Emerging markets have certainly been out of favour in 2013, losing money year-to-date and significantly trailing developed market indices, which have rallied strongly.
Year-to-date performance of indices
Source: FE Analytics
However, this is exactly the time investors should be taking profits from their investments that have surged ahead and using them to reinvest in the battered emerging markets, according to Omar Negyal, deputy portfolio manager of the JPMorgan Global Emerging Markets Income Trust.
"When I look at the asset class overall and think about if there is a buying opportunity, from a valuation perspective you want to look at price/book," he said.
"It’s a very objective measure and on that basis I think it’s pretty clear that emerging markets as a whole look cheap relative to history. So it looks pretty attractive today, trading much below the long-term average. So from a valuation perspective that’s definitely a buying opportunity."
Negyal admits there are a lot of top-down macro issues that are causing consternation in emerging markets but thinks investors need to see through these headwinds in order to take advantage of the long-term growth potential that comes from buying into equities at low levels.
"In this negative time, when we feel quite pessimistic, we need to remember that the valuation levels are very important for future returns," he said.
Titherington and Negyal focus on dividend yield and the potential for this figure to grow when considering investing in a company, rather than total return.
"The percentage of companies that pay dividends in emerging markets has risen dramatically over time, so the vast majority of companies do pay dividends today. I think that will remain going forwards," Negyal said.
"From our perspective, the key when we look at individual companies is the sustainability of the dividend and whether those companies can grow the dividend on a medium-term basis."
"The starting point clearly is 'do they pay a dividend?', but what’s important really is 'is the dividend sustainable and does the management want to continue to grow that dividend over time?'"
The £299.9m trust has an attractive yield of 4.2 per cent, higher than the average yield of the IMA UK Equity Income sector, which is roughly 3.9 per cent.
It has also outperformed its peers in the IT Global Emerging Markets Equities sector and the MSCI Emerging Markets index over the short- and medium-term.
Over the last three years, the trust has made just under 30 per cent while the MSCI Emerging Markets index made 3.27 per cent. The average trust in the sector gained 8.78 per cent, according to FE Analytics.
Performance of trust vs sector and index over 3yrs
Source: FE Analytics
The highest sector weighting in the portfolio is to telecommunications, media and technology stocks, with names such as Telekomunikasi Indonesia and Delta Electronics, the world’s largest provider of switching power supplies and brushless fans, featuring in the top-10 holdings.
The JP Morgan trust is also backing a number of banks, including the Bank of China and Sberbank of Russia – a mainstay of many open-ended emerging markets funds.
Negyal says there are three basic questions the team asks before it buys a stock.
1 – What is the current yield of the stock?
2 – What is the sustainability of that yield?
3 – Can that dividend grow on a five-year basis?
"At JP Morgan, in the emerging markets team we’re very fortunate because we have a very well-established research platform," he said.
"We have 23 stock analysts covering close to 700 companies, so we’re never short of ideas to look at."
Negyal says he and Titherington look very carefully at the reports the analysts produce and put each stock through an income filter to determine whether it can hold up to the yield expectations for the portfolio in both the immediate and long-term.
On top of the dividend requirement, the pair look at the potential return on equity from a company and the attitude of the management to paying dividends.
"We want to see positives on all of that for the companies we invest in," he said.
In order to deliver both the steady and growing dividend components, Negyal says they split the portfolio into three types of yield, the first being core companies that can generate good dividend growth but that are also already offering higher dividend yields than the market.
They add other "buckets" of higher dividend-yielding stocks and lower dividend-yielding stocks.
"In the lower dividend-yielding bucket, these are companies where the yield isn’t quite as high but we’re looking for much superior dividend growth compared with the broader universe."
"But all our stocks must pay a dividend," he added.
The trust has ongoing charges of 1.26 per cent excluding a performance fee, or 2.09 per cent, including a performance fee.
This article was written in collaboration with and is sponsored by JPMorgan Asset Management.
