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Trust Insider: after EMD disaster, emerging equity income's time to shine
by James Carthew on Aug 20, 2013 at 10:06
JP Morgan Global Emerging Markets Income (JGEMI), has just celebrated its third birthday, and I am pleased to say that it has been a successful three years.
At the end of July, the fund’s net asset value was up by 37.2% over three years, well ahead of the next best global emerging markets closed-end fund, Advance Frontier Markets , up by 5.8%, and the MSCI Emerging Markets index, JGEMI’s benchmark, which increased by 7.5%.
It is trading on a premium, issuing shares and offers a yield of 4%. If I had to quibble, it might be to point out that a couple of the Asian income funds, Schroder Oriental Income and Aberdeen Asian Income , have done even better over that period, up by 61.9% and 64.8% respectively, but I still think JGEMI is to be congratulated.
The problem for JGEMI has been that many parts of the world other than Asia have struggled over the past three years. For example, Aberdeen Latin American Income , which was launched a month later than JGEMI, is still trading below its issue price.
JGEMI listed on 29 July 2010 and raised £104 million gross from investors. It went to a premium straight away and started dripping stock into the market in September 2010 to satisfy demand. The money kept flooding in and a C-share issue in April 2011 raised £26.4 million in one lump, but pretty much constant demand for new stock has allowed it to steadily grow the company. There are now 234.5 million shares in issue and JGEMI has a market cap of almost £300 million.
The portfolio is managed by Richard Titherington, head of the global emerging market business, and he is supported by Omar Negyal, who joined JPM in 2012 from HSBC. The pair can draw on the support of JPM’s regional portfolio managers and analysts based around the world, as well as analysts and fund managers that look at global emerging equity and debt markets as a whole.
It is primarily an equity portfolio, although JGEMI has retained the flexibility to hold up to 50% of the fund in fixed interest stocks during periods when equity markets are struggling. It can also hold unlisted stocks and up to 10% in options, which it can use to boost the income account by writing calls, although it does not look as though the managers have done this to date.
They split the universe by yield and target roughly 20% in high-yielding stocks returning more than 6%, 60% in a core of stocks yielding 3%-6% and the other 20% in growth stocks yielding less than 3%. The board decided recently it should permit the fund to borrow up to 20% of net assets on a long-term basis, arguing that JGEMI ought to be exploiting the current low cost of long-term debt.
Shareholders approved the change on 20 June but we are yet to hear if the policy has been implemented. When it happens it is there should be a boost to the income account, as only 30% of finance costs are allocated against revenue.
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