Another one Bites the Dust: Jupiter Emerging and Frontier Income

To lose one investment trust from my portfolio to voluntary liquidation is unfortunate, but to lose a second one within a few months…so soon after Acorn Income…

The recent announcement of the proposed liquidation of the Jupiter Emerging and Frontier Income trust (JEFI) marks a disappointing end to an investment I’d made with high hopes at IPO in 2017.

With a long-term investment horizon, I remain firmly of the view that I should have a structural allocation of at least 10% to emerging markets,with a sizeable proportion of this focused outside of China, not least due to the heightened geo-political risks recent events have highlighted. This Jupiter trust, with an emphasis on high yield and up to 25% allocation to frontier markets, looked like an attractive means of generating income and growth.

One COVID-related dividend reduction period aside, the trust displayed a pleasing commitment to growing the dividend, with the current year seemingly poised to deliver 1.25p a quarter, a yield of around 5%.

Although JEFI's net asset value had not made great progress given many headwinds, not least COVID; over 3 years to March 18^th the NAV total return of 19.5% exceeded that one or two peers such as Blackrock Frontiers and Fundsmith Emerging, although was outpaced by the lower-yielding JP Morgan Emerging Markets Income Trust.

As recently as mid-February 2022 the JEFI share price traded just above the issue price of £1.00. But since then, the news in Ukraine - the trust had some Russian exposure – and the announcement of its imminent demise have hardly helped sentiment and the shares trade at around 90p as of 18^th March 2022, the discount still about 10%.

Given the probable offer of a cash exit at Net asset value it probably makes little sense to sell out now, and as with Acorn Income hold out to the bitter end. This is particularly the case as there might be some final dividend payment(s) and the emerging market alternatives are likely to be at least somewhat correlated to any near-term moves in the JEFI share price.

Where next for Emerging Markets Income?

So, what replacement investment should I make for this c. 3% of my portfolio?

I already hold Blackrock Frontiers. The aforementioned JP Morgan Emerging Markets Income trust has performed reasonably well in capital terms, but the dividend has been broadly flat for several years, and yields somewhat below 4%.

Given my inclination towards small cap value, I’m tempted to revisit a former holding, an ETF, the WisdomTree Emerging Markets Small Cap Dividend ETF.

I’d sold out of this a while ago due to concerns over its dividend visibility during COVID, but according to data on justETF, the COVID year dip in dividends from 45p to 40p a share in 2020 has begun to be corrected with a rise to 43p in 2021 and potentially 47-48p this year if the January 2022 half-year dividend of 24p is a guide. 

Although 'only' 3.5% or so yield at the current DGSE share price, the exposure to a wide range of small caps across several emerging markets offered by DGSE is attractive, and the DGSE share price has held up surprisingly well in the first quarter of 2022.

I’ve also noted the recent improvement in Latin American markets, so alongside a return to DGSE, a partial allocation of the Jupiter funds to the Blackrock Latin American trust - which has a 1.25% per quarter of NAV distribution policy - may help replicate the income yield from JEFI.

I just hope the board of JEFI acts swiftly and allows holders to exit at NAV as quickly as possible. There is no equivalent income-paying emerging markets fund available within the Jupiter stable, so the option of a dignified departure should be offered to JEFI shareholders, particularly those like me who invested right at the start of trust's regrettably short life.

The Thin Red Line in Investing

 "(...) it is by no means easy to draw the line between investment and speculation" (Philip Carret, The Art of Speculation,  1930, Ch. XVIII)

It can be equally difficult to draw the line between a morally defensible contrarian investment and an unethical exploitation of a troubled situation.

These points have been given renewed force by the February 2022 invasion of Ukraine by Russia, under the command of Vladimir Putin.

As the world's tentative recovery from the COVID pandemic is now confronted by the profoundly shocking spectacle of war in mainland Europe, well-known quotations like Nathan Rothschild's "Buy on the sound of cannons, sell on the sound of trumpets" seem utterly inappropriate.

Even if it were judged ethically appropriate to invest in Russia now, the removal of companies from London listings and the sanctioning of cash flows into and out of the Russian economy make it practically uninvestable.

However, once it became clear that an invasion was underway my investing red line was crossed, and small holdings in Polymetal and the Thornbridge Global Opportunites Fund (the latter holding 10% in Russia as of January 2022) were sold. 

Thus part of my planned 2042 value portfolio has already been disrupted, just after inception. 

Everyone's red line is differently placed, or perhaps non-existent, but some investments become too uncomfortable to hold with a clear conscience. Such is true of Russia for me in spring 2022.

I am fortunate to have the freedom required to ponder what to invest in instead. In the time it's taken me to write this post who knows how many in Ukraine will have lost their lives, let alone their liberties.