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Austin Forey: I don’t have to gear to beat emerging markets!

Austin Forey has managed JPMorgan Emerging Markets (JMG) for nearly 25 years through several crashes and rallies. 

In this video interview he explains why the investment trust has special advantages that enabled it to deliver returns far ahead of his other fund, which is not an investment trust, and emerging markets in general.

In the 21 years from 1 July 1997 to 28 February 2019, under Forey JPMorgan Emerging Markets delivered a total shareholder return in sterling of 557% versus 364% for his JPM Emerging Markets open-ended fund and 304% for the MSCI Emerging Markets index. (Source: Lipper. Returns inculde fund charges but not share-dealing or broker administration costs.)

After a difficult 2018, Forey is positive on the outlook as a halt in US interest rates helps the macro-economic picture while on the ground he continues to find companies with good prospects, such as Chinese social media network Tencent, which is his biggest holding.

Can’t watch now? Read the transcript.

Gavin Lumsden: Hello, with me today is Austin Forey, fund manager of JPMorgan Emerging Markets Investment Trust. Austin, thanks very much for joining me. Now you’ve been running this trust for nearly 25 years I understand?

Austin Forey: That’s correct. Yes I started in ‘94 which was three years after the trust launched.

GL: Okay well we’ll be looking for some longer-term perspective from you but actually I’ll start on the shorter term if I may. Emerging markets are enjoying a bit of a rebound after falls last year. How confident are you this will continue?

AF: I think if you look at things that have been difficult last year: it was the dollar, it was the trade disputes with China. You know none of those are going to continue to be adverse forever. We’re encouraged, we’re quite constructive about what’s going on and I think especially a weaker dollar would be a good tailwind for emerging markets.

GL: Yes the Federal Reserve is being a lot more dovish in saying it’s not necessarily going to be proceeding with the interest rate rises of last year. And that helps emerging markets?

AF: Definitely, definitely.

GL: Okay but you seem to have become a bit more cautious on China. You’ve got just over a quarter of the trust invested in China and you were very enthusiastic last year reading the annual report after a research trip to China, really quite positive! You seem to be a little more cautious reading the half-year results. Is that right?

AF: I wouldn’t say that’s necessarily the case. We’ve added a bit to China actually in the last few months so in fact our exposure is probably, price adjusted, gone up since I wrote that report. But the point I was trying to make then was our views are really about Chinese companies and not so much about the macro-economy. It’s the macro-economy that gets all the headlines and the coverage. But you know if we find good businesses which grow their share, there’s a huge potential.

GL: Yeh that’s right. But the bigger picture, there have been the so-called headwinds from the trade war with the US president and the slowdown in the economy and the Chinese economy as well.

AF: Yeh but I think that’s a natural thing. The economy is not going to grow at an excessively high rate forever. It’s not necessarily bad for the corporate sector when that happens. And something I say to clients when they ask about this is that no one invests in America because it is a high growth economy, they invest because it’s got great companies. And I think more and more that’s the kind of thing we’re looking for.

GL: And China is the same.

AF: Looking for great businesses to emerge. The overall rate of economic growth probably not the most important thing.

GL: Okay now one of those great Chinese companies at the moment is Tencent and it’s your biggest holding, 6% of the trust’s assets invested there. It’s had a difficult year last year. How significant is it that China’s content regulator has just resumed approving sales of online games? How significant is that for Tencent?

AF: It’s good news obviously because there was a freeze for a long time on new publications, which tends to drive gaming revenue. But we should also remember a lot of Tencent’s potential is actually about its social network where it has a very dominant position in China and you can gradually expect them to find more ways to make money out of that. So I think that the share price is actually going to be less connected to the games side and more connected to what they can do on the social network and payments side in the future.

GL: Okay so it’s just a part of what they do. Looking at the trust and its gearing. Currently the trust has no borrowing that it uses to gear up shareholder returns. Is that an indicator of your overall caution?

AF: Well I would say we’re 99.8% invested! So I don’t think that’s a cautious view.

GL: Glass half full, glass half empty.

AF: Indeed and you know the trust hasn’t had gearing for quite a long time actually. So we’re about as invested as we can be. Gearing is something we continue to debate with the board.

GL: Oh I see because you can go up to 20% so I assumed that was something you might do occasionally.

AF: It’s not something we’ve done for a long time. I think you need to be careful of various factors when you look at gearing but as of today you shouldn’t take the fact that we’re not geared as an interpretation of an investment view. We are fully invested.

GL: Okay. But so then – okay well that’s quite interesting because your trust. You also run an open-ended fund but the performance of the investment trust over the long term, in the I don’t know 21 years you’ve been running both I think. The investment trust has done much, much better.

SHOW CHART: according to Lipper data from 1/7/1997 to 28/2/19 under Austin Forey JPMorgan Emerging Markets delivered a total return in sterling of 557% versus 364% for JPM Emerging Markets open-ended fund and 304% for the MSCI Emerging Markets index.

GL (cont): An explanation for that often is the gearing, the borrowing that can increase returns. If the trust doesn’t use gearing why does the investment trust do better than your other fund?

AF: It’s not gearing. It’s two very simple things. Firstly obviously as a closed-end fund you don’t have client money going in and out everyday so you have fewer transactions and you can measurably see lower running costs year after year as a result of that. And we’ve used that closed-end fund status to buy smaller companies precisely because we didn’t have to offer clients daily liquidity. So we could take stuff that was less liquid if we thought it was very, very compelling. That’s given us a wider investment universe and that’s really been the thing that’s driven differential performance in the long run.

GL: Okay well those are two big advantages of investment trusts obviously. Great, Austin thanks very much for your time.

AF: Pleasure, thanks for having me.

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Austin Forey
Austin Forey
19/256 in Equity - Global Emerging Markets (Performance over 3 years) Average Total Return: 60.47%