Last checked at 27 Oct 2022 07:00
LONDON STOCK EXCHANGE ANNOUNCEMENT
JPMORGAN GLOBAL EMERGING MARKETS INCOME TRUST PLC
FINAL RESULTS FOR THE YEAR ENDED 31ST JULY 2022
Legal Entity Identifier: 549300OPJXU72JMCYU09
JPMorgan Global Emerging Markets Income Trust plc (the "Company" or "JEMI") announces its results for the year ended 31st July 2022.
Chairman's Statement
Performance
Following the Company's strong performance in the previous financial year, unexpected economic and geopolitical events impacted our performance this year. Emerging Markets have suffered significantly since Russia's invasion of Ukraine in February. This conflict and the accompanying economic sanctions imposed on Russia and the knock-on effects on the supply and price of energy and other commodities weighed heavily on global economic growth and intensified existing inflationary pressures. China's interventionist policies, its developing geopolitical tensions with the US and its economic slowdown resulting from a 'zero Covid' policy have further dented Chinese market sentiment and adversely impacted global markets.
Against this challenging backdrop, the Company's total return on net assets, including dividends, was -4.7% (in GBP) for the financial year to 31st July 2022, whilst our benchmark, the MSCI Emerging Markets Index, declined by 8.7%. The total return to shareholders was -9.4%, reflecting a widening of the discount to net asset value at which the Company's shares trade, to 11.6% by the end of the period, from 6.7% a year earlier.
The Company's stock selection in China and Mexico was the most positive influence on relative performance. In addition, the Manager's decision to reduce the portfolio's exposure to the geopolitical and macroeconomic risks associated with the Russian market from November 2021 onwards lessened the adverse impact of the Russian invasion and contributed to relative performance over the review period. Unfortunately, our Taiwanese exposure was a drag on both absolute and relative performance. The Investment Managers' Report that follows provides more detail on the Company's investment strategy and performance.
Dividends
Gross revenue for the year amounted to £22.2 million (2021: £18.9 million) with net revenue of £18.1 million (2021: £14.7 million). Net revenue return per ordinary share for the year, calculated on the average number of shares in issue, was 6.11p (2021: 4.94p).
In the current financial year, the Board paid three interim dividends of 1.0p per share, and announced the payment of a fourth interim dividend of 2.2p per share on the 5th September 2022. This brings the total dividend for the year to 5.2p per share, a modest increase from the previous year (2021: 5.1p per share). We recognise that the Company's dividend generation is important to our shareholders, and it is a distinguishing feature of investment trusts that we have the capacity to smooth the dividend stream in this way. We cannot guarantee that we will always be able to do this, but we currently have revenue reserves of £11.13 million (July 2021: £8.4 million), after payment of the fourth quarterly interim dividend, which equates to nearly three quarters of future annual dividends at the current level.
The Board pays four interim dividends, reflecting the support we have received from shareholders for a regular and timely income stream. It is seeking shareholder authority to maintain this dividend payment policy at the forthcoming Annual General Meeting ('AGM').
The Board continues to monitor dividend receipts, recognising that some companies within the portfolio may experience pressure in maintaining historic dividend payout ratios in the short term. Over the longer term, both the Investment Manager and the Board remain of the view that Emerging Markets continue to offer long term growth potential with attractive income prospects. The Board carefully considers the outlook and potential risks with the investment team on a regular basis, including the impact of currency movements on revenue receipts. As shareholders are aware, the Company receives dividends in the currencies of developing countries and US dollars, but pays dividends in sterling. It has not been the Company's policy to hedge currency risk as that is expensive and, for many currencies, impracticable. That policy inevitably means that the Company's asset values and cash flows will be buffeted by adverse currency movements (if sterling strengthens) and flattered by favourable moves (if sterling weakens relative to emerging market currencies and US dollars).
Share Purchases and Issuance
During the financial year to 31st July 2022, the Company's share price traded at an average discount to net asset value of 10.4%. In line with the Company's investment policy, as a mechanism to manage the discount to net asset value, the Company bought back into Treasury 400,000 shares for a total consideration of £510,815. Since the year end, the Company has bought back 88,243 shares for a total consideration of £110,587.
The Board is seeking shareholder authority at the forthcoming AGM to have the flexibility to issue up to a further 10% of the Company's issued share capital. The Board intends to use the authority to meet demand for the Company's shares as and when they trade at an appropriate premium to net asset value.
Key Performance Indicators ('KPIs')
The Board tracks a series of KPIs. Further details may be found on page 29 of the Annual Report. The Board pays particular attention to performance, ongoing charges, gearing, income available to pay dividends and the investment risk of the portfolio.
Gearing and Loan Facilities
The Board regularly discusses gearing with the Investment Managers, who use it to enhance long-term shareholder returns. As at the beginning of the financial year, the Company had a US$20 million fixed interest loan facility with National Australia Bank ('NAB'), repayable in November 2022 and a US$20 million floating rate loan facility with ING Bank, repayable in October 2023. The facility with NAB will be repaid in November 2022 as NAB has notified the Company of its strategic decision to move away from investment trust lending.
The Company has provisionally agreed a $20m loan with a two year term with an international bank replacing the NAB facility which matures in November 2022.
Management Fee
As previously reported, with effect from 1st August 2021 the Manager agreed to reduce its investment management fee, which is now being charged at the rate of 0.75% per annum (previously 0.90% per annum) on the net asset value of the Company's portfolio. The fee will continue to be calculated and paid monthly.
Board and Corporate Governance
Following the Board's annual evaluation by the Nomination Committee, it is felt that the Board's composition and size are appropriate. During the financial year, as part of the Board's succession plan, the Board engaged an independent external recruitment consultant to assist in the search for a new non-executive Director to be appointed to the Board. Following a rigorous recruitment process, the Board is delighted to welcome Elisabeth Scott as a non-executive Director of the Company. Elisabeth joined the Board on 3rd May 2022. She has over 35 years' experience in the asset management industry. She was appointed the Chair of the Association of Investment Companies in January 2021 and has extensive knowledge of and experience in the investment companies sector as a fund manager, investor and non-executive director. Elisabeth's appointment has further increased the Board's diversity of skills, experience and background.
In addition, having served as a Director since 2011 and as Chairman since 2018, I will be retiring from the Board upon the conclusion of the forthcoming AGM in November. Following a thorough selection process led by the Senior Independent Director, Lucy Macdonald, I am delighted that the Board has agreed that Elisabeth Scott will succeed me as Chairman. I am confident that Elisabeth will make an invaluable contribution to the Company and provide experienced leadership for the Company during the years ahead.
The Board supports the annual appointment/reappointment for all Directors, as recommended by the AIC Code of Corporate Governance, and therefore all of the Directors, with the exception of myself, will stand for appointment/reappointment at the forthcoming AGM. Shareholders who wish to contact the Chairman or other members of the Board may do so through the Company Secretary or the Company's website, details of which can be found below.
Environmental, Social and Governance
Through the investment process, the Investment Managers look beyond the purely financial attributes of a company or its shares. In looking for sustainable business models and long-lasting competitive advantages, they are assessing the environmental, social and governance ('ESG') aspects of the companies in which the Company invests. ESG considerations are fully integrated into the investment process and the Board shares the Manager's view of the importance of ESG factors when making investments for the long term and of the necessity of continued engagement with investee companies throughout the duration of the investment. Further information on the Manager's ESG process and engagement is set out in the ESG section on pages 17 to 22 of the Annual Report.
Annual General Meeting
The Company's AGM will be held at 60 Victoria Embankment, London EC4Y 0JP on Monday, 28th November 2022 at 2.00 p.m. Full details of the format and explanations of the business proposed at the AGM can be found in the Notice of Meeting on page 91 of the Annual Report.
We are delighted that this year we will once again be able to invite shareholders to join us in person for the Company's AGM. However, Shareholders wishing to follow the AGM proceedings but those choosing not to attend in person, will be able to view them live and ask questions (but not vote) through conferencing software. Details on how to register, together with access details, will be available shortly on the Company's website at www.jpmglobalemergingmarketsincome.co.uk or by contacting the Company Secretary at invtrusts.cosec@jpmorgan.com.
As is best practice, all voting on the resolutions will be conducted on a poll. Shareholders who are unable to attend the AGM in person are strongly encouraged to submit their proxy votes in advance of the meeting, so that they are registered and recorded at the AGM. Proxy votes can be lodged in advance of the AGM either by post or electronically: detailed instructions are included in the Notes to the Notice of Meeting on pages 92 to 94 of the Annual Report.
Shareholders are encouraged to send any questions ahead of the AGM to the Board via the Company Secretary at the email address above. We will endeavour to answer relevant questions at the meeting or via the Company's website. My fellow Board members, representatives of JPMorgan and I also look forward to the opportunity to meet and speak with shareholders after the formalities of the meeting have been concluded. We would also welcome comments and questions from shareholders throughout the year - please use the same contact details as above.
If there are any changes to the above AGM arrangements, the Company will update shareholders through an announcement to the London Stock Exchange and on the Company's website.
Stay in touch: receive the JEMI bulletin
In a new initiative to keep investors informed, our Manager will be offering regular email updates on the Company's progress. The JEMI bulletin will deliver topical and relevant news and views directly to your inbox. The updates could be particularly helpful to investors holding shares through an investment platform who may not otherwise have a direct line of communication with the Company. By signing up you will receive our updates including:
• Performance updates
• Insights and analysis from the Investment Managers
• Independent research
• Links to annual and half-year reports as and when they are published
• News and views, including press coverage and notification of future events.
To receive the JEMI Bulletin directly to your inbox please opt in by visiting https://tinyurl.com/bdhkakhf. The Manager will do the rest. Please be reassured that we will not pass your details to third parties and you may always unsubscribe at any time. If you have an independent financial adviser, please contact them for guidance.
Outlook
After a brief summer rally, global equity markets have once again weakened and are transitioning away from the wild boom triggered by the post pandemic fiscal and monetary stimulus. Concerns about interest rate rises, inflationary pressures and geo-political tensions are reflected in an increasingly challenging economic backdrop, with a potential recession looming.
This said, economic activity in many of the Emerging Market economies remains strong and their debt to GDP levels are less stretched than those in several major developed countries. Lower debt levels will also make Emerging Market economies more resilient to the impact of a stronger US dollar than in past cycles. Over the longer term, many emerging economies should continue to show higher growth underpinned by several positive structural trends such as generally favourable demographics which support growing working-age populations and rising incomes.
The performance track record of your Company over three years and beyond remains excellent. Whilst in future, there may be further shorter term periods when the Manager's strategy underperforms, the Directors remain confident, that the Manager's disciplined investment process and careful approach to risk management will enable the strategy to continue to outperform over the longer term, as it has done in the past.
On behalf of the Board, I would like to thank you for your ongoing support.
Sarah Fromson Chairman
26th October 2022
Investment Managers' Report
Introduction
For the year ended 31st July 2022, the Company's total return on net assets, including dividends, was -4.7% (in GBP). This compares with our benchmark, the MSCI Emerging Markets Index with dividends reinvested, which declined 8.7%. Shareholder return, including dividends, was -9.4%, reflecting a widening in the share price discount to NAV to 11.6%, from 6.7% at end FY21. We think it is important to note the Company's strong long term performance track record. The Company achieved annualised NAV returns (including dividends) of 2.6% per annum ('p.a.') over three years and 5.2% p.a. over five years, compared to index returns (MSCI EM) of 1.1% p.a. and 2.6% p.a. over three and five years respectively. Over ten years, NAV return was 6.5% p.a. vs 5.5% p.a. for the index.
Investment environment
The market's decline over the past year reflects the impact of several particularly challenging events. Foremost of these was Russia's invasion of Ukraine in February 2022. In addition to the tragic and disturbing human toll this war continues to take, it also has had wide ramifications for the global economy. The constraints it has imposed on the supply of energy and other commodities added to already concerning inflationary pressures and forced central banks, led by the US Federal Reserve, to take a more aggressive monetary policy stance. Sharply higher rates will create an inevitable drag on growth this year and next, and potentially drive some countries into recession. The dramatic shift in the US interest rate environment has also resulted in a major upward move in the US Dollar, which has strengthened against both developed and emerging market currencies. These developments had a detrimental impact on global equity markets. In particular, stocks with high valuations (which in many cases were dependent on high growth assumptions far into the future) saw those valuations decline. However, we believe we have navigated these events relatively successfully, acting quickly to manage portfolio risk from Q4 2021 onwards, as geo-political tensions and economic uncertainties escalated. Both our asset allocation and stock selection decisions supported relative performance over the year. (See table and details below.)
Performance attribution
for the year ended 31st July 2022
% | % | ||
Contributions to total returns | |||
Benchmark total return | -8.7% | ||
Asset allocation | 3.6% | ||
Stock selection | 2.7% | ||
Gearing/cash | -1.3% | ||
Investment manager contribution | 5.0% | ||
Portfolio total return | -3.7% | ||
Management fees/other expenses | -0.9% | ||
Share buy-back/issuance | -0.1% | ||
Other effects | -1.0% | ||
Cum income net asset value total return | -4.7% | ||
Cum income share price total return | -9.4% |
Source: JPMAM and Morningstar. All figures are on a total return basis.
Performance attribution analyses how the Company achieved its recorded performance relative to its benchmark index.
The other important and surprising development over the past year was China's continued harsh enforcement of its zero COVID policy. At the start of the year, our base case scenario assumed that we would see some relaxation of restrictions, and that this would be positive for the economy. Instead, as we write, Chengdu, a city of 21m people, is in another lockdown, and, if anything, the government appears to have doubled down on its efforts to eradicate COVID. This approach would appear unsustainable in the long term, yet events over the past year suggest that we should not assume the Chinese government will necessarily soften its severe anti-COVID stance any time soon.
Performance drivers over the past year
We build the portfolio on a bottom-up basis, selecting stocks based on their sound fundamental qualities, strong balance sheets and capacity to pay dividends over the long term. Naturally, some areas within Emerging Markets offer more investment opportunities than others, and this results in tilts within the portfolio towards some sectors and countries. From a sectoral viewpoint, we tend to find the most attractive income opportunities within Technology, Consumer Staples and Financials, so these are the portfolio's three key sector overweights, while historically, the portfolio is usually underweight in Materials, Energy and Industrials.
Stock selection enhanced relative returns during FY22, due to contributions from stocks that we own and also from others that we do not. The table below, showing the top five and bottom five contributors to performance over this period, illustrates.
Top five contributors | Top five detractors |
Alibaba (not owned) | Moscow Exchange |
Walmart de Mexico | Severstal |
Telkom Indonesia | Petrobras (not owned) |
Tencent (not owned) | Novatek Microelectronics |
Bank Rakyat Indonesia | Reliance Industries (not owned) |
From a country viewpoint, the Company's exposure to China was the most important favourable influence on relative performance, as can be seen from the table below. This was due mainly to stock selection - our underweights to some of the pure growth areas (for example, technology companies and ecommerce platforms such as Alibaba and Tencent) made a positive contribution to relative returns, as these sectors underperformed over the period, due to investors' concerns about the implications of the Chinese government's 'common prosperity' agenda. In addition, our positions in financials and consumer stocks (for example China Construction Bank and Inner Mongolia Yili, a dairy company) performed relatively well during the year.
Country contributors to relative performance
POSITIVE | NEGATIVE |
China | India |
Mexico | Saudi Arabia |
Indonesia | Taiwan |
Our exposure to Mexico was another positive contributor to relative performance, thanks in large part to our position in Walmart de Mexico (Walmex). This multi-format retailer is a good example of the kind of investment opportunity in which we are most interested. It is delivering a high return on equity and strong free cash flow generation and has a positive dividend policy. During the year, Walmex reported healthy earnings numbers and it appears to be coping with changes in the retail operating landscape. It is investing in technology and enabling its stores with omnichannel capability (such as 'drive through pickup' services or home delivery).
Indonesia was another market where we derived positive relative returns. Rakyat, a regional bank, announced its dividend for 2021, which showed a strong recovery after the challenges of 2020. Dividends per share rose 80.6%, implying a healthy yield. In addition, we welcome the company's announcement of a buyback programme to reacquire shares totalling 0.4% of its market capitalisation, as we view share buybacks alongside regular dividend payouts as a healthy indicator of good corporate governance, as discussed in the ESG section below.
On the negative side, markets in both India and Saudi Arabia performed well, but our underweight positions relative to benchmark created a drag on relative performance. In the case of India, we find it difficult to find stocks offering an attractive yield, partly because India is more of a 'growth' market, and also, simply, because valuations are high, thanks to positive investor sentiment towards the country, which means the yields on offer are low.
Our exposure to Taiwan has been a source of positive performance for us for many years, but was a drag on returns in FY22. This was primarily due to our positioning in technology stocks, which suffered as interest rates rose and markets became more concerned about the possibility of a US recession which would dampen demand for tech products. This caused a derating of positions, including semiconductor manufacturers Novatek Microelectronics and Realtek Semiconductor.
Portfolio positioning and changes
Given the year's particularly challenging investment environment discussed above, some key portfolio changes over the past year have been motivated by our efforts to limit the portfolio's exposure to geo-political and macroeconomic risks. Firstly, as tensions between Russia and the West began to escalate in Q4 2021, we started to reduce our Russian positions and we continued on this path in Q1 2022 as a Russian invasion looked increasingly likely. This meant we were underweight in the Russian market when Russia invaded Ukraine. This portfolio shift was not driven by individual stock decisions, but rather by our overriding desire to reduce Russia-related portfolio risk. This decision paid off, as our reduced Russian exposure contributed to relative performance over the review period. We were unable to sell all our Russian positions down to zero due to trading suspensions. For the remaining Russian assets, we have applied a fair valuation methodology in accordance with our established policies; as at end-July 2022 they represented 0.006% of total investments in the portfolio.
At the sector level, technology, together with consumer staples and financials, have been a rich source of income ideas for the portfolio and a positive contributor to performance over the long term, although, as mentioned above, our tech positions have detracted recently. During H1 2022, as our assessment of the global economic outlook deteriorated and our fears of a US recession mounted, we scaled down our overweight exposure to technology stocks. We still like this sector from a long-term perspective, but the extent of uncertainties pervading global markets suggests it is prudent to control overall position sizing in the near term.
We also reduced our overweight position in the Taiwanese market in H1 2022, and we continued to scale back exposure in the early months of H2 2022. As at 30th September 2022, our active weight stood at +2.4%, down from +9.3% at the end of the 2021 financial year. This decision was partly driven by our caution about the near term outlook for tech stocks, as discussed above, as many of our tech positions are listed in Taiwan. It also reflects a desire to limit risks arising from heightened tensions between China and Taiwan.
While these portfolio construction decisions were driven, somewhat unusually, by top-down concerns and portfolio risk management, most of our portfolio adjustments are still driven by our views on individual stocks, which are derived from our analysis of each company's return on equity, free cash flow and dividend policy. ESG considerations are also an important factor, incorporated into our investment process via our risk profile analysis and materiality framework, as discussed below and in our ESG Report on pages 17 to 22 of the Annual Report.
Sales/reductions
In terms of stock disposals, in addition to reducing our exposure to Russia, we trimmed exposure to the tech sector, also mentioned above, including a cut to our position in Taiwan Semiconductor Manufacturing (TSMC), the dominant global producer of these key components. This partial sale also served to lower our exposure to Taiwan, consistent with our concerns about mounting tensions between Taiwan and China. However, TSMC remains an important position for us, as it is well positioned, with a strong competitive advantage in cutting edge chip manufacturing. The company is also able to invest heavily, with the expectation of high returns on capital, while still maintaining a stable and increasing dividend.
Elsewhere, we reduced our position in China Pacific Insurance, in recognition of the fact that it has become harder for the Chinese insurance sector to grow at the pace we had previously anticipated. COVID lockdowns have of course played a role here, but companies in the sector also seem to be facing broader challenges related to the establishment of effective sales channels and agency networks. Additionally, a lack of clarity over capital rules for the sector makes future dividend payments less certain.
Purchases/additions
The proceeds of the above sales were used to fund a number of new positions and top ups to existing holdings. One purchase was PZU, a Polish insurer with strong fundamentals. This company's leading position in the Polish market allows it to generate strong profits, which support an attractive dividend. We often describe our portfolio as a combination of value and quality, and this stock fits into the value component of the portfolio, as its high dividend yield acts as a valuation support. Another key point we considered during our analysis of PZU was governance. This has been a weaker area for this company due to its historic purchase of stakes in Polish banks, something we viewed at the time as a poor capital allocation decision. Having considered this carefully, we concluded that this was unlikely to be repeated as their ambition for meaningful exposure in the Polish banking sector has already been attained. We also judged that this risk was reflected in the stock's valuation at current levels, so overall, we were comfortable building a position in the company.
We also opened a new position in HCL Technologies, an Indian IT services company. This acquisition is a good example of how we think about individual stocks' quality and value characteristics. HCL demonstrates many of the positive quality characteristics we seek. It has a high return on equity (22% in FY22), strong free cash flow generation, and a much improved dividend policy (which now pays out 75% or more of net income). Within our materiality framework, which looks at specific ESG issues, we think certain social factors are particularly important for IT services companies, for example, their hiring and compensation practices, as well as their efforts to protect user privacy and data. From a value point of view, the stock trades on an earnings multiple significantly lower than some comparable Indian IT services companies (partly reflecting its positioning within the market which is not quite as strong as bigger competitors such as Infosys). This lower earnings multiple translates into a relatively higher dividend yield. This quality/value combination looked attractive and we initiated a position during the year (partly rotating from an existing position in Tata Consultancy Services, which attracts a higher valuation in the market).
Another new addition to the portfolio is Wuliangye, a Chinese producer of baiju (spirits). Wuliangye commands a strong position at the high end of the Chinese alcoholic beverages market. Again from a quality perspective, this company appeals to us given its 75% gross margin, which translates into a 25% return on equity. However, the stock saw some derating due to understandable concerns over its sales trajectory during China's harsh and ongoing lockdowns. But in our view the company is well-positioned to perform strongly over the long term, and we saw the valuation decline as an opportunity to add the stock to the portfolio at an attractive level.
Our engagement on ESG issues
We believe that sound ESG practices are extremely important to the sustainability of business models, and we welcome the fact that more Emerging Market companies are explicitly recognising this fact and improving their practices accordingly. ESG considerations are therefore integral to our investment process. When considering potential investments, our analysts assess each company on a list of related factors, including its carbon emissions, renewable energy and recycling policies, employment and diversity practices and its approach to corporate governance.
We place particular emphasis on governance, and we draw a direct link between a company's dividend policy and the quality of its governance. In our view, a company's willingness to return cash to shareholders is a tangible and positive governance indicator. We have engaged with many companies on this issue over time, to understand their motivations and capital allocation objectives. We also discuss the magnitude of returns to shareholders and the rationale behind any split between dividends and buybacks.
Further examples of recent ESG engagement with portfolio companies can be seen in the ESG Report on page 19 of the Annual Report.
Dividends
The pandemic had a significant impact on companies' ability to maintain dividend payments. However, the post-pandemic resurgence in activity saw the portfolio's dividend receipts grow by 24% in the financial year ended July 2022. Dividend income in this year also benefited from some favourable timing effects, as a couple of Taiwanese companies paid two dividends over the course of the year (this was simply a function of delays in their Annual General Meetings due to COVID).
As a reminder, the Company receives dividends from portfolio companies in local currencies and pays out dividends in sterling. Currency movements therefore have an impact on revenue receipts year-on-year. All else being equal, a falling pound increases revenue receipts from Emerging Markets, and vice versa.
Other factors apart from currency will also impact near term dividend receipts. Aggressive central bank policy could well drive much of the developed world into recession in coming quarters, and this risk is casting a shadow over the dividend outlook for the immediate future. Despite these near-term uncertainties, we are confident that the portfolio's long-term dividend generating power remains intact.
Outlook
Global financial markets are presently processing a number of considerations. In addition to the rising risk of recession in the US, and elsewhere, as discussed above, China's property market contraction, while apparently manageable, must inevitably have an impact on the country's growth outlook. The way in which China manages its zero COVID policies in coming months will be an equally important influence on near-term growth, and indications are that restrictions could be maintained for some time, creating a further drag on activity. The impact from the Russian invasion of Ukraine will continue to be felt globally, whether via energy prices or further geo-political tensions. In our view, Emerging Markets have begun to discount these risks, and overall market valuations look low relative to historical levels, although not excessively so. For example, the trailing price-to-book ratio for Emerging Markets is presently around 1.5x, compared to a historical average of 1.8x.
In the current higher inflation, higher interest rate environment, the pricing power of the companies we hold and their stock valuations are foremost in our minds as we make decisions regarding the company's portfolio holdings. On the former, for obvious reasons we are attracted to companies with the capacity to exercise pricing power in a world of higher costs. But, at the same time, we are also aware of the negative impact of higher rates on stock valuations. So we are very mindful of the need to strike a careful balance between these two considerations when assessing individual stock positions across the portfolio.
As always, we remain focused on our aim of investing in quality businesses with sound fundamentals, strong balance sheets and sustainable dividend policies. We believe this quality focus puts the Company's portfolio in the best position to successfully navigate current market uncertainties and we are confident in the Company's potential to keep delivering attractive dividends, capital returns and outperformance for shareholders over the long-term. Thank you for your ongoing support.
Omar Negyal
Jeffrey Roskell
Isaac Thong
Investment Managers
26th October 2022
Principal and Emerging Risks
The Board has overall responsibility for reviewing the effectiveness of the Company's system of risk management and internal control. The Board is supported by the Audit and Risk Committee in the management of risk. The risk management process is designed to identify, evaluate, manage, and mitigate risks faced. Although the Board believes that it has a robust framework of internal controls in place this can provide only reasonable, and not absolute, assurance against material financial misstatement or loss and is designed to manage, not eliminate, risk.
The Directors confirm that they have carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. With the assistance of the Manager, the Audit and Risk Committee has drawn up a risk matrix, which identifies the principal and emerging risks to the Company. These are reviewed and noted by the Board through the Audit and Risk Committee, which includes the ways in which these risks are managed or mitigated.
The principal risks fall broadly under the following categories: investment; strategy; financial; corporate governance and shareholder relations; operational and cybercrime; accounting, legal and regulatory; political and economic; environmental, social and governance.
The Board considers that the risks detailed below are the principal risks facing the Company currently, along with the financial risks detailed in note 23 to the financial statements. These are the risks that could affect the ability of the Company to deliver its strategy.
|
|
| Movement in risk |
|
|
| status in year to |
Principal risk | Description | Mitigation/Control | 31st July 2022 |
Investment | Inappropriate investment decisions, for example poor stock selection or asset allocation, or foreign exchange weakness, may lead to underperformance against the Company's benchmark index and peer companies or it may lead to insufficient local currency income generation which may lead to a cut in the dividend. | The Manager provides the Directors with timely and accurate management information, including performance data and attribution analyses, revenue estimates, currency performance, liquidity reports and peer group analyses. The Board monitors the implementation and results of the investment process with the Investment Managers, who attend Board meetings, and reviews data which show statistical measures of the Company's risk profile. | ® |
Strategy | If the Company's business strategy is no longer appropriate, it may lead to a lack of investor demand. This may result in the Company's shares trading at a narrower premium or a wider discount. A widening discount out of line with the industry may lead to hostile action by shareholders or arbitrageurs. An inappropriate gearing strategy may lead to suboptimal returns; poor performance if over-geared in weak markets or performance foregone if under-geared in strong markets. | The Board seeks to narrow the discount by undertaking measured buybacks of the Company's shares. The Company has authority to buy back its existing shares to enhance the NAV per share for its shareholders and to reduce the absolute level of discount and discount volatility. The Company and Investment Manager works with the Corporate Broker to seek to increase demand for the Company's shares. The Board has set a gearing range within which the Investment Managers employ the Company's gearing on a strategic basis. Gearing levels are detailed in the monthly investment restrictions and guidelines report provided to the Board and the level of gearing is discussed at each Board meeting. | ® |
Financial | The financial risks faced by the Company include market price risk, interest rate risk, liquidity risk and credit risk. | Further details are disclosed in note 23 on pages 79 to 85 of the Annual Report. | - |
Corporate Governance and Shareholder relations | Failure to maintain corporate governance best practice could raise reputational issues which may damage the Company's share price and reduce demand for its shares. | Further information on the Company's compliance with Corporate Governance best practice, including information on relations with shareholders, are set out in the Corporate Governance Report on page 45 of the Annual Report. | ® |
Operational and Cyber Crime | Failure of, disruption to or inadequate service levels by key third-party service providers could prevent the accurate reporting and monitoring of the Company's financial position. The threat of cyber-attack is regarded as at least as important as more traditional physical threats to business continuity and security. In addition to threatening the Company's operations, such an attack is likely to raise reputational issues which may damage the Company's share price and reduce demand for its shares. | The Board monitors effectiveness and efficiency of service providers' processes through ongoing compliance and operational reporting. The Company benefits directly and/or indirectly from all elements of JPMorgan's Cyber Security programme. The information technology controls around physical security of JPMorgan's data centres, security of its networks and security of its trading applications, are tested by independent auditors and reported every six months against the AAF Standard. | ® |
Accounting, Legal and Regulatory | Loss of its investment trust status and, as a consequence, gains within the Company's portfolio could be subject to Capital Gains Tax. A breach of the Companies Act 2006 could result in the Company and/or the Directors being fined or the subject of criminal proceedings. Breach of the FCA Listing Rules or Disclosure, Guidance & Transparency Rules ('DTRs') could result in the Company's shares being suspended from listing which in turn would breach Section 1158. | The Section 1158 qualification criteria are continuously monitored by the Manager and the results reported to the Board at each Board meeting. The Board relies on the services of its Company Secretary, the Manager and its professional advisers to ensure compliance with the Companies Act 2006, the FCA Listing Rules, DTRs and the Alternative Investment Fund Managers' Directive. | ® |
Political and Economic | Sustained underperformance of emerging markets as an asset class as a result of risks such as the imposition of restrictions on the free movement of capital, ability to pay corporate dividends and change in legislation. Risks of economic, political and ultimately military conflicts between nations, regions and trading blocks are an ever present risk. So too are the risks of social dislocation or civil unrest within countries. These bring with them risks to economic growth, to investors' risk appetites and, consequently, to the valuations of companies in the portfolio. | This risk is managed to some extent by diversification of investments and by regular communication with the Investment Managers on matters of investment strategy and portfolio construction which will directly or indirectly include an assessment of these risks. The Board receives regular reports from the Manager and Company Broker regarding market outlook and considers thematic and factor risks, stock selection and levels of gearing on a regular basis. | - |
Environmental, Social and Governance | The Board acknowledges that there are risks associated with investments in companies which fail to conduct business in a responsible manner. Insufficient consideration given to ESG factors may lead to poor performance and a reduction in demand for the Company's shares as investors seek greater ESG oversight in their portfolios. Climate change is one of the most critical issues confronting asset managers and their investors. Climate change may have a disruptive effect on the business models and profitability of individual investee companies, and indeed, whole sectors. | The Manager has integrated the consideration of ESG factors into the Company's investment process. Further details are set out in the ESG report on pages 17 to 22 of the Annual Report. The Board is also considering the threat posed by the direct impact of climate change on the operations of the Manager and other key service providers. | ® |
Emerging Risks
The AIC Code of Corporate Governance also requires the Audit and Risk Committee to put in place procedures to identify emerging risks. Emerging risks, which are not deemed to represent an immediate threat, are considered by Audit and Risk Committee as they come into view and are incorporated into the existing review of the Company's risk register. However, since emerging risks are likely to be more dynamic in nature, they are considered on a more frequent basis, through the remit of Board when the Audit and Risk Committee does not meet. The Board considers that the following are emerging risks:
Economic Contraction - A long term reduction in returns available from investments as a result of recession, stagnation, inflation or other extended exogenous factor which may render the Company's investment objectives and policies unattractive or unachievable.
China and Taiwan Conflict - The political tensions between China and Taiwan have the potential to lead to war which would have a detrimental effect on the Company's investments in China and Taiwan and, probably, on many other global markets.
Transactions with the Manager and related parties
Details of the management contract are set out in the Directors' Report on page 42 of the Annual Report. The management fee payable to the Manager for the year was £3,432,000 (2021: £3,864,000) of which £nil (2021: nil) was outstanding at the year end.
During the year £nil (2021: £nil) was paid to the Manager for the marketing and administration of savings scheme products, of which £nil (2021: £nil) was outstanding at the year end.
Included in other administrative expenses in note 6 of the Annual Report are safe custody fees amounting to £250,000 (2021: £240,000) payable to JPMorgan Chase Bank N.A. of which £39,000 (2021: £163,000) was outstanding at the year end.
The Manager may carry out some of its dealing transactions through its group subsidiaries. These transactions are carried out at arm's length. The commission payable to JPMorgan Securities Limited for the year was £14,000 (2021: £11,000) of which £nil (2021: £nil) was outstanding at the year end
The Company also holds cash in the JPMorgan US Dollar Liquidity Fund, which is managed by JPMF. At the year end this was valued at £684,000 (2021: £1,897,000). Income amounting to £21,000 (2021: £6,000) was receivable during the year of which £6,000 (2021: £1,000) was outstanding at the year end.
Stock lending income amounting to £44,000 (2021: £50,000) was receivable by the Company during the year. JPMAM commissions in respect of such transactions amounted to £5,000 (2021: £6,000).
Handling charges on dealing transactions amounting to £36,000 (2021: £40,000) were payable to JPMorgan Chase Bank N.A. during the year of which £7,000 (2021: £23,000) was outstanding at the year end.
At the year end, total cash of £3,603,000 (2021: £570,000) was held with JPMorgan Chase Bank N.A. A net amount of interest of £1,000 (2021: £1,000) was receivable by the Company during the year from JPMorgan Chase Bank N.A. of which £nil (2021: £nil) was outstanding at the year end.
Full details of Directors' remuneration and shareholdings can be found on page 54 and in note 6 on page 72 of the Annual Report.
Statement of Directors' Responsibilities
The Directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law) including FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland'. Under Company law the Directors must not approve the financial statements unless they are satisfied that, taken as a whole, the annual report and financial statements are fair, balanced and understandable, provide the information necessary for shareholders to assess the Company's performance, business model and strategy and that they give a true and fair view of the state of affairs of the Company and of the total return or loss of the Company for that period. In order to provide these confirmations, and in preparing these financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and estimates that are reasonable and prudent;
• state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business,
and the Directors confirm that they have done so.
The Directors are responsible for keeping proper accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The financial statements are published on the www.jpmglobalemergingmarketsincome.co.uk website, which is maintained by the Company's Manager. The maintenance and integrity of the website maintained by the Manager is, so far as it relates to the Company, the responsibility of the Manager. The work carried out by the auditors does not involve consideration of the maintenance and integrity of this website and, accordingly, the auditor accepts no responsibility for any changes that have occurred to the financial statements since they were initially presented on the website. The financial statements are prepared in accordance with UK legislation, which may differ from legislation in other jurisdictions.
Under applicable law and regulations the Directors are also responsible for preparing a Directors' Report, Strategic Report and Directors' Remuneration Report that comply with that law and those regulations.
Each of the Directors, whose names and functions are listed on page 41 of the Annual Report confirm that, to the best of their knowledge:
• the financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), give a true and fair view of the assets, liabilities, financial position and return of the Company; and
• the Strategic Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.
The Board confirms that it is satisfied that the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.
For and on behalf of the BoardSarah Fromson Chairman
26th October 2022
STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31st July 2022
2022 | 2021 | |||||
Revenue | Capital | Total | Revenue | Capital | Total | |
£'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
(Losses)/gains on investments held at fair value through profit or loss | - | (31,037) | (31,037) | - | 78,279 | 78,279 |
Net foreign currency (losses)/gains | - | (3,249) | (3,249) | - | 1,416 | 1,416 |
Income from investments | 22,232 | - | 22,232 | 18,877 | - | 18,877 |
Interest receivable and similar income | 66 | - | 66 | 57 | - | 57 |
Gross return/(loss) | 22,298 | (34,286) | (11,988) | 18,934 | 79,695 | 98,629 |
Management fee | (1,030) | (2,402) | (3,432) | (1,159) | (2,705) | (3,864) |
Other administrative expenses | (758) | - | (758) | (724) | - | (724) |
Net return/(loss) before finance costs and taxation | 20,510 | (36,688) | (16,178) | 17,051 | 76,990 | 94,041 |
Finance costs | (239) | (557) | (796) | (254) | (594) | (848) |
Net return/(loss) before taxation | 20,271 | (37,245) | (16,974) | 16,797 | 76,396 | 93,193 |
Taxation | (2,118) | (1,205) | (3,323) | (2,098) | 153 | (1,945) |
Net return/(loss) after taxation | 18,153 | (38,450) | (20,297) | 14,699 | 76,549 | 91,248 |
Return/(loss) per share | 6.11p | (12.94)p | (6.83)p | 4.94p | 25.75p | 30.69p |
STATEMENT OF CHANGES IN EQUITY
Called up | Capital | ||||||
share | Share | redemption | Other | Capital | Revenue | ||
capital | premium | reserve | reserve1,2 | reserves | reserve2 | Total | |
£'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
At 31st July 2020 | 2,973 | 222,582 | 13 | 100,605 | 35,111 | 15,129 | 376,413 |
Net return | - | - | - | - | 76,549 | 14,699 | 91,248 |
Dividends paid in the year (note 3) | - | - | - | - | - | (15,161) | (15,161) |
At 31st July 2021 | 2,973 | 222,582 | 13 | 100,605 | 111,660 | 14,667 | 452,500 |
Repurchase of shares into Treasury | - | - | - | (513) | - | - | (513) |
Net (loss)/return | - | - | - | - | (38,450) | 18,153 | (20,297) |
Dividends paid in the year (note 3) | - | - | - | - | - | (15,155) | (15,155) |
At 31st July 2022 | 2,973 | 222,582 | 13 | 100,092 | 73,210 | 17,665 | 416,535 |
1 The balance of the share premium was cancelled on 20th October 2010 and transferred to the 'other reserve'.
2 These reserves form the distributable reserve of the Company and may be used to fund distributions to investors.
STATEMENT OF FINANCIAL POSITION
At 31st July 2022
2022 | 2021 | |
£'000 | £'000 | |
Fixed assets | ||
Investments held at fair value through profit or loss | 440,419 | 476,731 |
Current assets | ||
Derivative financial assets | 1 | - |
Debtors | 8,556 | 2,513 |
Cash and cash equivalents | 4,287 | 2,467 |
12,844 | 4,980 | |
Current liabilities | ||
Creditors: amounts falling due within one year | (20,210) | (441) |
Derivative financial liabilities | (2) | - |
Net current (liabilities)/assets | (7,368) | 4,539 |
Total assets less current liabilities | 433,051 | 481,270 |
Creditors: amounts falling due after more than one year | (16,435) | (28,770) |
Provision for capital gains tax | (81) | - |
Net assets | 416,535 | 452,500 |
Capital and reserves | ||
Called up share capital | 2,973 | 2,973 |
Share premium | 222,582 | 222,582 |
Capital redemption reserve | 13 | 13 |
Other reserve | 100,092 | 100,605 |
Capital reserves | 73,210 | 111,660 |
Revenue reserve | 17,665 | 14,667 |
Total equity shareholders' funds | 416,535 | 452,500 |
Net asset value per share | 140.3p | 152.2p |
STATEMENT OF CASH FLOWS
For the year ended 31st July 2022
2022 | 2021 | |
£'000 | £'000 | |
Net cash outflow from operations before dividends and interest | (3,073) | (4,737) |
Dividends received | 18,648 | 15,276 |
Interest received | 17 | 6 |
Overseas tax recovered | 174 | 218 |
Indian capital gains tax paid | (1,124) | - |
Interest paid | (829) | (862) |
Net cash inflow from operating activities | 13,813 | 9,901 |
Purchases of investments | (102,855) | (186,767) |
Sales of investments | 106,618 | 187,826 |
Settlement of forward currency contracts | (46) | 94 |
Net cash inflow from investing activities | 3,717 | 1,153 |
Dividends paid | (15,155) | (15,161) |
Repurchase of shares into Treasury | (513) | - |
Repayment of bank loans | - | (15,505) |
Drawdown of bank loans | - | 15,469 |
Net cash outflow from financing activities | (15,668) | (15,197) |
Increase/(decrease) in cash and cash equivalents | 1,862 | (4,143) |
Cash and cash equivalents at start of year | 2,467 | 6,530 |
Unrealised (losses)/gains on foreign currency cash and cash equivalents | (42) | 80 |
Cash and cash equivalents at end of year | 4,287 | 2,467 |
Increase/(decrease) in cash and cash equivalents | 1,862 | (4,143) |
Cash and cash equivalents consist of: | ||
Cash and short term deposits | 3,603 | 570 |
Cash held in JPMorgan US Dollar Liquidity Fund | 684 | 1,897 |
Total | 4,287 | 2,467 |
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31st July 2022
1. Accounting policies
(a) Basis of accounting
The financial statements are prepared under the historical cost convention, modified to include fixed asset investments at fair value, and in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice ('UK GAAP'), including FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' (the 'SORP') issued by the Association of Investment Companies in April 2021.
All of the Company's operations are of a continuing nature.
The financial statements have been prepared on a going concern basis. In forming this opinion, the Directors have considered any potential impact of the ongoing COVID-19 pandemic and the direct and indirect consequences arising from the Russian invasion of Ukraine on the going concern and viability of the Company. In making their assessment, the Directors have reviewed income and expense projections and the liquidity of the investment portfolio, and considered the mitigation measures which key service providers, including the Manager, have in place to maintain operational resilience. The Directors have also reviewed the compliance with debt covenants and noted the full support from 100% of voting shareholders for the continuation vote at the AGM in November 2021 in assessing the going concern and viability of the Company.
The policies applied in these financial statements are consistent with those applied in the preceding year.
2. Return/(loss) per share
| 2022 | 2021 |
| £'000 | £'000 |
Revenue return | 18,153 | 14,699 |
Capital (loss)/return | (38,450) | 76,549 |
Total (loss)/return | (20,297) | 91,248 |
Weighted average number of shares in issue during the year | 297,087,353 | 297,240,161 |
Revenue return per share | 6.11p | 4.94p |
Capital (loss)/return per share | (12.94)p | 25.75p |
Total (loss)/return per share | (6.83)p | 30.69p |
3. Dividends
(a) Dividends paid and declared
|
| 2022 | 2021 |
|
| £'000 | £'000 |
| Dividend paid |
|
|
2021 Fourth interim dividend paid of 2.1p (2020: 2.1p) | 6,242 | 6,242 | |
First interim dividend paid of 1.0p (2021: 1.0p) | 2,972 | 2,973 | |
Second interim dividend paid of 1.0p (2021: 1.0p) | 2,972 | 2,973 | |
Third interim dividend paid of 1.0p (2021: 1.0p) | 2,969 | 2,973 | |
| Total dividends paid in the year | 15,155 | 15,161 |
|
| 2022 | 2021 |
|
| £'000 | £'000 |
Dividend declared | |||
Fourth interim dividend declared of 2.2p (2021: 2.1p) | 6,530 | 6,242 |
4. Net asset value per share
| 2022 | 2021 |
Net assets (£'000) | 416,535 | 452,500 |
Number of shares in issue | 296,840,161 | 297,240,161 |
Net asset value per share | 140.3p | 152.2p |
5. Status of announcement
2021 Financial Information
The figures and financial information for 2021 are extracted from the Annual Report and Accounts for the year ended 31st July 2021 and do not constitute the statutory accounts for that year. The Annual Report and Accounts includes the Report of the Independent Auditor which is unqualified and does not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. The Annual Report and Accounts has been delivered to the Registrar of Companies.
2022 Financial Information
The figures and financial information for 2022 are extracted from the Annual Report and Accounts for the year ended 31st July 2022 and do not constitute the statutory accounts for that year. The Annual Report and Accounts includes the Report of the Independent Auditor which is unqualified and does not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. The Annual Report and Accounts will be delivered to the Registrar of Companies in due course.
Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.
JPMORGAN FUNDS LIMITED
26th October 2022
For further information please contact:
Emma Lamb
For and on behalf of
JPMorgan Funds Limited
020 7742 4000
ENDS
A copy of the Annual Report will shortly be submitted to the National Storage Mechanism and will be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism. The Annual Report will also be available on the Company's website at www.jpmorganglobalemergingmarkets.co.uk where up to date information on the Company, including daily NAV and share prices, factsheets and portfolio information can also be found.