JPMorgan Emerging Markets Dividend Income (JEMI) has made a good start to its five-year performance review, delivering a 38% investment return in the year to 31 July.

This beat the 34.2% return from the MSCI Emerging Markets index and is just the outperformance the £510m trust needs to achieve to avoid holding a 25% tender offer in 2030, which it announced last year, should the trust underperform the benchmark.

Like its big sister, the £1.5bn JPMorgan Emerging Markets Growth and Income (JMGI) which also reported strong results last month, JEMI was boosted by the extraordinary rally in South Korean advanced memory chip providers caused by the rapid rollout of artificial intelligence (AI).

Gearing, or the level of borrowing used to increase investments, rose to 5.4% from 4.9% and contributed 2% to the total investment gain in net asset value (NAV).

An underweight to India, which like China, has lagged the emerging markets rally of the past 18 months, also helped its performance against the index, which it is now outperforming over three, five and 10 years.

Shuyu Gao, a former Schroders analyst with over a decade’s experience in Chinese, Taiwanese and South Korean markets, has been appointed as co-manager to work alongside fund manager Omar Negyal. She joined JPMorgan Asset Management last year.

Despite the fall in China, the fund made gains in the country, particularly on Lenovo as the PC manufacturer’s shares advanced on the back of a move into higher margin, higher growth servers and services business. Their underweight to Chinese internet stocks was also beneficial as these companies were sold off on fears of excessive investment in AI.

The biggest detractor to performance was not holding South Korean memory chip provider SK Hynix, which outgunned the share price of their preferred rival Samsung. That has been corrected with the managers buying a position earlier this year.

With tech valuations now much higher, the managers have become more cautious, taking profits on the likes of ASE Technology and Realtek in Taiwan to leave the trust 2.9% below the weighting of IT stocks in the index. Nevertheless, with 40.8% of the portfolio still invested in IT companies, the company has plenty of exposure to an AI revolution the managers say “will remain a significant driver for EM for the foreseeable future”.

The company said its annualised NAV growth of 18.7%, 11.7% and 10.6% over those periods had exceeded the MSCI benchmark’s 17.6%, 8.7% and 9%.

Over the last financial year, the total return to shareholders was 36.7%, slightly below the NAV return as the share price discount widened to 10% from 8.8%. The company spent £19.9m buying back 11.4m of its cheap shares, adding 0.7p to NAV share which stood at 221.6p at the year-end.

Having changed its name from JPMorgan Global Emerging Markets Income Trust to emphasise its target of growing its dividend each year, JEMI raised the total pay-out by 7.1% to 6p per share. This was covered by 6.1p of revenue per share with the additional support of £14.3m revenue reserves that the board can dip into if investment income dips in future.

Our view

Richard Williams, senior analyst at QuotedData, said: “An excellent year for JEMI, with NAV total return comfortably ahead of the benchmark, extending a strong record of outperformance over three, five and 10 years. Encouragingly, stock selection and asset allocation both contributed positively, with the managers’ longstanding caution towards expensive Indian equities proving particularly well judged. While the AI-driven rally has been a major force behind emerging market returns, the managers have been taking profits in technology holdings where they see valuations have become stretched, reflecting the discipline of JEMI’s income-focused approach. The increase in the annual dividend to 6p is also welcome, particularly as it remains fully covered by earnings, and the reduction in management fees is another positive development. Nevertheless, despite the strong performance and continued share buybacks, JEMI’s shares still trade at a discount to NAV of around 8.5%. Given the trust’s consistent outperformance and attractive income proposition, that looks difficult to justify.”