EuropeanDec 1 2014

Fund Review: JPM New Europe fund

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This £106.3m fund launched in November 1997 and is co-managed by Oleg Biryulyov and Sonal Tanna.

The fund was an early investor in new Europe and it is committed to the region, Mr Biryulyov says. The majority of the portfolio is invested in Russia, Turkey and Poland, but it also has some exposure to Greece, Kazakhstan, Ukraine, Hungary and Turkmenistan.

He notes: “We seek to outperform by compounding superior growth in profits over long periods. We do so by identifying high-quality businesses through in-depth fundamental research.”

The managers believe the region offers a “compelling opportunity set” and that the fund is positioned to benefit from some of the key themes driving emerging markets, including domestic demand, the long-term commodity theme and the European Union convergence story.

“Our investment approach is concentrated upon two core principles – understand what we own and value what we understand,” Mr Biryulyov explains. “Our investment process is designed to enhance our understanding of the companies and countries we invest in and determine the correct valuation of growth prospects that this leads us to expect.”

He notes that the fund takes advantage of the high relative volatility of emerging markets by investing for the long term, beyond the investment horizon of the average investor. It is managed from a primarily bottom-up perspective, using ideas generated by the fund’s team of 39 emerging markets investment professionals. It is a concentrated portfolio that holds between 45 and 65 stocks. “Generally speaking, in considering what businesses we want to own, we look for economics, duration and governance,” Mr Biryulyov says.

Both he and Ms Tanna are well supported on the fund in terms of bottom-up analysis and top-down research. He elaborates: “In terms of our process, bottom-up stock analysis is conducted by both portfolio managers and analysts. They are multicultural, multilingual and sit in various locations around the globe to better understand the companies, sectors and markets in their respective areas. Top-down analysis and research is conducted by our global macro strategist and assessed monthly by our global and regional portfolio managers.

He adds: “Along with my co-fund manager, I sit in the specialist team for emerging Europe, Middle East and Africa within our global emerging markets group and I am supported by product-focused analysts who work closely with our industry analysts.”

The key investor information document reveals that the fund is ranked at level six on a risk-reward profile, or the riskier end of the spectrum, and has an ongoing charge of 1.68 per cent.

Mr Biryulyov points out that the fund has outperformed its benchmark, the MSCI Emerging Markets Europe index, since inception and across 10 years.

According to FE Analytics, in the 10 years to November 19, the fund has returned 93.15 per cent to investors, against 72.64 per cent by the index. More recent performance has dropped off though, and in the past 12 months to November 19 it has lagged its benchmark, making a loss of 22.07 per cent compared with a loss of 17.90 per cent delivered by the index.

He notes that as the fund is bottom-up driven, stock selection typically drives returns. He says: “In market environments such as the current one, when macro, top-down factors impact markets, short-term numbers can be impacted negatively. For example, performance in 2014 has been dominated by Russia. Stock selection in Russia has detracted as the ongoing tensions with Ukraine affect confidence and sentiment in the market, combined with a slowing macro environment. Early in the year, the strong performance in Turkey impacted returns as we were underweight and overly cautious in this market.”

The impact of the fund’s holdings in both Russia and Turkey illustrate the need to understand how the same scenario can affect markets and companies differently, Mr Biryulyov points out. “For example, the weakening oil price is beneficial to Turkey as an oil importer. Lower oil prices help to lower inflation and reduce the current account balance. In contrast, the impact on Russia is negative, given that the market is dominated by energy.”

EXPERT VIEW

Rob Morgan, pensions and investment analyst, Charles Stanley Direct:

This is a higher beta fund for exposure to eastern Europe and thus tends to do best in relative terms in a rising market. Oleg Biryulyov, who has managed the fund since 2002, is part of a stable global emerging markets equity team based in Moscow. Overall returns have been roughly in line with the MSCI Emerging Markets Europe index during his tenure, with a particularly strong period from 2007 to 2010. However, this has since reversed and the fund has been affected by weakening sentiment towards both Russia and Turkey. Although returns have been unspectacular against its index, it is a fund that you would probably back to do well in a bull run.