US Edition
Heightened fear among investors has weighed on the performance of the JP Morgan Emerging Markets investment trust.
Its shares have fallen by 9pc since the start of the year, which follows their 13pc slump last year. This means that the trust now trades at a 10.8pc discount to net asset value.
The discount is heading towards its widest level of the past five years; a figure of 16pc was recorded during the pandemic.
The discount is also well above its three-year and five-year averages of around 8pc, which suggests it offers excellent value for money and a wide margin of safety on a long-term view.
Despite its recent share price decline, the trust’s performance since this column tipped it in October 2018 has been encouraging.
Its shares have risen by 28pc, against a paltry 5pc increase for the FTSE 100 index, and are well ahead of their benchmark: the MSCI Emerging Markets index has produced an annualised return of just 1.9pc, versus 5.3pc for the trust, over the past five years.
This puts it firmly among the top 25pc of its emerging market investment trust peer group. And over the past decade the company’s 7.7pc annual return is 2.7 percentage points greater than that of its benchmark – a highly significant difference when compounded over long periods.
The trust’s recent performance has undoubtedly been held back by growing investor concern over economic and geopolitical events.
The threat of a slowing in the US economy, thanks to the time lags that follow interest rate rises before they start to bite, and its impact on global growth are increasingly weighing on investors’ sentiment.
This is prompting investors to shun volatile emerging markets in favour of companies listed in developed markets, which are perceived to be less risky, as well as encouraging lower-risk assets such as bonds and cash to be more widely held.
While this situation could persist over the short run, especially while geopolitical risks are so high, history suggests it is almost certain to give way to a more benign outlook over the coming years.
If interest rates fall in line with current forecasts, and ultimately settle towards pre-pandemic levels, the global economy’s performance is extremely likely to improve. This should prompt investors to turn towards riskier assets such as emerging market stocks.
More than 50pc of the trust’s assets are invested in stocks listed in India and China (including Hong Kong). These economies are forecast to perform relatively well over the near term, with growth of 6pc and 4.6pc respectively expected next year.
Emerging markets as a whole are forecast to expand by 4pc this year and next, which highlights their significant investment potential at a time when Britain and Europe are struggling to deliver any growth.
Somewhat disappointingly, the trust does not currently employ gearing. While this reduces share price volatility, the lack of borrowing also prevents the trust’s returns from being magnified by debt in what is likely to be a rising market.
Meanwhile a yield of 1.3pc means the trust remains of interest to growth investors rather than income seekers.
In terms of holdings, its 10 largest positions account for 45pc of the portfolio. Major holdings include familiar names such as Taiwan Semiconductor, Tencent and Samsung Electronics.
Its 25pc exposure to Indian stocks is its most significant “overweight” regional position: it is nearly nine percentage points greater than the index’s weighting to India.
At the sector level, information technology, financials and consumer staples are all more heavily represented in the trust than in the index; the fund is “underweight” relative to the index in every other sector.
Many investors will doubt that now is the right time to buy the trust. The near-term prospects for its holdings, and the economies in which they operate, are highly uncertain. Despite its lack of gearing, the shares could prove volatile.
However, the long-term prospects for China, India and other emerging economies are significantly more upbeat than those of developed markets, so the trust continues to offer huge growth potential.
Its large discount, coupled with a sound track record of benchmark outperformance, suggests it is a bargain. Keep buying.
Questor says: buy
Ticker: JMG
Share price at close: 101.2p
Read the latest Questor column on telegraph.co.uk every Monday, Tuesday, Wednesday, Thursday and Friday from 6am
Read Questor’s rules of investment before you follow our tips