Performance Review 2007
Greg Mattiko: "The Fund incepted in November 2007, and finished the quarter up 0.8% (USD), outperforming the benchmark which fell -1.2% over the same period. Stock selection in underweight Brazil was the greatest contributor to returns. The Fund also benefited from investment ideas in Russia, an underweight in Korea and cash holdings over the period. Stock selection in China detracted from returns, as did holdings in South Africa."Performance Review 2008
Greg Mattiko: "The EM Small Cap index underperformed the broader market by 4.92% in 2008, a negligible amount, considering the high risk aversion conditions during the period. All of the underperformance took place in the first half of the year, with small caps falling less than the broad market in the second half (mostly the energy effect). The Fund has underperformed its benchmark over the period, with stock selection detracting from results and asset allocation contributing to returns. The Fund benefited significantly from an underweight in India, Poland and Indonesia, and an overweight in Mexico and Singapore. An overweight in specific consumer names in South Africa and China has added to returns, as well selected cyclical names in South Korea, China and Mexico. Selected investment ideas and overweight positions in Russia, Kazakhstan and Brazil detracted from return."
Performance Review 2009
Greg Mattiko: "The fund outperformed the benchmark in 2009 with both stock selection and asset allocation contributing to returns. Stock selection and asset allocation in Korea and Brazil contributed to performance. While stock selection in China detracted, asset allocation contributed overall. Investment ideas in India, Philippines and Mexico also had a positive impact. Off-index exposure to Singapore detracted from returns. Given the market run, the residual cash position acted as a drag on performance."
Performance Review 2010
Greg Mattiko: "The fund finished ahead of the benchmark with stock selection contributing all of the returns. Despite a negative impact from being overweight China during the year, stock selection in this market was the single largest contributor to returns. Investment ideas in India and Brazil also had a positive impact on performance. The fund also benefited from underweight positions in Taiwan and Poland as well as off-index exposure in UAE. Stock selection in Korea had a negative impact on performance. Thailand and Malaysia detracted as we held little in these markets which posted strong returns."
Performance 2011 - Year-do-Date
Greg Mattiko: "The fund under-performed YTD primarily due to stock selection and an overweight in China.
Longtop Financial - US listed software developer.
China LotSynergy - project development & equipment for lotteries.
Investment ideas in Russia and South Africa also detracted from returns as did an underweight in Thailand.
Technology stocks in Taiwan performed well.
Catcher - magnesium casings for consumer electronics.
Radiant Optoelectronics - liquid crystal displays."
Performance since 2007
Investment Process and Strategy – How does the Fund Manager invest?
Greg Mattiko: "Our investment approach is concentrated upon two core principles; understand what we own and value what we understand. We look to take advantage of the high relative volatility of emerging markets by investing for the long-term, beyond the investment horizon of the average investor. Our investment process aims to achieve superior returns by combining ideas from our well-resourced and experienced team in an appropriate way according to each client´s or Fund’s risk profile and performance requirements. Portfolio managers are active participants in the process of idea generation, not simply passive recipients of the analysts’ ideas. Our process can be summarised by the following diagram:
The JPM Emerging Markets Small Cap Fund follows the GEM Discovery strategy which is a high alpha, high conviction strategy. The Fund is managed from a primarily bottom-up perspective using the ideas generated by our team of 29 emerging markets investment professionals. The Fund is managed against the MSCI Emerging Markets Small Cap Net Index and has 60-140 holdings with a typical annual turnover of 30-70%. The cut-off point for investment is limited to stocks with a market cap no greater than the weighted average market capitalisation of the MSCI Emerging Markets IMI Index. This dynamic definition allows for market movements over time."
Investment Outlook
Greg Mattiko: "The global environment remains treacherous for emerging markets even as valuations have corrected sharply and are approaching 1.5x price to book for MSCI Emerging Markets, historically a good buying opportunity. It is harder to dismiss fears of a relapse in global growth today than a year ago as manufacturing is losing momentum and there is an increasing fiscal drag as developed markets tighten budgets to address deficits.
In contrast, emerging countries retain significantly greater flexibility to react to a slowdown through monetary and fiscal policy. Brazil is the first major economy to start cutting rates which we see as a short term positive. However, as inflation has not yet begun to fall convincingly across emerging markets, there are medium risks that easing may be premature. Aggressive easing could rekindle concerns further down the line over inflation and easy credit, a repeat of the last few years. However, this appears secondary in the face of current market fears.
Small cap stocks offer investors access to the attractive growth potential of emerging markets, providing much greater exposure to secular themes, such as increased consumer demand and infrastructure development, than their large cap peers. In comparison, their exposure to global cyclical sectors – where earnings are more sensitive to the global economic cycle – is significantly lower. This means that an investment in emerging markets small caps may offer diversification benefits for investors with existing emerging markets holdings.
Inevitably, a rise in global risk aversion has a short-term effect on emerging market equities. However, the long-term background suggests a more sustainable trend at work in emerging markets. Exports to the developed world are falling as a share of emerging market growth. Instead, intra-emerging market exports and domestic demand are playing an increasing role making emerging economies increasingly self-role, self sustaining. We therefore view problems in the developed world as buying opportunities, rather than as cause to reassess our views on emerging markets. With disposable incomes in emerging markets growing very rapidly compared with the rest of the world, we favour stocks with exposure to domestic demand.
As well as the global events and impact on markets, additional performance headwinds facing the JPM Emerging Markets Small Cap fund come from the overweight position in China which, once again, was an underperformer for the month. So far this year, Chinese small caps have underperformed the broader small cap benchmark by over 11 percent and are by far the worst performing large market (only Turkey has fared worse). The obvious valuation discrepancy between Chinese small caps and the rest of the universe is becoming ever more blatant. There are a number of good quality Chinese smaller companies that are now trading on mid to low single digit P/Es. We have been selectively adding to these names and are continuing to investigate other potential investments."
