My 30 years in emerging markets and why now’s a good entry point

In our latest Insider Interview, Austin Forey, manager of the JPMorgan Emerging Markets Growth & Income (LSE:JMGI) Investment Trust, explains why now’s a good point for investors looking to boost or introduce emerging market exposure in their portfolio, noting that one major tailwind is that investment in technology hardware is really dependent on companies located in emerging market regions.

In part two of our interview, Forey, who has managed the investment trust since 1994, outlines why it has been underweight India for a long time, shares where he’s finding opportunities in Taiwan, and explains that he would look to have more of the portfolio in India if valuations were lower.

Forey also indicates that he likes to run his winners, but is keeping an eye on Taiwan Semiconductor Manufacturing Co Ltd ADR (NYSE:TSM) to ensure it doesn’t become a more dominant part of the portfolio, with the stock accounting for around 15% of the portfolio.

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Kyle Caldwell, funds and investment education editor at interactive investor: Hello, and welcome to our latest Insider Interview. Today in the studio, I have with me Austin Forey, manager of the JPMorgan Emerging Markets Growth & Income Investment Trust. Austin, thanks for your time today.

Austin Forey, manager of the JPMorgan Emerging Markets Growth & Income Investment Trust: It’s a pleasure, thank you for having me.

Kyle Caldwell: Austin, you’ve managed the investment trust since 1994. You’ve seen an enormous amount of change over that time period. So, what would you say are the key principles to successfully invest in the emerging markets?

Austin Forey: Yeah, that’s a big question. The first thing I’d say is that I don’t really think investing in emerging markets is different from investing anywhere else in the world. But if you invest in the US, there’s political risk, there’s regulatory risk, and the same is true in emerging markets.

But you do need to understand that the dynamics can be very different in many different countries and have some sense of that. When you look at China, that’s not a market that works in the same way as Taiwan, for example, or Brazil. That may be to do with the macroeconomics, it may be to do with politics, and you’ve just got to have some awareness of all those things because, ultimately, all those are going to bear upon the sterling return you can make as an investor from their equities.   

Kyle Caldwell: Of course, over time, the country weightings change in a particular index, whether that be global or the emerging markets. At the moment, the two biggest country weightings in the emerging market index are China and Taiwan. When looking at your portfolio, you have a small overweight position to Taiwan, but you’re underweight China by around 5%. Could you explain why?

Austin Forey: Sure. The first point to make is that we don’t start from saying ‘we must have this percentage in this country and that percentage in another market’. It’s really a function of where we find businesses we want to own.

It is true that we’ve been underweight in China for a long, long time and I think that reflects the fact that ultimately it’s still a market with a big state-owned sector.

There are some outstandingly good businesses in China but there are also some which really only exist because the government is supporting them all the time. Those are, in our view, less likely to be great investments in the long run.

In Taiwan, it’s really purely about the tech sector, which is by far the dominant part of both the equity market and the local economy. We have a lot of money in Taiwan because we’ve found some great businesses there that have grown for a long, long time, and we’ve tried to run those positions.

I think one of the mistakes investors make too often is to sell too early. If you find a great business and it keeps performing, a stock keeps going up, ultimately you want to keep running it as long as the valuation doesn’t get crazy. That’s led us to a fairly significant position, especially in some companies in Taiwan.

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Kyle Caldwell: How do you attempt to navigate the political risks of investing in the emerging market regions and in particular, the political tensions at the moment around China and Taiwan? Do those political tensions concern you, particularly when they are the two biggest country weightings in the portfolio?

Austin Forey: The first thing to say is that I don’t think I have any special insights on politics, particularly in the case of China and Taiwan, so in a way, I don’t really have anything to add. I would also say, however, that if anything were to happen in China and in Taiwan, it’s not an emerging market problem, it’s a global problem.

So, it’s not something specific to an emerging market,and if you think of some of the world’s very biggest businesses, they all depend on stuff that is made in Taiwan. The chips that power iPhones, and NVIDIA Corp (NASDAQ:NVDA)’s chips that are beginning to power AI and data centres around the world. All of that’s made in Taiwan. So, it’s not only emerging market companies which would have a problem if anything were to happen there.

I think if you’re an equity investor, you quite often need to be an optimist, and I’m optimistic that ultimately people don’t do daft things for the sake of it. So, I hope that things will be fine. But it’s not the only political risk that arises either. You see political risk come in all kinds of places. There are tariffs, there’s protectionism, there is sometimes favouritism in corporate sectors. So, we are very used to looking at political risk in a kind of broad sense and trying to understand it.

One of the ways you can deal with that is to find businesses that are competitive in their own right and which are winning because they’re good at what they do, not because they are being protected or supported or something like that.

Kyle Caldwell: You own around 50 companies, however your top holding is just over 15% of assets and that is TSMC. Why do you own such a big position in that company? It’s a big position in the index at around 12.5%, but you are running an even bigger position.

Austin Forey: That’s a good question. I mean, the simple answer to why it’s such a big part of the portfolio is because it’s done very well and we’ve owned it for a long time and we kept as much of it as we can.

But your question goes to another point, which is interesting for someone like myself as a professional investor, which is what’s the balance between absolute risk and relative risk?

In relative terms, we’re about 2%-3% overweight TSMC. That’s entirely a normal position size for us. There’s plenty of other stocks where we have comparable position sizes today and have had for many years before. So, we’re not doing anything unusual in that sense, but it is very unusual for us to have so much absolute percentage of the portfolio in one stock.

And you’re right, there’s a level at which ultimately you begin to think, we can’t keep just letting it go forever. We’ve actually already taken quite a lot of money out of TSMC, and had we not, I suspect by now it would have been over 20% of the portfolios. But around this level, I begin to get a little uneasy with it going up further.

So, that’s one of the reasons why we’ve been trimming pretty consistently, actually, I’d say, over the last year or so in the stock.

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Kyle Caldwell: I also wanted to ask you about India. It is a smaller part of the portfolio and the country is associated with having a higher valuation than other emerging market regions. Is that premium valuation justified? And how do you approach investing in India?

Austin Forey: Good question. We’ve had a lot of money in India for a long time, but I think you make a good point that valuations now are certainly a lot higher than they were 10 or 20 years ago in that market. India has lots to like, it’s a rapidly growing economy, I think we saw the latest GDP print very recently and it’s still growing at over 7% and most countries would kill for that. So, the economy is doing great, the corporate sector is pretty mature, pretty well managed, there’s a lot of great management teams in India, so there’s lots to like.

But it goes back to one of the key parts of our overall approach, which is that you have to also think about what you’re paying. We would have a lot more money in India if the market were cheaper than it is. But it retains a pretty premium valuation.

I think part of the reason for that is that there’s an increasingly active domestic equity market in India, and remember that India has capital controls. So, investment money inside India is inside India. Investors in India can’t say, I prefer the US or I prefer investing in China. It’s in India. To some extent, that creates an extra source of demand and pushes valuations up.

It’s a pity in a way, because we’d love to have more money in India, but there’s a limit to the valuations [we are] prepared to pay, and that’s really capped where we are at the moment.

Kyle Caldwell: For an investor considering emerging markets today, what would you say are the main reasons for optimism? Why should investors consider investing in the emerging markets?

Austin Forey: I think now is a good starting point for a couple of reasons. We went through a long period of emerging markets delivering fairly disappointing equity returns. It was a period of a very strong dollar and a very dominant US economy. If you look at what’s happening in the world today, we have a sense that those things are shifting around a bit.

If you looked at the investment in technology hardware, which is driving businesses like Nvidia in the US, that’s really dependent on emerging markets. Most of the advanced technology hardware in the world is produced in South Korea and Taiwan today. So, emerging markets have a big position in a very important sector.

They’re also major producers of many commodities, much more so in many cases than developed countries are. So, emerging marks have the raw materials, they have some of the high technology manufacturing, and they have growing populations and domestic demand as well.

There’s a very big management pool of talent out there. I mean, ultimately, we’re not saying that you have to be in emerging markets because they’re emerging. We’re saying in a world of thousands and thousands of companies, surely we can find some good investment opportunities. And if we do it with a consistent process and we make more successes than failures, then we’ll give the shareholders a good outcome.

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Kyle Caldwell: And finally, Austin, do you have skin in the game?

Austin Forey: Yeah, I do. If you work at JPMorgan as a fund manager, a considerable amount of your pay is deferred and that pay gets put into funds that you manage. I don’t get a choice over a lot of that. So, whether I like it or not, and I’m very happy incidentally to have that situation, I have a considerable exposure to the investment trust. And that’s been the case now for, oh, certainly well over a decade that we’ve run this system internally. So, I’m invested alongside the shareholders.

Kyle Caldwell: Austin, thank you for your time today.

Austin Forey: Thank you very much.

Kyle Caldwell: So, that’s it for our latest Insider Interview. For more videos in the series, do hit the subscribe button and hopefully I’ll see you again next time.