Austin Forey, fund manager of JPMorgan Emerging Markets (LSE:JMG) investment trust, points out that regulatory risk has always been part and parcel of investing in China. As a result, he is continuing to back the region, despite recent government intervention in the technology and education industries. He also runs through portfolio activity, and gives his elevator pitch for investing in emerging market regions.
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, political risk comes with the territory of investing in the emerging markets. Following the recent political interventions by the Chinese government into certain sectors, the technology and education industries, has this made you rethink your exposure to China at all? And has the trust’s exposure to China changed over the past couple of months?
Austin Forey, fund manager of the JPMorgan Emerging Markets investment trust: Well, the trust exposure to China, obviously, when share prices go down, the exposure declines a little bit, but we’ve not made any significant changes to the portfolio in China in the last couple of months. So the answer to that is no. But on your first question about, has it made us reconsider? I mean, I think, of course, it’s made us go back and look again at some of our assumptions of how we think about the risks. But I have to say, my overall take on this is that investors have been reminded recently that China has always had these risks. If you look at it, it has a corporate sector that is relatively new. There are some places in the world where you find companies that can trace their roots back 100 years or more. Obviously, that is not the case in China. And so you have a lot of fairly young companies.
You have a regulatory system that is also trying to evolve and keep pace with the rapidly changing world, including things such as technological advances. And obviously, on top of that, you have a political system which is very different to what we see here in the West. So when you put all those things together, I think you should basically always have thought that China had some particular risks which you needed to assess. And this has been really a reminder of that, in my opinion, rather than a radical change to what we’ve actually been coping with for the last 20 years as a whole.
In spite of that, I might add, fortunes have been created in the Chinese equity market in the last 20 years, with all those conditions still in-place. So it’s clearly possible to find some great investments in China, with or without thinking about those risks, and I don’t really think that’ll be different in the future.
Kyle Caldwell: Two of the companies that were negatively impacted by the government’s intervention was Alibaba (NYSE:BABA) and Tencent (SEHK:700). Has your view changed on those two companies at all, I can see that they’re currently top 10 holdings.
Austin Forey: Not really. I think both of them have always faced regulatory risks, and you might well argue that big internet companies in the West face some of the same risks as well. So in that sense, no. I think it’s worth saying that both of them have formidable business models and very strong starting positions, and, if anything, their share prices have got rather cheaper in the last year – six to 12 months, as you alluded to. So if anything, we don’t see a massive change. A lot of the valuation stretch – which maybe existed, perhaps, going into the early part of this year – has probably gone away from their shares.
Kyle Caldwell: Financials is the second biggest weighting in terms of sectors in the trust. Could you run through a couple of names in that sector that you invest in?
Austin Forey: Sure. So we own, I guess, three kinds of businesses in the financial sector. The largest amount would be invested in straightforward banking businesses around the world. We own some insurance companies – particularly life insurance businesses – and we have a couple investments in stock exchanges. So let me just give you a couple of examples. We own a business in South Africa called Capitec, which we’ve owned now for a long time. And Capitec was launched as a challenger bank, against a very consolidated incumbent marketplace, with a real focus on extremely low cost of operations using technology. It’s not a digital bank, per se, but it’s been very much a super low cost consumer bank, and they’ve been able to take market share consistently while generating really strong profitability.
And so that’s a business we’ve, as I said, been invested in for a number of years now. It’s been a successful investment thus far and we have, again, great regard for the management team – what they’ve done there. The second one I guess I might mention is, we own a life insurance company in India called HDFC Life. And India is a pretty immature market for life insurance. This is a business where, again, we know the management pretty well, we think they are probably the market leader in terms of standards of what they do, and it just has a very, very long runway.
One of the things about financial services is, when people are really, really poor, you don’t have surplus capital. As economies develop and people become richer and acquire possessions, they have risks they need to insure, they have savings they need to invest. And so you tend to find that financial services, for a long time, can actually grow significantly ahead of overall economic rates of growth. And successful players within those industries can do a bit better than that, because they gain market share, and as long as you navigate risks well, it can be a very rewarding area to invest in. So that’s been, as you say, a persistent focus of ours over a long time now.
Kyle Caldwell: Now I wanted to move on to a recent portfolio activity for the trust. Given your long holding periods of 10 to 12 years for a stock, there might not have been too many changes made in recent months, but in terms of this year, what have been the changes that have been made?
Austin Forey: You’re right that actually we’ve done very little indeed in recent months. I think if I look at the last few stocks we’ve bought, I think they have all been in China, interestingly, although that also goes back probably to the early part of the year. And several of them have been in the healthcare industry. I mentioned three big areas that interest us. One area that interests us a lot – and doesn’t feature hugely in the portfolio yet, but has potential – is healthcare. It’s going to be a very big industry, especially in China, and around that will be a number of different kinds of business models. So we’ve made investments, for example, in a diagnostics clinics business, which provides outsourced diagnostics testing for hospitals.
If you go to a hospital in the UK and you have a blood test or some other kind of clinical test, chances are the hospital doesn’t have a laboratory itself where it’s processed and it gets outsourced to someone who aggregates lots of people’s volumes, and as a result, gives lower unit costs. And that model is slowly beginning to spread in China as well. So we have a business called KingMed Diagnostics, which is at a very early stage in this outsourcing process, and is quite a good example of a kind of tertiary services or business services-type company where we think the growth rates are going to be appealing and the growth trajectory is going to be long. So that’s one of them.
We also have another investment in China – our largest investment in healthcare – in a business called WuXi Biologics (SEHK:2269), which is, again, an outsourced business providing contract manufacturing, contract research for the development of biotechnology products. And I’m just going to pause and say, that’s a great illustration of my earlier point about how much the opportunity set has changed. Here is a really high-tech business, specialising in cutting-edge scientific development in the medical field, and it’s been built up in China as one of the world’s leading players. So WuXi Biologics has been actually not the newest investment, but another good example of an increased interest in healthcare within the portfolio.
Kyle Caldwell: So if you were asked to give an elevator pitch for investing in emerging markets, what would you say? What are the main opportunities? And also, what would you say are the main risks as well?
Austin Forey: I would say you can’t afford to ignore the majority of the world’s population, which is covered by investment in emerging markets. And that you’ll have economic growth rates and social development of a sort, which gives you lots and lots of interesting opportunities. So those, in a very simple sentence, are two of the big appeals. As far as the risks go, I think, to be honest, my view is, the risks of emerging markets investing are not that different, and maybe not even different at all to the risks of investing in developed markets. But sometimes the risk comes in different proportions to each other.
So you must always be thinking about, what’s the macroeconomic environment? What’s the regulatory environment? What’s the political environment? And most of all, actually, what’s the competitive environment? But I guess you might well say that of some very famous global companies out of the US and Europe as well. So in that sense, I don’t think that it’s that different.
Kyle Caldwell: And finally, do you have skin in the game in terms of, do you invest in the JPMorgan Emerging Markets Investment Trust?
Austin Forey: I do. I get – an element of my pay is deferred and a significant part of that is put in shares in investment trusts. So I have certainly a big enough economic interest in the outcome of the trust to be well-aligned with the shareholders.
Kyle Caldwell: Good to hear. Austin, thank you very much for your time today.
Austin Forey: It’s a pleasure. Thanks for talking to me.
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