Reforms aimed at improving the attractiveness of Korean firms to income investors have proved “disappointing”, according to the manager of the JPMorgan Global Emerging Markets Income Trust.
Omar Negyal, who runs the £307m trust, has a longstanding underweight to the country, but reconsidered his position last September when the Korean government moved to encourage companies to boost dividends.
Historically, Korea has had one of the lowest dividend payout ratios among major economies. However, the reforms, which were passed by the Korean parliament last autumn, offer tax incentives for companies to increase dividends or wages.
The legislation has also lowered dividend income tax and subjected new retained earnings to a special tax if they are not used within three years.
Mr Negyal said he had begun to increase exposure to Korea following the announcement of the new rules. But a year on, he has scaled back his holdings once again, from 6.5 per cent to 5 per cent.
He is now 10 per cent underweight Korea compared to his benchmark, the MSCI Emerging Markets Net index, according to the fund’s factsheet.
The manager said the reforms have “made slow progress” and “are somewhat disappointing”. “There isn’t any huge evidence that it’s getting better [either],” he added.
The downbeat view follows a difficult year for emerging markets. As of September 25 the MSCI Emerging Markets index had lost 14.4 per cent this year in sterling terms, according to data from FE Analytics.
The JPM trust has been hit even harder, falling 24.4 per cent, compared with an average loss of 13.4 per cent for the Association of Investment Companies’ Global Emerging Market Equities sector.
Mr Negyal said: “Overall, it is clearly a challenging period for emerging markets.”
Recent months have worsened an already lacklustre outlook for the sector, as stocks plummeted on renewed fears of a commodity price slump, falling currencies, and a US rate rise.
However, the recent volatility has given Mr Negyal a chance to add to his positions in Taiwan, one of his favourite regions.
Taiwan is the manager’s top allocation by country, making up 20.3 per cent of his portfolio – a position that constitutes a 7.8 per cent overweight versus his benchmark.
Mr Negyal said: “Companies in Taiwan have many of those characteristics that I look for: a decent return on capital, a positive free cashflow, and a clear and understandable dividend policy.”
But the manager added the technology cycle has been “a bit more difficult this year as companies have built up inventories”, suggesting they may now be holding excess supply.
Nonetheless, global equities’ struggles at the end of August allowed him to add some more to the holdings.
