The trust has suffered in the emerging markets sell-off of the last year, but lost less than the majority of its peers.
Winterflood’s analysts say that the managers’ style is also attractive for the long-term investor, focusing on stable growth sectors and avoiding volatile cyclicals.
“Emerging markets have endured a very difficult period of late. However, JP Morgan Global Emerging Markets Income has performed strongly since its launch in 2010, outperforming both its benchmark and emerging markets peer group and with lower volatility,” they said.
“As well as its dividend, we believe that this fund has significant merit as an emerging markets equity fund.”
“It provides investors with exposure to a portfolio with an emphasis on stable growth sectors and underweight positioning in more cyclical sectors such as materials.”
“We believe that this approach enables the fund to capture the growth in emerging markets while providing lower volatility.”
Data from FE Analytics shows that in share price terms, the fund has made 19.17 per cent since launch while the average Global Emerging Markets portfolio has made just 7.96 per cent and the MSCI EM benchmark has fallen by 1.76 per cent.
Performance of trust vs sector and index since launch
Source: FE Analytics
The past 12 months have been more difficult for the trust, although it has still managed to outperform most of its peers.
Over one year its NAV has fallen 17.1 per cent, but this is less than all but two frontier market trusts and Utilico Emerging Markets.
In share price terms the trust has lost 16.07 per cent.
Source: FE Analytics
The yield has meant the trust has lost less than its sister fund JPM Emerging Markets and the £1.68bn Templeton Emerging Markets fund.
However, the fund has significant exposure to some of the countries most harmed by the sell-off in emerging markets – those most exposed to foreign currency movements.
“Recent relative performance has been quieter, with the fund’s overweight exposure to the ‘fragile five’ weighing on returns,” the Winterflood analysts said.
“The strength of sterling over the last year against the majority of emerging market currencies is likely to impact the fund’s revenue for the current financial year.”
“However, the fund has built up a revenue reserve, which could be used to mitigate the impact if necessary.”
The fund has 8.6 per cent in Russia compared with just 5.9 per cent from the benchmark. It is also overweight Turkey, with 4.5 per cent in the country compared with the benchmark’s 1.4 per cent.
Brazil is a slight overweight, too, making up 11 per cent of the portfolio compared with the 10.2 per cent on the index.
The question of whether to buy back into emerging markets or wait is one that is vexing many investors at this time.
“Emerging markets valuations appear to be low by historical standards; however, with the current uncertainty surrounding emerging markets, it is certainly possible that they could become cheaper in the short-term,” Winterflood said.
“Nevertheless, for longer-term investors we believe the outlook remains positive and that JP Morgan Emerging Markets Income provides exposure to a high growth asset class combined with an attractive yield.”
The broker has also added private equity fund Candover Investments to its list of recommendations as a high risk investment.
“In addition to our core private equity recommendations, we believe that Candover Investments is worthy of consideration as a specialist, high risk recovery play,” its analysts said.
“It has been a long haul since the fund adopted a managed wind-down strategy in 2010 and no capital has yet been returned to shareholders.”
Performance of share price vs sector and index since Jan 2010
Source: FE Analytics
“However, in our view, the fund’s prospects have improved considerably of late and the recent refinancing is undoubtedly positive, removing what had been a significant uncertainty.”
“After two disposals in the last six months, we would expect more this year, with candidates including Innovia and ONO.”
“However, in order to repay the new loan notes and allow the fund to contemplate returning capital to shareholders, some of the fund’s key holdings (Expro International, which accounts for 46 per cent of net assets, Stork or Parques Reunidos) would have to be sold.”
“With Expro performing strongly last year, this may be the most realistic hope, although the rest of the portfolio, with the exception of Stork Technical Services, also appears to be performing well. Net debt is now equivalent to 31 per cent of net assets.”
“Candover Investments is not without risk. The timetable for any future disposals is unclear and remains in the hands of the management team at Arle.”
“In addition, the portfolio is highly concentrated. However, we believe that there could be considerable upside to both the fund’s share price and NAV in the next few years as a result of key disposals.”
The private equity sector as a whole has seen discounts tighten recently, but Candover Investments is still on a 25 per cent discount, according to the AIC.
