JPMorgan Global Emerging Markets Income recorded a total return on net assets of +16.9% for the year to the end of July 2016. This compares with a return on the benchmark index, the MSCI Emerging Markets Index, of +16.7%. The total return to shareholders was +21.3%, as the share price increased from 100.3p to 115.3p. If we strip out the effects of currency movements however, the NAV return was fairly flat for the year (sterling’s weakness boosted asset values in sterling by approximately 16%).
Dividend receipts over the year to 31st July 2016 were below levels of the prior year. The Board paid three interim dividends of 1.0p per share and has announced the payment of a fourth interim dividend of 1.9p per share. This brings the total dividend for the year to 4.9p, unchanged from last year.
They say that emerging market dividends remain under pressure, as companies struggle to increase their payouts against a challenging growth backdrop. Dividends across emerging markets declined in the financial year and they saw dividend receipts from the portfolio also decline. JPMorgan Global Emerging Markets Income maintained its dividend by utilising part of the revenue reserve that it had built up in previous years. Their expectation is that payout ratios will be held steady by emerging market companies, but the overall earnings environment remains weak, which means they should still be cautious when considering the trajectory of dividend receipts from the portfolio in the near term (although continued sterling weakness would help the revenue account).
The managers’ report says asset allocation was a bigger contributor to relative performance than usual in the review period as they added to positions in South Africa and Brazil in the period to take advantage of higher dividend yields and attractive valuation opportunities, and their overweight positioning relative to the benchmark contributed positively to performance. A significant underweight in China also contributed positively to relative performance. They says that, although China remains an important driver of emerging market equities as a whole, from a stock and dividend perspective they feel that there are more attractive opportunities outside the country. The Chinese market underperformed emerging markets overall.
Stock selection and an overweight position in Taiwan also contributed positively. Country weightings are driven by individual stock decisions. The largest overweight is in Taiwan, where they have found several attractive stocks with high returns on capital and positive free cash flow, and where they have confidence in the dividend payout. The positive performance from stock selection in Taiwan was driven by some of their technology holdings, in particular Vanguard and Siliconware Precision Industries. In a difficult operating environment, Vanguard held its dividend in the year, while Siliconware Precision Industries was the subject of a takeover bid by a competitor (an indicator that non–financial market participants saw attractive valuations in the market).
Stock-level detractors from performance included an overweight holding in MTN, a telecoms company operating in South Africa and Nigeria, which was hit by a large regulatory fine. Their view on future dividends deteriorated due to the magnitude of the fine, as well as a concern that the operating environment for the company was more difficult than they had initially judged. They exited the stock in the year, but it was one of the biggest detractors from performance overall.
An overweight position in China Resources Power also held back relative returns. The utility company has stable cash flows and a good dividend payout policy. However, the stock suffered as growth concerns in China led to a reduction in demand for – and subsequent oversupply of – thermal power, denting the profitability of utility companies. Although the stock lagged, they added to the overweight position as they believe the yield is attractive, while meetings with the company have reassured them of the sustainability of its future dividend payouts.
From a sector perspective, underweight exposure to energy and materials was negative for performance, as both sectors have performed well on the back of a rise in commodity prices this year.
JEMI : JPMorgan Global Emerging maintains dividend despite declining income