Emerging Market Trusts Going Cheap

Stifel has revealed that emerging market closed-end funds are trading at double digit discounts despite strong recent performance

Emma Wall 12 September, 2017 | 7:49AM
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Shanghai skyline emerging markets China

Emerging market closed-end funds have performed strongly over the past two years, but research firm Stifel thinks they have further to rally. Not only to prospects for emerging market trusts look positive, but several are trading at a discount, Stifel reveals, meaning you can pick up an attractive opportunity on the cheap.

Top performers JPM Emerging Markets (JMG) and Templeton Emerging Markets (TEM) have both delivered significant returns over the past 12 months, with the JPM trust up 25% and TEMIT gaining 35%. But both trusts are trading on double digit discounts.

“Tech enthusiasts power ahead. Over the last three years the Technology sector has gone from being the third largest sector in the MSCI Emerging Markets index to being the largest, accounting for 27% of the index,” says Stifel’s Anthony Stern. “Funds such as TEM, who have embraced the rise of the tech sector have been the strongest performers as the MSCI Tech Sector outperformed the broader index by over 50% over the last two years. Our top picks remain TEM and JMG due to their strong track records and wide discounts.”

Morningstar fund analyst David Holder explains that for now TEM only holds a Neutral Morningstar Analyst Rating due to the reasonably recent manager change.

“Carlos von Hardenberg was appointed lead fund manager on the trust in October 2015. The changes in personnel here have come at the same time as a slight change in emphasis within the investment process,” explains Holder. “Historically, this portfolio has reflected a clear large-cap value bias with around 50 stock positions and relatively little attention paid to country or sector weights.

"Under the new regime, the number of positions has risen above 90, and von Hardenberg will place greater emphasis on achieving diversification to avoid unintended country and sector positions.

“It remains early days into von Hardenberg’s tenure, but he had made much progress in restructuring the portfolio and more saliently sharpening the large analyst resource. We feel that the reinvigorated approach holds much promise for investors.”

JPMorgan Emerging Markets holds an Analyst Rating of Silver, and is described as a high-quality offering by Morningstar’s Simon Dorricott.

“There tends to be a bias to domestic consumption growth, rather than commodity prices, and therefore the portfolio will often be dominated by financials and consumer staples,” Dorricott warns. “Although the approach may result in the fund underperforming for short periods of time if markets are driven by commodities, lower-quality names, or macro and political issues, the fund has generally not shown significant weakness over more meaningful time periods.”

Fund Fees Falling

The Stifel report also highlights that management fees have been cut across the emerging market sector for investment trusts in recent years. Genesis Emerging Markets (GSS), TEMIT and Aberdeen Emerging Markets (AEMC) are the latest funds to reduce their fees.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
abrdn China Investment Ord400.02 GBP-0.74Rating
Fidelity Emerging Markets Ord713.28 GBX-0.13Rating
JPMorgan Emerging Markets Ord108.18 GBX0.36Rating
Templeton Emerging Mkts Invmt Tr TEMIT163.93 GBX-0.04Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar

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