An emerging markets income option

This fund could produce a useful income for those looking to build a high-yielding portfolio but also wish to diversify into higher risk areas.

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  1. Rob Morgan

Emerging market equities is an asset class many consider for growth but disregard for income. Yet dividends are prevalent across the emerging world, which spans a diverse range of economies in Asia, Latin America and Eastern Europe. Surprisingly, the proportion of emerging market companies paying dividends now exceeds developed markets.

They don’t just pay a token amount either. Over a third of companies pay a dividend of over 3%, and the rate of growth in pay outs has exceeded that of all major developed markets over 15 years. Going forward the picture looks pretty healthy too. On the whole, companies are less burdened with debt than the developed world average. There are also strong cash flows that could support increasing dividends in the future alongside investment for growth.

For income investors keen to include emerging market equities in their portfolios there are a variety of funds available. JPMorgan Emerging Markets Income Fund, a constituent of our Foundation Fundlist of preferred investments across the major sectors, is one example. It looks to pay investors a 4% income yield each year, although this is variable and not guaranteed.

The managers, Omar Negyal, Amit Mehta and Jeffery Roskell, focus on identifying cheap but good-quality companies that can produce growing earnings and income to investors over a five-year horizon. These tend to be in areas such as telecommunications, financials, consumer and manufacturing industries rather than the most economically-sensitive or speculative parts of the market such as commodities. There is a balance between companies paying large dividends and those with a lower but faster-growing income.

The fund tends to be relatively light in areas such as South Korea and India where dividends are leaner, and there is less focus on technology stocks compared with many of the broader funds investing in the region. Notably, the fund has little invested in the internet heavyweights such as China’s Tencent and Alibaba. Despite the exciting growth prospects on offer, these offer less yield and at times funds like this may miss out on periods of performance dominated by these areas.

The influence of the internet names in terms of the fund’s relatively performance versus its benchmark and peers has been in evidence recently. Having been surpassed in terms of performance by many of the growth-orientated funds in the sector for a couple of years, the past year has seen an improvement as market returns became broader based.

Past performance table: JPMorgan Emerging Markets Income Fund

An emerging markets income option

Past performance is not a reliable indicator of future returns. Figures are shown on a % total return basis, bid to bid price with net income reinvested; Source: FE Analytics.

 

Much of the fund’s technology exposure comes from top holding Taiwan Semiconductor, one of the best dividend-paying firms in the Asia Pacific region. It has paid consistent dividends over the past ten years without any cuts, and has grown its dividend by an annualised 22% over the past five years. The managers continue to back the stock, noting that the company has signalled its commitment to sustainable cash dividends through quarterly rather than annual pay outs.

Other favoured  positions are Sberbank, a Russian bank, which the managers believe has a strong management team, a healthy balance sheet and an increasing focus on providing dividends to investors, and Brazil’s Itau Unibanco.

 

Our view

JPM are a well-resourced investment manager in this area and apply a disciplined process. We would not expect the fund to perform well relative to indices or peers during a strong and sustained rally in emerging markets. A relative lack of the most economically-sensitive areas and the more stable nature of many dividend-paying companies mean it could lag behind, but it could still benefit from the considerable growth prospects of these regions.

Over the course of a market cycle (a period encompassing both rising and falling share prices) we believe the fund could add value for investors. It could also produce a useful income for those looking to build a diversified, high-yielding portfolio. It remains part of our Foundation Fundlist of preferred investments across the major investment areas.

 

Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

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