China underweight pays off for this Super 60 fund

Super 60-rated JPM Emerging Markets trust outperformed its benchmark, the MSCI Emerging Markets index, in the year to 20 June 2023 due to its “cautious” approach to Chinese shares and “optimism” around Indian shares.

The trust’s net asset value (NAV) return for the 12-month period was flat, but shares rose 0.8% due to a narrowing of the discount from 10.3% to 9.7%. In contrast, its benchmark fell 2.8%.

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Over 20 years, the trust has delivered an 863% share price return compared with 456% for the MSCI Emerging Markets index. This equates to an impressive 4 percentage points a year on average above the benchmark.

Having an underweight position to China (22% of the portfolio compared with 27.3% of the benchmark as of August 2023) has helped recent performance.

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Portfolio managers Austin Forey and John Citron said China's extraordinary economic growth over the past three decades has been driven above all by two factors: huge growth in exports and property – but now neither of these are currently providing the stimulus that they once did.

On exports, they argue that the weakness of developed-world demand is naturally providing a headwind and increasing geopolitical sensitivity has led to direct interventions from Western governments, especially the United States, to curb China's success in hi-tech industries in particular.

Meanwhile, they say the Chinese property sector is in trouble and has begun to see large and high-profile bankruptcies.

“A spectacular construction boom saw almost the whole housing stock of the country reconstructed in two decades; but having done this, there is neither the need nor the demand to do it again. For businesses like property developers that depend on the flow of construction rather than the stock of completed buildings, this is bad news,” they said.

Nevertheless, valuations in China are now cheap, so Forey and Citron are watching closely for opportunities there. Their largest position in a Chinese company is internet group Tencent.

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India is the trust’s largest allocation, accounting for 24.3% of the portfolio compared to just 15% for the benchmark. The managers invested for the first time in two new companies in India over the reporting period: Kotak Mahindra Bank and Cyient, an IT services company specialising in engineering design.

Other Indian positions include HDFC Bank (NYSE:HDB) and Tata Consultancy Services.

They said: “In India, we see two things happening at the moment. The first is a degree of investor optimism, which has pushed share prices for some companies well above the levels we would be happy to pay and we have reduced some of our exposure as a result.

“But in the real world, India is emerging as one of the few credible alternatives to China for large-scale export manufacturing, and a round of inward investment adds to reasons to be optimistic about the future of the Indian economy. The country remains one of our largest allocations in [the] portfolio.”

After India and China, Taiwan, Hong Kong and South Korea are the largest country bets.

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A final dividend of 1.07 pence per share has been declared, taking the total dividend for the full year to 1.65 pence per share, a rise of 22.2% compared to the previous year. The trust currently yields 1.3%.

The trust also announced it was cutting its charges. With effect from 1 July 2023, 0.75% a year is charged on the first £500 million of net assets, 0.65% on net assets between £500 million and £1 billion, and 0.60% on net assets in excess of £1 billion. This compares with the flat fee of 0.75%, which has been levied since 1July 2021.

Chair Aidan Lisser said: “The new, tiered management fee is expected to further reduce the annual ongoing charges ratio from its level of 0.85% at end June 2023, continuing the steady reduction in the ongoing charge from its levels of 1.02% from five years ago.”