Investors in emerging markets should examine companies for their ESG criteria and maintain a long-term investment horizon to maximise their returns.
That is according to Richard Titherington, who is chief investment officer and head of the emerging markets equity team at JP Morgan Asset Management.
#1. Looking long-term
Speaking at JP Morgan’s annual investor conference in London, the Citywire + rated manager said the amount of people using EM ETFs in the short-term had increased.
However, Titherington said, over the longer-term investors need to look at how individual companies are performing.
‘Short-term investing works if you are a trader or a speculator, but if you care about saving for the future, you really need to think long term and that is especially true in my world.
'People think of emerging markets as being very short term and volatile, but in reality you are going to earn a far better return the longer your investment time horizons,’ Titherington said.
#2. ESG emphasis
Titherington added that ESG factors were important in EMs as companies which did not think about sustainability tended to fail. He gave the example of one of the largest chain stores in South Korea.
‘BGF Retail in Korea is not a bad retail business, but they thought it was a good idea to buy a golf course, presumably for their senior management to play golf.
'We had lots of meetings with them about how inappropriate this was, but they wouldn’t change their mind and therefore we exited the stock because we can't live with companies that misallocate capital,’ he said.
Titherington gave another example of a firm which pledged to plant seven trees for each one it cut down. It failed to do this, which resulted in a lack of future stock and led to significant losses in earnings for the company.
Chinese internet companies Tencent and Alibaba make up 6.5% and 4.3% of the fund. Titherington said too many people were worried about the country.
'The pessimism you generally hear about China is overstated. I think if you look at the dynamism of the economy - you look at companies like Alibaba or Tencent, for example - and there is more dynamism in the financial system in China than there is in the US,’ Titherington said.
‘It amazes me that over a billion cheques are issued in the US, but nobody uses a cheque in China, everybody does everything on their mobile phones. There is a lot of innovation.'
Over three years to the end of September 2017 the JPM Emerging Markets Opportunities fund returned 19.70% in US dollar terms.
This compares to a rise of 16.71% by its Citywire-assigned benchmark, the MSCI EM (Emerging Markets) TR USD ,over the same time frame.