Buy high growth at a discount with Templeton Emerging Markets

Despite this, the trust is still trading at a discount to net asset value (NAV) of 12.9 per cent, a similar level to when we tipped it in July last year. However, if investors start to recognise the improvement in performance the discount could tighten, so it could be worth getting in before this happens.

Templeton Emerging Markets aims for long-term capital appreciation by investing in companies operating in emerging markets. These may include companies that have a significant amount of their revenues in emerging markets but are listed on stock exchanges in developed countries.

Emerging markets include some of the world's fastest-growing economies, with overall gross domestic product (GDP) growth rates often much higher than those of developed countries. Emerging markets also tend to have young populations, vast resources and a growing middle class.

Templeton Emerging Markets' largest geographic exposure is to Asia, with China and Hong Kong accounting for 20 per cent of assets, followed by South Korea (12.7 per cent) and Taiwan (10.1 per cent).

One of Mr Hardenberg's key changes since his appointment as lead manager is introducing a focus on technology companies, a sector that accounts for 28.5 per cent of the trust's assets. Mr Hardenberg is finding value in Chinese technology firms that have suffered from negative sentiment on the Chinese economy. Two of the trust's top 10 holdings are large Chinese internet companies, Tencent (700:HKG) and Alibaba (BABA:NYQ).

The trust also has substantial exposure to the growth in domestic consumption in emerging markets, with consumer discretionary companies its second-largest sector allocation.

The trust had avoided leverage (debt), but at the end of January it signed a £150m credit facility, equivalent to leverage of up to 7 per cent of its net assets. The trust's board did this as it considers the current environment positive for emerging markets, and with low interest rates debt is cheap. Mr Hardenberg has been granted discretion to draw down the debt as opportunities arise, subject to overall supervision by Templeton Emerging Markets' board. If he makes use of this facility to make more investments it could increase investment returns.

Anthony Stern, analyst at broker Stifel, says he "would not be surprised to see some leverage added to the portfolio in the near future".

But as well as the potential for greater returns, gearing could also lead to greater volatility, particularly as emerging markets are higher risk and more volatile than developed markets. If the assets the trust invests in go down, debt could compound losses. And Mr Stern doubts that the pace of returns Mr Hardenberg has made so far can continue.

However, drawing on debt to make more investments can lead to higher returns and Mr Hardenberg's strong performance so far suggests he makes the right calls on major holdings. Mr Stern adds: "His proactive, contrarian approach should lead to sustained outperformance over time."

So if you want to tap into the potential of fast-growing regions and benefit from the stockpicking expertise of a manager who looks like he can deliver strong outperformance, then Templeton Emerging Markets on its current discount to NAV seems like a bargain. Buy. EA.

Source: Winterflood Securities as at 27/03/17, *Franklin Templeton Investments as at 31/12/16, **AIC

Performance

Source: Winterflood Securities as at 27/03/17

Top 10 holdings as at 28 February 2017 (%)

Source: Franklin Templeton Investments

Sector breakdown as at 28 February 2017 (%)

Source: Franklin Templeton Investments

IC Tip rating