Shares I’ve owned for over a decade and lessons learned

Austin Forey, who has managed JPMorgan Emerging Markets (LSE:JMG) investment trust since 1994, explains how he invests in emerging market companies. He names the firms he's held for more than a decade, and the key drivers of the trust’s outperformance.

Kyle Caldwell, collectives editor at interactive investor: Hello. Today, I’m joined by Austin Forey, fund manager of the JPMorgan Emerging Markets Investment Trust. So, Austin, you’ve been managing the trust for almost three decades. What is it that you like about investing in the emerging markets and what are the key lessons that you’ve learnt over that time period?

Austin Forey, fund manager of the JPMorgan Emerging Markets investment trust: Yeah, that’s a great question. Let me just start by saying, thank you for giving me this opportunity to speak to you. Look, as an investor, I think you want a wide opportunity set and you want an opportunity set that refreshes itself. And I don’t think you could find that better than you could find it in emerging markets where the world has changed. And we have a very, very wide range of opportunities from Chile all the way around to China to look at. So the variety and the change is a great starting point for me, as an investor, and that’s what’s kept my interest, as you say, for all those years.

As far as the lessons we’ve learned, I think that, more than anything, the thing which I’ve come to, I suppose, think about more and more as a portfolio manager is, you’ve got to know what you’re trying to do. And you don’t want to get distracted and side-tracked and pulled off into doing things that don’t come naturally to you as an investor. So finding your individual groove and your own process and staying true to that is probably the most important thing of all.

Kyle Caldwell: And over that three-decade time period, how has the portfolio evolved to meet the changing trends in emerging markets?

Austin Forey: Look, inevitably, the opportunity set, as I’ve just said, has changed enormously and I think I’ve made two very simple points. First, the stock markets we can invest in much better reflect the real world behind them than they did 30 years ago. When I started, countries like Malaysia were some of the biggest parts of the overall opportunity set in spite of being a pretty small country with a pretty small economy. Now, the landscape is dominated – understandably – by China, which is the biggest economy we look at – and India, which is also, obviously, a huge country. So you’ve seen the opportunity set widen as stock markets open to foreign investors, and that’s been a really important development which I think has not only grown the set of choices that we have, but brought us a lot of interesting businesses. That’s the first point.

The second point is that, clearly, the world has changed enormously. Thirty years ago – although people find this hard to remember – no mobile phones, sometimes hardly any internet. The rise of technology has been just as important within emerging markets as it has been for the rest of us in more developed countries. So the kind of businesses we see in front of us have moved a very long way from 30 years ago where you could more or less assume that every emerging market had a bank, a beer company and possibly a telecom business. Now we see a very, very wide range of businesses, and again, that’s great for us, as investors.

Kyle Caldwell: And in terms of themes running through the portfolio at the moment, what are the key areas of focus?

Austin Forey: So as you know, we have a pretty low turnover in the portfolio, which means that it doesn’t change very rapidly, and we have some very long-lasting biases. Essentially, because we’re always looking for the same kinds of characteristics in the businesses we buy for our clients and we tend to find them repeatedly in the same sorts of places. So the portfolio is really dominated, I guess, by three broad types of business. We have investments in consumer companies – a lot of branded consumer product companies and also some consumer service businesses. We have a lot of money in technology in one form or another, although that is a very wide description. Which covers everything from companies that make semiconductor chips through to internet-style business models offering a platform or a marketplace or something like that.  

And then we have significant investment in financials as well, which has been an area of focus for us for a long time. And if you ask me what’s in common, I’d say that one of the key characteristics – and this is something we spend a lot of time discussing and thinking about at the moment – of digitalisation. You’ve seen the world digitalise and, in my view, that has enabled the separation of ownership of assets from ownership of intellectual property or intangible value creation in a wider and wider set of industries. And all those three areas that I mentioned are ones in which the value the companies create is most dependent on intangible property. Whether that’s a brand, whether it’s know-how, whether it’s patented or whether it’s an advantage with data.

So broadly speaking, I would say the company’s portfolios are more and more invested in the software value of businesses of all types and less and less interested in ownership of hard physical assets. And that’s why we end up with those three particularly large concentrations across portfolio.

Kyle Caldwell: As you mentioned, you have a very long investment time horizon. I think the average holding period is 10 to 12 years, but do correct me if I’m wrong on that. And in terms of the qualities that you look for in a business, is there a sort of checklist of attributes that you have that you tick off?

Austin Forey: Look, there isn’t a formal checklist, as such, because obviously we’re looking at many different kinds of companies, but I think you’re absolutely right to say that we are looking for the same kind of characteristics. And clearly, if you’re setting out to own a stock for as long as possible, first of all, you care that it can sustainably create value. And so ‘sustainability’ in the broadest sense of the word is something that’s always mattered to us. When you get into what that means for a company, I think you have to think under three headings. The first is that, any business which has the ability to create value sustainably needs to be able to finance that. It doesn’t want to be sucking in external capital all the time. So ‘are the basic economics of the business good?’ is the first question we would put to ourselves. And that really means cash generation, it means returns on capital, that kind of thing.  

The second thing is, does it have duration? There are many reasons why companies lose value over time. Sometimes they lose market share, sometimes the industry, as a whole, gets eclipsed and taken over by a different way of doing things. So we think a lot about how strongly-positioned a company is, and all the things that might affect its ability to keep creating value in the future. And then finally, we think about governance, because you can always find examples where a company ticks the first two boxes, but the governance means that the value doesn’t really translate in full to its shareholders. So those three things, that are good economics, good duration and good governance, I guess, are kind of the most central part of our assessment.

And we hope to find those characteristics in all the stocks we own, because otherwise you can’t really take long-term views. And I should say, finally, on this that, we’re interested in a business’s ability to create value in the business. When you keep stocks for a decade or more, you’re naturally less interested in short-term fluctuations in valuations and share prices, and you’re really concerned with, ‘where’s the business going? And is the business going to be significantly bigger and significantly more valuable in its own right many years into the future?’ So that will tend to be how we think about it.

Kyle Caldwell:And could you name a couple of examples of companies that you’ve held for a decade or more?

Austin Forey: Sure. So I guess one of the obvious ones will be Taiwan Semiconductor (NYSE:TSM), which is a very well-known company now. You’ll find it in many people’s portfolios. We’ve owned it in the trust, I think, for somewhere over 20 years now, continuously, and it’s a business that makes semiconductor chips. And it’s actually a very good example of many of the things I’ve just talked about, because it’s got really strong cash generation, good returns on capital. It has a leadership position in its industry. If anything, its competitive moats have got steadily wider as the years have gone by, and it’s also exposed to an industry which has long-term growth in the market. And everything we do requires more computer processing power and they’re a natural beneficiary of that.

But the business has also been managed in a very sustainable way. We’re big admirers of the management of that company. And even more recently, some of the things they talked about in terms of their ambitions for carbon reduction and renewable energy sources, etc. So that they’re continuing to think well into the future in terms of defending the business, making its competitive position unassailable, and continuing to deliver for shareholders. So that would be one example.

I think if you asked for another one, we’ve been shareholders in an Indian financial services company called Housing Development Finance for a long time. That’s primarily mortgage company, so it’s very bread and butter – taking deposits, lending them out to mortgages. And again, it’s a business with, I think, unquestionable quality of management, strong competitive position, cost leadership in terms of really low cost of operations. And exposed to a really long-term growth in demand as the Indian economy grows. And a huge intrinsic housing shortage has to be addressed, and someone has to help finance that. So those would be a couple of examples of some of our longest-held positions in the trust.

Kyle Caldwell: The trust is a standout performer over the past three and five years. What would you say have been the main drivers behind that performance? Are there any particular sectors or countries that you would pick out?

Austin Forey: I mean, look, we really think about stocks, so in a sense, I’m going to give you an answer based on stocks rather than either sectors or countries. But I think I would have to say that, we’ve done, I think, probably better than we even might have expected ourselves in investment in areas like information technology and anti-services in particular. We’ve had a couple of standout investments from places, interestingly, that you might not think were in the centre of your attention as an emerging market investor. One of them is a business based in Argentina, and one was originally created in Byelorussia in the former Soviet Union.

And those two businesses are very similar to some of the companies you find in India. They’re providing outsourced software development skills for first-world corporates and they’ve been big successes for us and added a lot to the trust performance. And I think also demonstrate, again, the kind of things that I talked about a moment ago in terms of strong cash generation and good returns on capital. Very asset-light businesses and very long-term growth trajectory in front of them.

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

Austin Forey: It’s a pleasure. Thanks for talking to me.

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