Investment bank Stifel states in an analyst note that JP Morgan Asset Management’s Austin Forey is the last remaining “pioneer” within emerging markets investment trusts, having founded and led the portfolio for 24 years, since the retirement of the much higher profile Mobius from Franklin Templeton Investments in January.
“We believe Temit investors seeking stability in management and philosophy should consider switching to JP Morgan Emerging Markets IT and we reiterate our positive rating,” says the Stifel investment note, which was written by analysts Anthony Stern and Iain Scouller.
The day after Mobius’s formal retirement on 31 January, Franklin Templeton announced Hardenberg’s exit, stating that he would be succeeded by Chetan Sehgal, who has worked in the emerging markets team for 22 years. The fund house pointed out Singapore-based Sehgal was involved in all portfolio management decisions prior to his appointment as lead manager.
However, Stifel expects JPMAM could benefit from Temit outflows.
“The [JP Morgan Emerging Markets IT] discount remains stubbornly wide but we believe Temit investors, worried about yet another manager change, should consider switching trusts and this could act as a catalyst for the discount to narrow.”
The discount on the JP Morgan Emerging Markets IT is 12.3%, while on Temit it is 12.8%, according to the Association of Investment Companies (AIC).
Franklin Templeton Emerging Markets (Temit) vs JPMorgan Emerging Markets IT
|Franklin Templeton Emerging Markets||-13.07||-8.80||6.66||25.22||22.19|
|JPMorgan Emerging Markets||-8.67||-1.86||9.20||33.02||44.60|
|MSCI Emerging Markets index||-7.55||-4.12||8.87||25.17||39.47|
|IT Global Emerging Markets sector||-7.27||-2.83||5.22||22.60||23.35|
Source: FE Analytics
Winterflood had previously said Hardenberg delivered a turnaround story at Temit and rated him highly.Winterflood Investment Trusts is also recommending the JP Morgan Emerging Market IT. However, analyst Simon Elliott warned Temit investors against selling in a panic, suggesting it might take further month or two for the dust to settle on changes at the trust.
The Blackrock Frontiers Investment Trust, managed by Sam Vecht and Emily Fletcher, is another fund Winterflood rates highly, although its premium can get stretched at times, according to Elliott. Shareholders in the investment trust voted in March to expand the portfolio to the smallest constituents in the MSCI Emerging Markets index.
Tilney managing director Jason Hollands says Fidelity Emerging Markets, managed by Nick Price, could be a good alternative for investors who are not dogmatic about fund structures, although he says investment trusts work well for volatility in emerging markets, which can be sensitive to capital flows. It also gives managers more freedom to invest into less liquid medium and smaller sized companies, Holland says.
Indian overweights versus underweights
India has been the biggest country overweight in the JP Morgan Emerging Markets IT for the last couple of years, accounting for 20% of the portfolio, compared to 9% in the MSCI Emerging Markets index.
The investment trust’s largest overweights are two Indian private banks and there is also significant exposure to Indian tech consultants.
In contrast, the Temit portfolio is underweight India, holding 5.3%, according to FE.
In contrast, South Korea is a significant underweight in the JP Morgan Emerging Market IT, representing 1% of the portfolio, compared to 14% in the benchmark. Temit holds 14.2% in South Korea.
Forey believes the South Korean government will struggle to bring through its corporate governance improvements, Stifel says.
However, the manager is “excited” about the addition of Chinese A-shares to the benchmark from May with the investment trust having a large team of analysts focused on this area to draw on, Stifel notes.
But Franklin Templeton also has a large team backing Temit, Elliott says.
A Franklin Templeton spokesperson says: “We take a team‐based approach to the portfolio management of each of our funds and investment strategies, supported by deep benches of experienced analysts.”
Sehgal is one of four investment professionals who have been in the emerging markets team for more than 20 years, while more than half the team has been there for more than a decade.
Stifel admits the JP Morgan Emerging Market IT portfolio looks expensive, but attributes this to the higher quality companies Forey seeks, plus its high tech weighting in the portfolio.
The investment trust holds 30.6% in information technology, while Temit holds 32.6% in the sector.
The JP Morgan Emerging Markets IT held 60 positions at the end of February with a concentrated top 10 accounting for 42% of the portfolio and the top 20 accounting for 60%.
The JP Morgan investment trust is top quartile over one, three and five years compared to its peers in the Investment Trust Global Emerging Markets sector, but is fourth quartile over the last three months, according to FE data.
Temit is also fourth quartile over the last three months, losing investors 13.1%, more than the 8.7% fall in the JP Morgan investment trust over the period. The NAV falls for both investment trusts were 9.7% and 7.6% respectively. The sector fell 7.5% over the period.
Elliott says Temit has an active buyback programme. “For ongoing shareholders that’s attractive.” Historically, JP Morgan Emerging Markets IT does less share buybacks, which Elliott attributes in part to its more institutional shareholder base.
He says emerging market investment trusts are currently a value play, trading at larger discounts than well-known global equity funds such as Witan, which has a 1.8% discount, and Scottish Mortgage, which is trading at a 3.3% premium, according to the AIC.
Elliott says Mobius and Forey differed in investment style.
Mobius took a value approach to emerging markets, which Sehgal has said will continue under his management of Temit, while Forey takes a core, growth-type approach.
Franklin Templeton’s extensive marketing of Mobius attracted a lot of retail investors, while investors in JP Morgan Emerging Markets IT are more institutional, Elliott says.
“Mobius had a very high profile and flew around the world promoting emerging market equities explaining why people should invest in them. Austin Forey, it’s fair to say, probably doesn’t have as high a profile.”