GLOBAL EMERGING MARKETS DISCOVERING TREASURE

Jupiter Global Emerging Markets Focus Fund Jupiter Global Emerging Markets Focus ex China Fund

SUPERCOMPOUNDERS

A select number of companies in emerging markets are able to generate high and compounding returns over long periods of time. These “supercompounders,” named for their ability to maintain their sources of excess returns and compound value over time, offer rich targets for high investment returns. Uncovering and owning supercompounders is central to the investment approach of Jupiter’s Global Emerging Markets Focus and Global Emerging Markets Focus ex China funds, representing a source of alpha that enables the investment team to allow the power of compounding returns to work in the strategies’ favour over the long-term. This is especially important in emerging markets where higher volatility, macro events and capital flow cycles often conspire to weaken an investor’s resolve and time horizon.

The three multipliers of long-term returns

Long term vaLue creation

Profitability

MOAT

Compounding

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Please note the value of equities may go down as well as up in response to the performance of individual companies and can be affected by daily stock market movements and general market conditions. Other influential factors include political, economic news, company earnings and significant corporate events. When investing in emerging markets, it’s worth noting that less developed countries may face more political, economic or structural challenges than developed countries.

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the paradox of choice: why less is more

Companies that earn high returns over and above their cost of capital create economic profit. Over time, the stock market rewards companies that consistently create economic profit with increases in market value. It’s simple in theory, but difficult in practice. Quality is a rare commodity in emerging markets, with 80%* of emerging market companies failing to earn a return on invested capital that exceeds their cost of capital. By contrast, supercompounders typically possess high, stable, and sustainable returns on invested capital (ROIC) and return on equity (ROE), attractive free cash flow yields, and growing earnings—all indications of a quality company.

the paradox of choice

*Source: Jupiter’s Data Science team, as at 31.05.2023. This data is updated annually, based on the MSCI EM Index.

80% of emerging market stocks have return on invested capital (ROIC) of less than 10%*

Fishing where the fish are

In the search for the rare supercompounder, it is often just as important to decide what should NOT be owned and identify where research effort would likely be wasted. Even the best run businesses will struggle to escape the gravity-well of poor industry dynamics.

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80%*

Supercompounders are exceptional companies

Past performance is not a guide to future performance. The value of investments can go down as well as up and is not guaranteed. Stock examples are for illustrative purposes only, were not held by the Jupiter Global Emerging Markets Focus Strategies for this entire period, and are not a recommendation to buy or sell.

Source: Bloomberg from 09.07.01 to 31.01.23. This data is updated annually.

Bank Central Asia

31%

EM Index

Asia Paints

25%

HDFC Bank

20%

TSMC

17%

So how much difference can supercompounding really make? The below chart shows just a few supercompounders and their long-term share price returns. As you can see, the ability to consistently compound higher returns becomes extremely powerful over time. Clearly, not every investment can be as successful as these – some, of course, wind up losing money even if they initially appeared to have the required characteristics. If spotting genuinely exceptional supercompounders were easy then everyone would be doing it. But these are examples of the sort of opportunities the team are ideally seeking.

The power of supercompounders

Supercompounders are exceptional companies

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five reasons to consider the Jupiter Global Emerging Markets Focus and Jupiter Global Emerging Markets Focus ex China funds

The funds focus on finding supercompounders, companies that generate exceptional returns for shareholders over time. As described earlier, these are not run-of-the-mill companies. The investment process eventually results in a portfolio of typically 30-40 holdings. That’s quite a lot less than the 25,000 stocks in the global emerging markets universe, and this process results in a portfolio that is very different from the benchmark, with a high active share.

1. high-conviction, concentrated portfolios

This data relates to the full global emerging market equity universe.

idea generation*

qualitative review

The funds invest across the market cap spectrum, including both large and smaller companies. The investment team believes that opportunity comes in different sizes. Some large companies have further to grow, and some small ones are destined to become large. It’s worth noting that smaller companies are subject to greater risk as well as greater reward potential, and investments in them may be volatile or difficult to buy or sell.

2. unconstrained investment

The key to the investment team’s approach is disciplined stock selection. They demand that companies have a return on invested capital (ROIC) that is higher than their cost of capital (WACC). They also ensure that the companies have a strong competitive advantage, and fully meet the team’s environmental, social and governance (ESG) criteria. Yet even if a company achieves all that, a reasonable entry price is still a necessity.

3. disciplined stock selection

The term ‘economic moat’, popularised by Warren Buffett, refers to the ability of companies to maintain competitive advantages over its peers in order to protect long-term profits and market share.

4. the four sources of competitive advantage

For illustrative purposes only.

Invests in companies with sustainable moats

intangible assets

Brands, customer lists, patents, and technological processes can allow a company to charge a premium.

The lowest cost producer in an industry can thrive, when in a price war it would be the last one standing.

cost advantage

When it is too much effort, or too costly, for customers to change a product or service, a barrier to entry is present.

switching costs

The value of a service increases as more people use it.

network effect

How long a company can ‘fight the fade’ - effectively, the amount of time a business can maintain its dominance - depends on the width and depth of its moat.

ESG has been a key component of the investment team’s fundamental analysis for many years, predicated on the belief that company culture is extremely important for long-term and sustainable profitability. ESG should not be just a screen and to fully understand a company, engagement with its management team is crucial. Jupiter’s proprietary system, ESG Hub, provides support in interpreting third party information and the investment team also work closely with Jupiter’s Stewardship and ESG Research & Integration teams.

5. esg embedded into our process

article 8 under sfdr

The Jupiter Global Emerging Markets Focus Fund and the Jupiter Global Emerging Markets ex China Fund are Article 8 funds under the EU's Sustainable Financial Disclosure Regulation (SFDR).

• Transition to a low carbon economy • Upholding responsibilities to people and planet

promote environmental and social characteristics

A restriction is applied to companies who main business activity (defined as revenues from such activity exceeding 30% of the company's total revenue) is in the following areas: X fossil fuels X military spending X controversial weapons X coal X tobacco

investment restrictions

We know that investors want choice over the strategies in which they invest. A developing trend is for some investors to seek an emerging markets strategy that excludes China, perhaps because they wish to invest in Chinese equities as their own asset class. Whatever your preference, our funds are designed to meet it, with one fund that includes China and one that excludes it. Either way, it’s the same investment team applying the same process, with the same focus on supercompounders, and integrating ESG into the investment process.

one strategy in two flavours

excluding china

including china

• Greater diversification benefits from reduced weight in China • Reduced geopolitical concerns • More advantaged demographics

• Long term growth opportunities of the world’s second largest economy • Potential for a significant post-covid recovery • Lowly valued, relative to recent history

The below shows the country allocations of the Global Emerging Markets equity universe if one either includes or excludes China (Source: Bloomberg, as at 06.06.23. Totals may not add to exactly 100% due to rounding). China’s economic power is undeniable, although removing it gives greater exposure to fast-growing tech hardware, semiconductor and consumer sectors. The choice is yours.

EXCLUDING china

including china

1,000 stocks

24,000+

200 stocks

1,000

40 high conviction stocks

UNIVERSE

investible Universe

PORTFOLIO CONSTRUCTION

CANDIDATES

ROIC > WACC

Runway for growth

Competitive advantage

Reasonable entry price

Integrated ESG

Invests in companies with sustainable moats

Stock selection

Identification and analysis of material ESG areas

Go, No Go decision

Engage with company management

Consider adjustment to cost of capital or position sizing

Ongoing monitoring and engagement

Meet the team

One strategy in two flavours

Five reasons to consider strategy

Supercompounders

Nick Payne gives an overview of Jupiter’s global emerging markets focus strategy, how the investment process works, and how the team seek to generate alpha.

Talking Factsheet

Global emerging markets focus strategy

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