concentrated in markets that faced currency weakness, and rising bond yields ahead of the first interest rate rise from the Federal Reserve. Investors have also been nervous about the resilience of dividends given the weak growth backdrop.
At the country level, an underweight allocation to South Korea was the biggest detractor from relative performance, while stock selection in that market was also detrimental. The portfolio has a long-held underweight to South Korea due to the poor payout ratio (in the teens, compared to 35% for emerging markets overall), which means that yields are relatively unattractive. However, in the period, market heavyweight Samsung Electronics announced a change to its shareholder return policy, indicating that it would now aim to return a higher percentage of free cash flow to shareholders, through both dividends and buybacks. They added the stock to the portfolio following this announcement. They say, beyond Samsung, there is – as yet – little sign of other South Korean companies altering their dividend policies, meaning yields remain low and they maintain our underweight position for the time being.
Stock selection and an overweight position in South Africa also proved negative for performance. 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. But a secondary factor has been the strength of the institutional framework, with the treasury and central bank seen as credible institutions in an economy that undoubtedly faces macro challenges. This secondary factor was undermined in the period by President Jacob Zuma’s surprise decision to remove the finance minister. Markets reacted very badly to this announcement, and both equities and the currency collapsed. Zuma then performed a U-turn, reinstating a previous finance minister, which restored some credibility.
On the positive side, stock selection and an overweight position in Taiwan worked well in the period. In particular, an overweight position in Siliconware Precision was beneficial as the semiconductor packaging and testing company was subject first to a tender offer and then a full takeover bid by larger rival Advanced Semiconductor Engineering. An overweight position in Vanguard Semiconductor also worked well as the company benefited from increased restocking demand and announced that it would maintain its dividend for 2015. They increased the position in Vanguard during the period and also took the opportunity presented by volatility to add to other positions in Taiwan.
JEMI : Board says JPMorgan Emerging Markets Income performance disappointing