Emerging income trend gains pace

The team behind JP Morgan Global Emerging Markets Income argues that developed markets’ poor near-term prospects are far from being the only reason for seeking yield further afield.

The launch of the JP Morgan Global Emerging Markets Income fund provides further evidence of the growing trend of looking outside traditional markets for equity income.

The trust, which went live on July 29, is targeting a 4% yield at launch through a portfolio of 50-70 holdings in global emerging markets equities.

Given BP’s Gulf oil spill difficulties compounding concerns over dividend payments from British equities, it is not surprising that investors have started looking further afield for income.

Claire Simmonds, a client port­folio manager in the JP ­Morgan Emerging Markets Income fund team, says this appears to be the case, noting that most of the £104m raised during the trust’s subscription period came from private client brokers and retail investors.

“Emerging markets have displayed real resilience coming out of the crisis,” she says. “Income did dip slightly but it has since rebounded strongly.” (article continues below)

Many will feel that forecasts projecting at best below-trend developed market growth, fear of stagnation or even recession may be reason enough for investors to shift focus on to emerging markets. ­Simmonds, however, says that even ­ignoring the effects of the crisis there are compelling reasons to favour emerging market corporates.

“The big change in these markets has been the improvement in corporate profitability,” she says.

“In the 1990s you had a lot of unproductive capital because of poor investment decisions, but the Asian crisis was a watershed moment. Over the past decade we’ve seen much better allocation of capital and this is starting to yield results.”

“One of the four key emerging market sectors for income is technology and Taiwan is a very tech-dominated market,” Simmonds says. “To date we’re holding around a 14% allocation to Taiwan in companies such as HTC, one of the leading producers of smartphones that is currently paying out a 6% dividend.”

Another market the trust invests in is South Africa, which is still basking in the glow from its successful hosting of the football world cup. Its historical claim to fame on the international stage, however, has focused on its mining and materials industries, as well as its holding a key position as Africa’s major energy supplier, but the JP Morgan team felt that the ­valuations in these sectors were not compelling.

“We are underweight energy and materials relative to the benchmark, and only have one position in South African materials at the moment,” says Simmonds. “We felt there were better opportunities elsewhere with stocks such as Spar [the world’s largest food retailer].”

What will interest invest-ors will be whether the global reach of the trust will provide the stable level of income that British equity income funds have struggled to achieve since the onset of the crisis. One way in which the managers aim to ensure it does is by including the provision that the trust can retain up to 15% of its revenue each year and use it to smooth future dividend payments.

In fact, the structure of the trust, Simmonds says, can give investors greater confidence that some of the risks associated with emerging market investing can be avoided.

“The most important thing for these types of investments is portfolio stability,” she says. “This fund is going to be holding mid-cap yielding stocks, so if the market turns, the closed-ended structure will mean we won’t have to be forced sellers.”

The level of expectation is certainly high and if the trust can build up a solid record there are bound to be more of these types of launches.