Over the 12 month period ended 31 July 2023, JPMorgan Global Emerging Markets Income beat its benchmark by a decent margin, returning 9.2% in NAV terms and 12.6% in share price terms againsty a return of 2.5%.
The company’s net revenue of £16.9m was down from £18 .1m for the prior year, in part due to a timing issue of receipt of dividends from the Taiwanese portfolio holdings. Net revenue return per ordinary share for the year, calculated on the average number of shares in issue, was 5.70p (2022: 6.11p). Nevertheless, the dividend was covered by these earnings. During the financial year, the board paid three interim dividends of 1.0p per share and on 4th September 2023 it announced the payment of a fourth interim dividend of 2.30p per share. This brings the total dividend for the financial year to 5.30p per share, a modest increase from the previous year (2022: 5.20p per share).
The $20m fixed interest loan facility with National Australia Bank was repaid in November 2022. The company secured a competitive $20m, two-year revolving loan facility with Mizuho Bank Limited, repayable in November 2024. There was also a $20m floating rate loan facility with ING Bank, repayable in early October 2023. This has been renewed for a further two years. As at 31st July 2023, portfolio gearing stood at 5.7% (31st July 2022: 5.7%).
During the financial year, the company bought back 358,101 shares into treasury for a total cost of £448,000. It did not issue any shares.
Fee changes
Since the year end, the board has agreed with the manager that the investment management fee should be tiered. With effect from 1st November 2023, the investment management fee will be charged on a tiered basis at an annual rate of 0.75% of net assets on the first £500m and at 0.65% of net assets above that amount. This compares with the previous arrangement under which the management fee was charged at an annual rate of 0.75% on net assets. The fee will continue to be calculated and paid monthly. For now, the assets are about £100m under the £500m level.
Extracts from the manager’s report
Looking at some of the main individual contributors to performance:
Our position in B3, Brazil’s main stock exchange, was the largest positive contributor to performance. We like exchanges in general, as they tend to be high quality companies with few, if any, competitors. Furthermore, they generate strong free cash flow and often have attractive dividend policies. All these points hold true for B3, and the stock re-rated strongly over the period.
The holding in Taiwan’s Novatek Microelectronics Corp, which designs chips for screens as well as other specialised applications, contributed to performance. Novatek’s share price rose strongly, helped by an easing in market worries over high inventory levels. The company also reported meaningful improvements in revenue over several quarters. We continue to see the company as being able to generate a healthy return on equity and we like the fact it has been able to maintain its strong position within the market over a long period of time, showing that it has the ability to navigate multiple product cycles.
Within financials, the holding in Grupo Financiero Banorte, a Mexican bank, contributed to performance. Banorte’s net interest margin has expanded thanks to rate increases and accelerated growth in lending. Additionally, this bank has demonstrated good governance, and prudent capital allocation, as illustrated by management’s decision to eschew an offer to acquire its competitor, Banamex, from Citibank. Mexico’s macroeconomic prospects are also positive – its GDP growth is expected to outpace that of other Latin American countries, thanks in part to nearshoring trends (discussed further below), which will allow Banorte to benefit from greater local financing opportunities.
Of our holdings in consumer staples, an overweight in Inner Mongolia Yili Industrial Group, which produces and sells dairy products, detracted from performance. The company’s share price de-rated due to slower than expected sales growth and low returns from branding investments. Earnings also became more volatile due to expenses related to covid controls. However, we continue to hold this stock, as we expect these issues to fade with time. Furthermore, the company has been able to hold on to gains in market share and new product categories are growing well. Among communication services holdings, not owning China’s internet content giant Tencent detracted from performance. However, we will continue to remain uninvested in the stock, as it does not offer an attractive dividend yield.
Among materials sector positions, our decision not to own POSCO, a Korean steelmaker which produces materials used in the manufacture of vehicles, machinery and home electronics, also detracted from returns. The stock rallied thanks to Korean retail investors’ enthusiasm for battery materials. The company’s plans to produce battery cathodes were also well-received by the market, but we intend to stay out of the stock, as we do not share the market’s conviction in POSCO’s fundamentals, or its ability to fend off competitors over the long-term.
Our country allocations had a positive impact on relative performance over the year. The Company’s exposure to Mexico was the most important contributor. Since the pandemic, manufacturers have attempted to diversify and strengthen their global supply chains, and Mexico’s proximity to the large markets of the US and Canada means it stands to benefit greatly from this nearshoring trend, via heavier investment in manufacturing, including from foreign investors. In fact, these benefits are already materialising – Mexico became America’s top trading partner during the first half of 2023. Our positions in Banorte and Kimberly Clark Mexico, a supplier of household and personal products, have done well accordingly. Peru was another market which added to relative returns, due to our position in copper miner Southern Copper. Demand for copper is strong and likely to increase over time as this mineral is a key component of batteries and other components and equipment necessary of the transition to net zero carbon emissions.
In Asia, our exposure to Taiwan was another positive contributor to relative returns, thanks to gains in our holdings in semiconductor companies such as Novatek Microelectronics and computer hardware companies such as Wiwynn, which were supported by rising demand for semiconductors in general and, in a couple of cases, potential new opportunities in AI.
On the negative side, the Indian market performed well, but our underweight position relative to the Benchmark created a drag on relative returns. It is difficult to find Indian stocks offering an attractive yield, partly because India is more of a ‘growth’ market, and because valuations are high, thanks to positive investor sentiment towards the country, which means the yields on offer are correspondingly low. Our underweight in South Korea also hurt returns, in large part due to not owning POSCO, which, as previously mentioned, has gained thanks to retail investor enthusiasm, which we do not share.
Not owning stock in Turkey was a further drag. The market rose as high domestic inflation, negative interest rates and unattractive government bond yields made equity investment the only viable investment alternative for local investors. However, these are hardly compelling reasons for us to invest in this market, especially given escalating macroeconomic uncertainty and currency weakness, so we chose not to hold any Turkish names.
JEMI : Decent year for JPMorgan Global Emerging Markets Income