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Jupiter Emerging & Frontier Income enjoys turnaround performance

Jupiter Emerging & Frontier Income enjoys turnaround performance – Jupiter Emerging & Frontier Income (JEFI) has posted its full year results for the year ended 30 September 2021. Over the period, it delivered a share price total return of 31.5% and an NAV total return of 28.6%, compared to a 13.3% return from its MSCI Emerging Markets benchmark.

The principal factors driving the strong absolute and relative performance this year were a recovery in global equity markets following the roll out of vaccination programmes in developed countries, an underweight position in China, an allocation to smaller companies and frontier markets, as well as maintaining a reasonable level of gearing in the portfolio throughout the year. The board said in many ways, most of the factors which contributed to this strong performance were the same factors which contributed to the underperformance in the previous year.

JEFI pays four dividends a year. The first of these, an interim dividend of 1p, was paid on 26 March 2021. On 25 June 2021, the board paid a second interim dividend of 1p which was followed by a dividend payment of 1.2p on 24th September 2021 and a fourth interim dividend payment of 1.25p which was paid on 30 December 2021. As a result, total dividends for the year were 4.45p per share, slightly higher than the total distributions of last year.

Since the year end, the board has announced its intention to put forward proposals to amend the redemption facility by restricting the number of shares that can be redeemed to 20% and to move from an annual facility to one which will be offered once every three years, starting in June 2024. This follows a consultation with shareholders and is in response to the redemption facility resulting in a significant reduction in the size of JEFI’s capital base in the past year.

Manager’s performance review

Significant positive contributors to performance over the period included stocks from across a broad range of sectors and markets. Brazilian port operator, Wilson Sons, Indian refiner and fuel marketing business, Hindustan Petroleum (HPCL), and Taiwanese chip designer, Mediatek, all delivered strong share price returns.

Wilson Sons has been owned in the portfolio since JEFIT listed in 2017. Working together with our Stewardship Team, we have previously engaged with the Chairman and believe that management quality is high. Despite owning excellent port assets and having potential for structural growth in earnings as international trade volumes and cabotage expand over time, Wilson Sons’ stock has long appeared undervalued. However, the firm recently announced that it would move to a Brazilian main listing structure (replacing the current depository receipt structure), which has driven a re-rating of the company’s valuation towards a multiple that better reflects its strong competitive position and growth potential.

HPCL, which owns and operates refineries, gas pipelines and service stations across India, has demonstrated strong operational resilience throughout the pandemic. Better-than-expected earnings delivery, combined with share buybacks and a significant year-on-year increase in dividend payments drove strong share price performance over the period. We believe that HPCL is a good example of why it is important to engage with and analyse companies operating in sectors with higher ESG risk, rather than working on the basis of exclusions. While some might reasonably question the long- term future of fuel retailing, a closer examination of HPCL’s business reveals that the company, as a supplier of city gas and LPG, has a key role to play in India’s energy transition. Management is also working to leverage HPCL’s extensive network of fuel stations for non-fuel retail opportunities and electric vehicle charging.

Mediatek has continued to deliver very strong operational performance, in terms of both sales and margins. The company’s new fifth generation (5G) handset chipsets have been positively received by customers and these should drive a sustained uplift in margins for the company as 5G adoption becomes more widespread. Additionally, Mediatek continues to expand into non-mobile product areas: It is already the largest supplier of ARM-based processors for Google’s Chromebook, custom designs chips for Amazon’s Echo and is in the process of developing chips for advanced driver-assistance systems (ADAS) in cars.

Not owning Alibaba (one of the largest constituents in the Company’s MSCI Emerging Markets benchmark) was also a positive driver of the portfolio’s relative performance. The suspension of the keenly anticipated initial public offering of Alibaba’s subsidiary, ANT Financial, and heightened antitrust scrutiny of the entire Chinese internet sector weighed on sentiment towards the stock.

Detractors from relative performance included GRIT Real Estate and China Medical System. GRIT is a leading pan-African real estate company, which mainly leases properties to multinational tenants on a hard-currency basis. Throughout the course of a normal economic cycle, GRIT could be considered a very resilient business. However, the pandemic proved to be particularly challenging for the company, as it has over 20% exposure to the hospitality sector (tenants include Lux, Clubmed and Beachcomber) and a similar exposure to retail. The need to defer rental collections on several hotels concerned investors, particularly as it led to a downward adjustment in appraised property values. However, rental payments from these tenants are resuming, as tourist arrivals begin to recover, and the outlook for 2022 appears to be materially better than 2021.

The share price of China Medical Systems was weak during the third quarter of 2021, along with the rest of the Chinese pharmaceutical sector. However, the company delivered strong interim results and we view the business as being much better positioned to navigate regulatory uncertainty than peers.

Manager’s outlook:

We continue to see a combination of improving operational performance and valuations that are low relative to history for many of the portfolio’s holdings. Despite the recovery we have so far seen, valuations for many of JEFIT’s holdings remain at a level that, in our view, does not fully reflect their growth potential.

While many smaller emerging and frontier markets remain a long way behind developed markets and China in terms of their vaccine programmes, there was a marked acceleration in vaccinations during the second half of 2021, which bodes well for a continued recovery in economic activity in 2022.

In a world where the valuations for many asset classes look high relative to history, the opposite continues to hold true for most companies and sectors within emerging and frontier markets, despite the potential for strong long-term growth. As investors continue to look past the impact of the pandemic, we expect that the scope for operational recovery and re-rating from attractive valuations will be positive for stock performance.

There has already been a significant recovery in the Company’s revenue outlook, driven by a resumption of dividend payments by those companies that temporarily halted payouts at the height of the pandemic and by an improved earnings outlook for many of our holdings. We remain positive on the outlook for earnings and dividends at both a Company and an asset class level in 2022. Consensus dividend forecasts imply a strong level of dividend growth, with forecasts for the portfolio’s holdings suggesting a forward-looking portfolio yield of around 5.6%, which compares to a 12-month trailing dividend yield of 4.8%.

Gearing in the trust (loan value as a percentage of net asset value) currently stands at just below 10%, which compares to a guided range of 0% to 20%. Given where valuations are currently, we consider it appropriate to maintain this level of gearing in the trust.”

JEFI : Jupiter Emerging & Frontier Income enjoys turnaround performance

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