Out-of-favour investments belong in a diversified portfolio. Ian Cowie eyes a ‘cheap’ investment trust sector.
The best time to buy shares is when you least feel like doing so, because that is when confidence and prices are low. Few investment trust sectors demonstrate the truth of that adage more extremely than emerging markets (EM).
By the time EM is all the rage, share prices will be high and that is rarely a wise time to buy into such a cyclical and volatile sector. Here and now, the pendulum of popularity has swung to the opposite extreme after years of dismal returns lagging behind developed markets.
So, even if we really don’t want to, this might be a good time for long-term investors to consider some exposure to EM. Shares in the Association of Investment Companies (AIC) global EM sector are trading 11.5% below their net asset value (NAV) - or more than twice as cheap as the 4.6% average discount for all conventional trusts.
Yes, EM is cheap for good reasons - and not just the usual ones such as currency and political risk. Excluding China, which scarcely ranks as an emerging market in any meaningful sense since it became the second-largest economy in the world, EM tends to be underweight technology - where prices have risen sharply - and overweight commodities - where prices have slumped.
Looking further out, pessimists predict that EM may never recover if the US/China trade war and the coronavirus crisis end the trend towards globalisation. But there might be unexpected winners as well as losers from that trade war and many EM businesses have long since switched their emphasis from exports and, instead or as well, serve domestic demand in some of the world’s most populous nations.
For example, consider my exposure to the world’s biggest democracy and second-largest country by population. JPMorgan Indian (LSE:JII) is my longest-held share and was also my first ten-bagger.
I began buying JII when it was called Fleming Indian at 63p in 1996 and bought more at 328p during the global financial crisis before they peaked at 787p in July last year. Since then, the trend has been downhill; they have fallen by 22% over the last year to trade at 565p on a 16% discount to NAV.
But I intend to hang on and may buy more because I believe India still has masses of scope for growth and offers good value when that is becoming harder to find. Better still, I am not alone.
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Last month, Google (NASDAQ:GOOGL) announced plans to invest $10 billion (£7.7 billion) in India, following Facebook (NASDAQ:FB) largest-ever foreign investment when it bought a $5.7 billion stake in the Indian telecoms giant, Jio Platforms, last April. Sundar Pichai, the Indian-born chief executive of Google’s parent, Alphabet, explained:
“This is a reflection of our confidence in the future of India and its digital economy.”
Optimists argue that highly educated but low-cost Asian economies may actually benefit from any escalation in the US/China trade war, such as tougher sanctions imposed on the Chinese telecoms giant Huawei this week. American consumers’ appetite for cheap goods is unlikely to go away but may transfer to competing suppliers.
For example, Vietnam Enterprise Investments (LSE:VEIL), another trust in the AIC “country specialist: Asia Pacific ex-Japan” sector, and a holding in my “forever fund”, could continue to enjoy growing demand. Here and now, VEIL’s share price is 12% lower than it was a year ago and 9% below NAV.
Neither trust yields any dividends which, in itself, is a reason to restrict exposure for anyone nearing a retirement we hope to pay for with investment income. So, it is just as well some EM funds can yield income.
Jupiter Emerging & Frontier Income (LSE:JEFI) is one of the top yielders in my portfolio, with dividends equal to 6% of a share price that has fallen by 12% over the last year to trade 11% below NAV. As admitted earlier, EM performance has been dismal in recent years but that is no reason for long-term investors to ignore their opportunities.
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A diversified portfolio should include funds and shares that are currently out of favour. If you are looking for someone to tell you about investments that have already doubled in value, then look elsewhere - and don’t forget to bring the Tardis or time machine you will need to buy at yesterday’s prices. On a brighter note, remember that the first step towards making a profit is to buy low.
Ian Cowie owns shares in Jupiter Emerging & Frontiers Income (JEFI), JPMorgan Indian (JII) and Vietnam Enterprise Investments (VEIL), as part of a diversified global portfolio of funds and shares.
Ian Cowie is a freelance contributor and not a direct employee of interactive investor.
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