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Bet on a turnaround for Templeton Emerging Markets

Templeton Emerging Markets Investment Trust is performing better under a new manager but still trades at a discount to net asset value (NAV)
July 14, 2016

Templeton Emerging Markets Investment Trust (TEM) has been out of favour in recent years following a long period of underperformance under former manager Mark Mobius. However, new manager Carlos Hardenberg, who took over in October 2015, has made some radical changes and achieved a significant uptick in performance over the past nine months

IC TIP: Buy at 534p
Tip style
Growth
Risk rating
High
Timescale
Long Term
Bull points
  • Outperformance under new manager
  • Emerging markets benefit from weaker dollar
  • Demographics drive growth prospects
  • Emerging markets rallying
  • Wide discount to NAV
Bear points
  • Short manager record
  • Higher risk and volatility

Since the start of this year, TEM has risen 32.6 per cent while MSCI Emerging Markets Index rose 22.7 per cent. However, the trust is trading at a 13 per cent discount to net asset value (NAV) compared with its 12-month average of 11.8 per cent.

This recent performance is a marked contrast to the previous five years when the trust lagged its benchmark and sector peers. Over calendar year 2015, TEM lost more than 23 per cent against an index drop of just under 10 per cent, due to a high concentration in energy and materials. Large positions in stocks such as Brazilian energy giant Petrobras (PETR4:SAO) and South African miner Kumba Iron Ore (KIO:JNB) also detracted from performance. In July 2015, for example, almost 20 per cent of the trust was invested in energy stocks that experienced sharp falls.

But since October 2015 last year Mr Hardenberg has aimed to derisk TEM's portfolio and sought better value opportunities. The trust is now far less concentrated in individual stocks and sectors, and invests in a wider mix of countries including new additions Kenya, Cambodia and Peru.

New investment themes include technological disruption and genetics, and information technology is now the trust's largest sector exposure, accounting for 26.6 per cent of assets at the end of June. Some £270m of energy and materials exposure has been sold.

In July 2015 the trust had almost a third of its assets in financials but now consumer discretionary and consumer staples stocks play a larger role than they used to. The concentration of the top 20 stocks was reduced from 71 per cent in March 2015 to 58 per cent in March 2016, meaning there is less chance of a single stock's failure detracting from the trust's returns in a market fall.

It is a dramatic shift away from the high-conviction and high-risk approach taken by the former manager, and it has enabled the introduction of new stocks from a variety of sectors including Indian generic company Dr.Reddy's Laboratories (DRREDDY:NSI), South African media group Naspers (NPB:JNB) and Peruvian miner Minas Buenaventura (MBU:BER). Mr Hardenberg wants to move away from large blue-chip stocks to less well-researched and potentially better value mid caps, so he can add cheap and undervalued names from a variety of sectors that could outperform over the long term.

Emerging markets are higher risk but are shielded from the impact of Brexit, and have held up well in the aftermath. Year to date, the MSCI Emerging Markets Index is up just over 20 per cent, although if the index is nearing the end of its good run that is a risk.

But many emerging markets continue to benefit from a weaker dollar, looser global monetary policy and a rising oil price, and benefit from strong demographics, meaning they could have further to run.

The main risk is the trust's relatively new manager who has a short track record.

"The new manager has been active in revamping the portfolio," says Anthony Stern, an analyst at broker Stifel. "TEM is no longer a concentrated, benchmark agnostic, value portfolio. But we are not able to verify whether this level of outperformance can be sustained."

However, the recent good performance appears to be driven by the new manager's different approach to stock selection and derisking of the portfolio. So, with early signs of improvement, potential for the areas it invests in and a wide discount to NAV, Templeton Emerging Markets Investment Trust looks like a good option for a high-risk bet. Buy.

 

IC TIP RATING 
Tip styleGrowth
Risk rating High
Timescale Long term 

 

TEMPLETON EMERGING MARKETS INVESTMENT TRUST (TEM)

PRICE:534pNAV:610.85p
AIC SECTOR:Global Emerging Markets PRICE DISCOUNT TO NAV:13.41%
FUND TYPE:Investment trust YIELD:1.54%
MARKET CAP:£1.6bnONGOING CHARGE:1.22%
SET-UP DATE:12.06.1989MORE DETAILS:franklintempleton.co.uk/en_GB/investor/funds/temit/updates-and-literature-temit
GEARING:0%  

Source: Morningstar, as at 12.07.16

 

Performance (cumulative total return %)

1m3m6m1yr3yr5yr10yr
Templeton Emerging Markets Investment Trust 15.820.342.28.0-0.7-13.0133.7
MSCI Emerging Markets 11.911.830.39.010.20.798.6

Source: FE Analytics, as at 12.07.16

 

Top 10 holdings % of assets
Brilliance China Automotive5.6
Samsung Electronics 5.4
Unilever5.2
Taiwan Semiconductor Manufacturing4.2
Buenaventura3.6
Tencent3.2
Itau Unibanco 3.1
Astra International 3.1
MCB Bank 2.9
Naspers 2.9

Source: Templeton Emerging Markets, as at 30.06.16

 

Sector allocation % of assets
IT26.6
Consumer discretionary 19.0
Financials18.6
Consumer staples11.9
Energy 8.1
Materials5.2
Industrials3.7
Healthcare2.5
Telecommunications0.8
Other3.6

Source: Templeton Emerging Markets, as at 30.06.16