The long run: experience is the key in volatile emerging markets
Coronavirus is just the latest in a series of crises that have hit emerging markets over the last two decades. Trusting a fund manager with experience of selecting stocks successfully through crises could be crucial in this unique sector
The MSCI Emerging Markets Index, the broad benchmark for emerging market asset managers, covers over 1,335 stocks in 26 countries.
How would an investor even begin to analyse so many companies in-depth, considering the currency exchange, volatility and macro context?
As coronavirus struck, starting in January in China, this task has only become more momentous.
The falls in capital markets in early January and again in early March have not yet been as severe as during the financial crisis in 2008, but they were steeper in a shorter period of time.
Keeping the faith in emerging markets
A large and expert team can help make those choices easier, even during periods of extreme volatility.
JP Morgan Asset Management’s emerging markets division has close to 100 team members in offices across the world, from Taipei to Seoul and Shanghai.
‘the holding period for a company, the higher the returns it tends to produce’
Austin Forey has managed the JPM Emerging Markets Investment Trust (JMG) since 1994 – through the Asian crisis of 1997, the tech bubble of the early 2000s and the crisis of 2008/09 – and his investment process has remained steadfast.
He favours a bottom-up approach, picking companies whose compound earnings can beat market growth over the long term.
So long term, in fact, that the higher the holding period for a company, the higher the returns it tends to produce. (The average holding period for many of the stocks held in the investment trust is over a decade, with several reaching 20 years plus. This keeps the trust’s turnover, and by extension its trading costs, low.)
Let the winners run
One benefit of holding onto stocks for decades – or, as Forey describes it, letting the winners run – is capturing exponential growth, when many other investors would have sold earlier in order to feel the psychological benefit of crystallising a profit.
An example of one such long-term success story is Housing Development Finance, an Indian financial services business, which had a market value of $750m when the team bought it 22 years ago.
Today, despite its market capitalisation dropping by a third in the last month due to the virus, it is worth around $37bn. That growth of around 40 times has more than made up for the bumps in the road.
In the JMG team’s view, many of the crises in emerging markets are related to taking excess leverage and a lack of cash.
Forey avoids tactical gearing, which would sit at odds with his long-term stock approach, and does not try to predict macro events. After all, how many people truly anticipated the scale of the coronavirus?
With a portfolio of around 45 to 65 stocks, sometimes it’s better to resist excitement or kneejerk reactions – Forey and his team often follow a stock for years before deciding to invest.
‘strong exposures to financials, consumer staples and tech companies’
“Investing involves a combination of doubt and confidence,” says Forey, “I always have a view I’m prepared to believe in, but I’m always ready to challenge and question that view. No one can have 100% certainty in anything.”
Part of an investor’s skillset is to understand where their strength lies.
The JPM Emerging Markets Investment Trust has strong exposures to financials, consumer staples and tech companies, where the investment team can identify a long-term growth story. There is no exposure, for example, to primary commodity producers, as Forey says the main factor driving those assets is price – and that could be anyone’s guess.
Proof is in the pudding
All fund managers have varying approaches and styles when it comes to stock picking.
While it is possible to invest in numerous country-specific emerging markets funds, an investor is liable to wrack up trading fees, as well as spend a lot of time and energy watching markets, selecting funds and carrying out what should be a professional manager’s full-time job.
Trusting one manager – plus a team behind him of close to 100 professionals across the world – might make more sense.
The JPMorgan emerging markets team is able to meet over 5,000 companies every year, and make decisions that are beneficial to investor returns in the long term.
JMG has the results to prove its success: it has outperformed its benchmark in seven out of the last 10 years.
The trust has delivered 8.14% annualised on a share price basis over ten years, versus the MSCI Emerging Markets Index’s 5.01% annualised over the same period.
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