The majority of the world’s population – over 80% – lives in emerging markets, and a large proportion of this population is under the age of 35. This equates to a vast pool of potential workers and consumers, and emerging markets can piggy-back on technological advances in advanced economies to supercharge their own domestic markets.
This week we look at the JPMorgan Emerging Europe, Middle East & Africa [LON:JEMA] investment trust, a GBP22m fund in the Association of Investment Companies’ Global Emerging Markets sector, a sector of ten funds.
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The opportunity in emerging markets is vast, with rapid urbanisation, industrialisation and infrastructural developments creating fantastic opportunities with low barriers to entry to developed countries and the ability for global companies to emerge quickly, scale-up and develop regional and global brands.
The JPM fund is benchmarked against the S&P Emerging Europe, Middle East & Africa Index (BMI Net Return in GBP) and has been around for 22-years. The fund, historically, had a strong Russia bias, but following the invasion of Ukraine by Russia in February 2022, and the sanctions and restrictions imposed on Russian corporations and MOEX (the Russian Stock Exchange), the fund wasn’t able to trade its holdings, and if it continued to operate in the same way it would be financially impacted.
Change of investment policy post-Russian sanctions
As a result, the company voted to change its investment policy, as opposed to institute a wind-up, and expanded its mandate to invest in a diversified portfolio of quoted investments in equities in Emerging Europe (including Russia), the Middle East and Africa, including those markets that are considered as emerging markets according to the S&P Emerging Europe, Middle East and Africa Index. The fund is still trying to unravel its Russian holdings and is locked (along with JPMorgan) in a legal dispute with Russia’s VTB Bank, with worries over the insolvency of JPMorgan’s Russian subsidiary, JPMBI and the potential inability to transfer the assets of JPMBI to another custodian.
The fund was holding around a quarter of its portfolio universe in Russian stocks, amounting to around 8% of the fund’s net asset value, worth GBP25.2m with an additional GBP7.9m of dividends at the end of April. These funds may never be able to be recovered and are not accounted for in the funds current NAV now.
The manager of the fund, Oleg Biryulyov, has been on-station since the investment trust was launched and has been at JPMorgan most of his 31-year career. Prior to JPM, Biryulyov managed the Flemings Urals Regional Venture fund.
By their nature, many emerging markets funds are resource-heavy, but as emerging markets develop, newer, service-orientated and manufacturing industries are added to the mix. That said, the ‘big three’ that dominates the JPM fund are Saudi Arabia, South Africa and UAE, with a bias towards the financial services, energy, materials and communications sectors.
The fund was the best-performing in sector (on a share price total return basis to 9th December) over one-year, returning +49.9% against a sector average of +14.1%. However, it’s a different picture over the longer term. Over five-years the fund is bottom of the sector with a -67.8% return versus a sector average of +15.9%. Over ten-years Biryulyov’s fund is also in last place with a -13% return against a sector average of +81.2%. In some ways the expansion of the fund’s investment mandates may have helped bolster its performance.
JPMorgan Emerging Europe, Middle East & Africa top five holdings:
| Investment | Sector | Country | Weighting |
|---|---|---|---|
| Al Rajhi Bank | Financial Services | Saudi Arabia | 3.1% |
| Qatar National Bank | Financial Services | Qatar | 2.5% |
| Naspers | Consumer Discretionary | South Africa | 2.4% |
| First Rand | Financial Services | South Africa | 2.3% |
| Standard Bank | Financial Services | South Africa | 2.0% |
Source: JPMorgan, 31st October 2024
The fund trades at a discount to premium of 255% and has an ongoing charge of 3.19% with a dividend yield of 0.26%.
The JPMorgan Emerging Europe, Middle East & Africa fund offers exposure to a diverse range of emerging markets, with a focus on high-growth economies. However, the fund’s past performance, particularly in recent years, highlights the risks associated with investing in this region. While the expansion of the investment mandate may provide some diversification, investors should carefully consider the risks and rewards before investing in this fund.
