JPMorgan Emerging Markets Equity A JFAMX

The JPM Emerging Markets strategy’s highly experienced management team, the group’s extensive resources, and its well-codified investment process underpin our positive view. We reiterate the strategy’s People and Process ratings at High and Above Average, respectively.

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.

The more recent additions (Weiying Dong, Sarah Dodson, and Komal Dhillon) to the Fundamental Emerging Markets team joined 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 wider emerging-markets and Asia-Pacific (EMAP) equities team, which consists of more than 100 investment members. 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, 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.

Following two very strong years for the strategy in 2019 and 2020, the period since 2021 through the end of 2023 has been challenging. The underperformance of high-quality, long-duration growth businesses during the period has been a style headwind for this quality-growth strategy. Moreover, there have been some stock-selection issues, particularly in China. Nine of the top 10 stock detractors in 2023 were in China or China-related. These were predominantly domestic names, for example, Yum China, Foshan Haitian Flavouring, Wuliangye Yibin, and AIA, which suffered from disappointing reopenings and fragile consumer confidence.

Over the past 18 months, the EMAP team has been reviewing its strategic classification framework, which has led to a reclassification and downgrade of several companies (Meituan, Foshan Haitian, WuXi Biologics), where the analysts' forecasts were deemed overoptimistic. The new head of China research team, David Gleesan, will continue to work on creating a robust framework for sector analysis in China. We will keep track of its implications and monitor the outcome of stock selection in China.

Nonetheless, the strategy’s long-term track record remains solid over Eidelman’s tenure, outperforming both the index and peers. The strategy’s total assets under management was around USD 32 billion as of February 2024. The US mutual and the Luxemburg-domiciled funds remain soft-closed. The UK-domiciled vehicle remains open given regulatory restrictions, but it is not marketed to new clients.

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 standard, 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 sustainable 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.

Over the past 18 months, the EMAP team has been reviewing their strategic classification framework, which has led to a reclassification and downgrade of several companies (Meituan, Foshan Haitian, K Holdings), where the analysts' forecasts were deemed overoptimistic. The new head of China research team David Gleesan will continue to work on creating a robust framework for sector analysis in China. We will keep track of its implications and monitor the outcome of stock selection in China.

The portfolio has 60 to 80 stocks, with no formal constraints at the country or sector levels. The portfolio tends to be exhibit higher quality metrics (ROE, return on invested capital) when compared with the index and peers, given the focus on quality franchises with sustainable competitive advantages and consistent cash flow generation. As of March 2024, 29% of the portfolio was invested in the premium bucket and 55% in the quality bucket, while the remaining 13% was invested in standard names.

The portfolio continues to be positioned to benefit from the secular growth in emerging-markets consumption, including increasing penetration of financial products in under-banked markets. Current high-conviction sectors in the portfolio include consumer staples and technology, while the most notable underweightings remain in energy, materials, and utilities.

The year 2023 had higher turnover at the strategy; still, turnover for the year was only 25%. In part, this was due to changes to the team’s internal estimates in China, which have led to exits where conviction had diminished—for example, Foshan Haitian Flavouring, WuXi Biologics, Pharmaron Beijing and Dada Nexus. Moreover, the portfolio’s India exposure decreased, as the team exited Reliance Industries given a low-single-digit expected return and trimmed positions in Britannia Industries, Kotak Mahindra, and HDFC Life Insurance on valuation grounds.

Among new additions is WEG, a Brazilian company operating global in electric engineering, power, and automation technology, which the team likes because of its innovation, pricing, and competitiveness.

Lead manager 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, John Citron, and more-junior managers Weiying Dong, Sarah Dodson, and Komal Dhillon. Dong joined in January 2022 as the team’s China specialist, while Dodson joined in June 2022 from the 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. Finally, Dhillon joined in fourth-quarter 2022 to work on the small-cap and emerging-markets sustainable strategies with Mehta.

The managers are well-supported by the broader emerging-markets and Asia-Pacific team, composed of more than 100 analysts and portfolio managers. This includes 25 managers and 34 sector/product analysts, who conduct company-specific and industry-level research, as well as 26 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, hold up better than peers during down markets, and lag in value rallies.

Following two very strong years for the strategy in 2019 and 2020, the period since 2021 through the end of 2023 has been challenging. The underperformance of high-quality, long-duration growth businesses during the period has been a style headwind for this quality-growth strategy. Moreover, there have been some stock-selection issues, particularly in China.

In 2022, the overweight position in China during part of the year, as well as stock selection in the country, were a headwind. Holdings in hardware and component manufacturers such as Silergy and Sunny Optical underperformied because of concerns on slowing from a weakening global economy.

Nine of the top 10 stock detractors in 2023 were in China or China-related. These were predominantly domestic names—for example, Yum China, Foshan Haitian Flavouring, Wuliangye Yibin, and AIA, which suffered from disappointing reopenings and fragile consumer confidence. In e-commerce, the combination of not holding Pinduoduo and an overweighting in JD.com cost 200 basis points. In India, the fund’s holding in HDFC Bank was a modest detractor, but the real impact was driven by the market’s performance being more concentrated in areas not owned in the portfolio on valuation grounds, such as richly valued domestically exposed sectors: utilities, industrials, and materials.

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 Medalist Rating of Silver.