FundsIndia Reviews: NFO of JP Morgan Emerging Markets Opportunities Equity Offshore Fund

Stock markets follow cycles; and so do investment themes. With the volatility witnessed in markets such as India felt in other emerging markets (EM) as well in the last few years, EM themes had lost flavour, giving room to more evolved markets in US and Europe.

However, with the fortune wheels in India showing signs of turning favourably, the closely correlated EM peers can’t be far behind in terms of their turnaround. And so, fund houses appear to have started looking for opportunities in EMs once again.

The early mover in this space is the new fund offer from JP Morgan AMC – JP Morgan Emerging Markets Opportunities Equity Offshore Fund – an open-ended fund-of-fund scheme that will invest in stocks across EMs. The NFO will close on June 30.

The Theme

EMs gain importance: It is hard to deny that EMs have gained global importance, what with this segment currently making up for 55% of the world’s GDP growth. On the total global GDP per se, they account for 38% of nominal world GDP, but are merely 10% of the world market cap. That provides significant scope for these markets to grow on a market cap to GDP basis. Hence, holding EMs as a part of one’s portfolio would no doubt be a ‘growth-oriented’ approach to equity markets.

Moving to markets within this segment, EMs across Asia, Europe, Africa, Russia and South America are generally known to show positive correlation, save for the slightly divergent trends in those nations such as Brazil or Russia that are more commodity dependent.

Scope for value picks: However, macroeconomic and fundamental issues specific to these nations have meant that the bounce back in these countries may not happen together. For instance, while markets in countries such as India, Indonesia, Thailand or Turkey have seen a bounce back with double digit returns year to date, others such as China, Russia and some emerging European nations are still languishing.

However, these markets are not devoid of good companies with sound fundamentals. That means, there is still scope for ‘value picks’ if one casts the net wider among EMs.

Besides, EMs, together, can offer exposure to large corporate giants, the likes of which cannot be found in the Indian markets. Technology giants such as Samsung Corporation, or vertically integrated oil companies such as Lukoil are picks that can be found only outside the Indian stock exchanges. At 10.5 times forward price earnings ratio and 2.9% dividend yield (both for MSCI Merging Markets), the valuations point to value picks still being available in these markets.

The Fund

JP Morgan Emerging Markets Opportunities Equity Offshore Fund is a fund of fund. That means it will invest in an existing international parent fund, which would be – JP Morgan Funds – JP Morgan Emerging Markets Opportunities Fund (call it the parent fund).

This underlying parent fund has been in existence since 1997. It generated returns of 17.9% annually over five years (in Indian currency) ending May 30, 2014, and comfortably outpaced its benchmark return of 13.4% annually.  Returns over the last 3 years were 10.8% annually in Indian rupee. Returns over both these periods were still lower than what top quartile funds in India would have generated. But the muted performance can be attributed to large markets such as China underperforming. A recovery there can change the scenario.

Currently, not many fund houses, save for HSBC and Kotak, have EM funds. Neither of these funds have made an impressionable mark thus far as a result of the slowdown in the past few years.

Suitability

An EM fund is a good addition for those looking to supplement their Indian portfolio with high quality stocks in similar markets. Such an addition would not be a diversification into a different market – the way it can be when you add a US or Europe-based fund. However, the addition can be a diversification to your portfolio of stocks, if you took a stock basket approach to your funds.

The low valuation in these markets provide scope for upsides, provided you hold such funds for the long haul of say 3-5 years. Also, it is noteworthy that international funds will be treated like debt funds for tax purposes. Hence, holding these funds for the long term would at best give capital gains indexation benefit.

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