JPMorgan Emerging Markets Equity A JFAMX

JPMorgan Emerging Markets Equity has a highly experienced management team, extensive resources, and a notable investment process in its favor. The U.S. mutual fund earns a Morningstar Analyst Rating of Silver across all share classes.

Leon Eidelman was formally recognized as this strategy's lead manager in July 2016, though he has been the primary decision-maker since January 2015, when he was promoted to comanager alongside well-regarded former lead manager Austin Forey. Forey is head of the fundamental emerging markets team at JPM and remains a comanager here.

There have been three new additions (Weiying Dong, Sarah Dodson, and Komal Dhillon) to the fundamental emerging-markets team in 2021-22, bringing the overall number to seven. Dodson is the most relevant for this strategy as she will work directly with Eidelman, supporting him with analyst interaction and marketing.

Management is further supported by the 92-member emerging-markets and Asia-Pacific equities team. The team’s research analysts provide ample research support based on a well-structured and repeatable framework, ensuring the breadth and quality of coverage.

The process follows the same quality/growth bias we have come to expect from strategies managed by the EMAP team. The vast majority of assets are allocated to premium and quality names (92% as of March 2023), which operate in attractive industries with limited external risks, possessing strong balance sheets and solid cash-flow generation. Given the focus on quality growth here, we would expect the strategy to perform well in markets driven by earnings and fundamentals.

The three-year (through 28 Feb 2023) underperformance against the MSCI Emerging Markets Index is mainly attributable to the strategy's growth bias being out of favour, as well as structural underweightings in cyclical areas such as materials and energy. There have also been some stock-selection issues, such as Sea Ltd, which the manager exited after reevaluating its growth prospects. Nonetheless, the strategy’s long-term track record remains strong over Eidelman’s tenure, comfortably outperforming both the index and peers.

The strategy’s total AUM has declined to $32 billion at January 2023, from $40 billion a year prior, although it remains sold-closed.

The approach favors quality growth companies. The team seeks firms that boast quality franchises, consistent earnings streams, and solid returns on equity. To execute the approach, the managers leverage the team's country specialists and sector/product analysts. Sector/product analysts conduct in-depth fundamental research on prospective ideas and assign five-year expected return targets. Analysts also classify stocks on their coverage lists as premium, quality, or trading, according to the firm's strategic classification framework, which is based on a 98-point questionnaire. Premium and quality names operate in attractive industries with limited external risks and possess strong balance sheets, good management teams, and solid cash flow generation prospects, while trading names lack enduring competitive advantages. The vast majority of assets are allocated to premium and quality names, with trading names making up only a small portion. The team’s valuation framework helps to ensure managers pay the right price for the opportunity, although they are prepared to pay up for quality and growth.

The portfolio holds 60-80 stocks, with no formal constraints at the country or sector levels. The portfolio tends to exhibit higher-quality metrics (ROE, ROIC) when compared against the index and peers given the focus on quality franchises with enduring competitive advantages and consistent cash flow generation. As of March 2023, 38% of the portfolio was invested in the premium bucket and 54% in the quality bucket, while the remaining 6% were invested in trading names.

The portfolio continues to be positioned to benefit from the secular growth in emerging-markets consumption, including increasing penetration of financial products in underbanked markets. Current high-conviction themes in the portfolio include e-commerce, Indian private-sector banks, and Asian insurance franchises. The most notable underweightings tend to be in energy and materials.

Leon Eidelman entered 2022 with an overweight position in China, although this was brought down to neutral during the year driven by a relatively weaker economic environment. The manager exited his positions in Alibaba, Sichuan Swellfun, Bilibili, Ping An Bank, and Sunny Optical, amongst others, to manage aggregate exposure to the country given geopolitical risk and uncertainty in domestic policy. The proceeds went to areas like Latin America, where Eidelman initiated a new position in Grupo Financiero Banorte, the second-largest financial group in Mexico.

Eidelman was officially appointed as lead manager in July 2016 but has been the primary decision-maker since January 2015, when he was promoted to comanager alongside the well-regarded Austin Forey. He continues to get support from former lead manager Forey, head of the fundamental GEM team, who remains a comanager here and the lead manager on the closed-end vehicle and institutional mandates.

Eidelman and Forey work closely together and alongside the other managers on the emerging-markets fundamental team, Amit Mehta and John Citron. A junior manager Weiying Dong was added to the portfolio management team in January 2022 as the team’s China specialist. Sarah Dodson joined in June 2022 from US growth equity team to work closely with Eidelman and will support him with analyst interaction and marketing while building her knowledge of emerging markets. Komal Dhillon joined in the fourth quarter of 2022, to work on the small cap and emerging-markets sustainable strategies with Mehta.

The managers are well supported by the broader EMAP team composed of 92 analysts and portfolio managers. This includes 37 sector/product analysts, who conduct company-specific and industry-level research, as well as 28 country specialists. Overall, the EMAP team is deep, experienced, and stable.

As of 2022, this investment stalwart manages more than USD 2.5 trillion in AUM. Composed of various global cohorts and diverse asset classes, the firm has more tightly integrated its capabilities in recent years, notably through the development of proprietary analytical and risk systems. Investment teams are robustly staffed and helmed by seasoned contributors. The firm’s strategies tend to produce reliable portfolios, and several flagship offerings are Morningstar Medalists. Manager incentives align with fundholders'; compensation reflects longer-term performance factors, and portfolio managers invest in the firm’s strategies as part of their compensation plans.

The firm’s funds tend to be well-priced, but they aren’t as competitive as many highly regarded peers of similar scale. Recent product launches include thematic and single-country strategies, both of which carry the potential for volatile performance and flows, along with misuse by investors. The firm remains intrepid when it comes to developing an environmental, social, and governance-focused framework and continues to move into other areas such as direct indexing through its 55iP acquisition and China through its joint venture, but these complicated initiatives take time to assess any real and lasting effect.

Given the focus on quality growth here, we would expect the strategy to perform well in markets driven by earnings and fundamentals and hold up better than peers during down markets, but lag in value rallies.

In 2021, the fund was behind the index and peers, owing to a strong recovery of value areas such as materials where the strategy is underweight. In addition, a number of Chinese stocks suffered because of regulatory tightening such as New Oriental Education, Bilibili, and KE Holdings. Elsewhere, stock selection in financials hindered performance, with Asian banks such as AIA Group, HDFC Bank, and Kotak Mahindra Bank negatively affected by Omicron and delays to the reopening.

In 2022, the fund was again behind the index and peers. The overweight position in China during part of the year, as well as stock selection in the country, were headwinds. Here, holdings in hardware and component manufacturers such as Silergy and Sunny Optical underperformed because of concerns on slowing from a weakening global economy. The overweighting and stock selection in technology was also negative, with EPAM Systems, TSMC, and Samsung Electronics among the key detractors. E-commerce names within consumer discretionary and communication services such as Mercadolibre and Sea Ltd were hit as investors sold out of longer0-duration assets as bond yields soared on concerns over accelerating inflation.

Based on our assessment of the fund’s People, Process, and Parent pillars in the context of these expenses, we think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Silver.