HEAD-TO-HEAD: JP Morgan vs Stewart Investors

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Both funds belong to Morningstar’s global emerging markets equity category, which the firm defines as funds that tend to divide their assets among several emerging markets in Asia, Latin America, Europe, Middle East and Africa.

Both funds use the MSCI Emerging Markets Index as the benchmark.

According to Dorricott, both funds do a lot of work in terms of assessing the quality side of the stocks.

For example, the JPMorgan fund has a two-part analysis in assessing stocks, which include a 98-question checklist, looking at the strength and stability of the business, management quality, capital structure, competitive advantage and industry structure. Then stocks are evaluated for four sources of return: earnings growth outlook, dividends, changes in valuation and currency.

Like the JPMorgan fund, the Stewart fund evaluates the stocks’ quality, earnings growth and valuation. From a quality perspective, it looks at factors such as management, franchise, corporate governance and balance sheet strength.

“Managers in emerging markets [tend to] have a quality focus,” Dorricott said, adding that good quality companies are sought after given the higher risks in emerging markets than in developed ones.

What differentiates the two funds is that although JPMorgan’s process is more structured given its hard checklist, it is inclined to buy into quality stocks during times of short-term weakness linked to macro-economic events in order to take advantage of the lower valuation.

The Stewart fund does not tend to be opportunistic, and is stricter with the quality element, Dorricott said. “They are more about building relationships with companies, with suppliers, with competitors and assessing things via those channels through a lot of company contacts,” he said.

Given those differences, the JPMorgan fund is more diversified with 60-80 holdings its in portfolio, while the Stewart fund has 50-60 names.

The differences in their investment processes explain why both funds’ regional exposure and country weightings are different.

For example, Stewart’s regional exposure to developed markets is higher than both the JP Morgan fund and the category average. The UK also accounts for the second biggest country allocation of the fund.

This reflects the Stewart fund’s focus on quality, Dorricott said, adding that the fund will invest in companies domiciled in developed markets that have signficant revenues from emerging markets.

The JPMorgan fund’s opportunistic tendencies explain why its allocation to Brazil is higher than the Stewart fund and the category average, according to Dorricott. The fund has also bought stocks in Russia in recent years, he said.

Regional exposure

Source: Morningstar

Top five country allocations

Source: Morningstar

The Stewart fund’s bias towards quality also explains its high allocation to defensive sectors.

“The staple companies tend to have more visibility in terms of their long-term earnings outlook and that’s something that Stewart really focuses on,” Dorricott said.

While the JP Morgan fund also has a quality element, the manager focuses on balancing that against the stocks’ returns and would prefer to have a more diversified portfolio by sector, Dorricott said. The manager likes financials, IT and the consumer sectors.

Sector allocations

Source: Morningstar

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