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Enticing discount at Templeton

FUND TIP: Templeton Emerging Markets Investment Trust (TEM)
March 10, 2011

BULL POINTS:

■ Experienced manager

■ Track record of outperformance

■ Wide discount

BEAR POINTS:

■ High volatility

IC TIP: Buy at 623p

Political unrest and fears about inflation have brought emerging markets off the boil, with many key emerging-market stock indices underperforming those of developed markets this year. But if you still believe in the long-term opportunities offered by the rising affluence of several billion people, then now might be a good moment to take advantage of a widening discount on one of the UK's biggest emerging-market investment trusts. If you already own an open-ended fund in the same space, it may even be worthwhile switching to the trust instead.

Templeton Emerging Markets Investment Trust (Temit) is trading on a 8.12 per cent discount, compared with a six-month range of 8 per cent to 3 per cent and a 12-month average of 6.28 per cent. It is big - with £2bn under management - well established and popular, regarded by many as the sector leader.

IC TIP RATING
Tip styleGrowth
Risk ratingHigh
TimescaleLong term

The widening discount is a far cry from the final quarter of 2010, when investors were pouring money into emerging markets funds. Figures from the Investment Management Association (IMA) show that the global emerging markets sector enjoyed net retail sales of £336m in October last year, the highest month on record.

But veteran manager Mark Mobius, who has managed the trust since its inception in 1989, has been on such roller-coaster rides many times before, and remains resolutely focused on the long-term opportunity. "We believe emerging markets continue to be in a long-term upward-moving phase, and we expect this trend to continue into 2011. Even more money is likely to be directed into these markets as investors around the world realise that emerging economies on average are growing three times faster than developed economies, and generally have more foreign reserves and lower debt-to-GDP ratios than their developed counterparts," he wrote in the trust's end-of-year report.

And Dr Mobius could have been talking about his own fund when he pointed out that: "Emerging markets, like most other global equity markets, will, of course, experience corrections along the way...However, short-term volatility may provide investors with appealing entry points if valuations drop to attractive levels, while over the longer term emerging markets should reflect the underlying strong economic growth in those countries."

The favourable economic picture was highlighted last month by the The Barclays Capital Equity Gilt Study 2011, which concluded that equity returns from emerging markets are likely to outperform those of developed markets, and with lower volatility, partly because of their vastly more favourable demographics.

Dr Mobius is supported by 44 dedicated emerging markets portfolio managers, analysts and product specialists located in 17 offices around the world, and aims to provide long-term capital appreciation for its investors, through investment in companies operating in emerging markets.

But he's no index-hugger; indeed, many of Temit's country positions diverge widely from the weightings in the MSCI Emerging Markets Index, and the historical performance of the trust has generally vindicated such calls. It has beaten the index by 35 per cent over the five years to 31 December 2010. Currently, Dr Mobius is overweight Hong Kong/China, Brazil, India, Thailand, Indonesia and Turkey compared to the MSCI benchmark, while underweight South Korea, Russia, South Africa and Mexico. At the stock-specific level, his team aims to find stocks that are cheaper than their "real value". They are not limited by market trends, country or industry sector.

Dr Mobius is fond of quoting Baron Rothschild's dictum that the best time to buy "is when there's blood in the streets." But things are unlikely to get that bad in any of the main emerging markets to which Templeton is exposed. "Investors are fretting about higher inflation leading to higher interest rates," says Mark Dampier, of Hargreaves Lansdown. "But this remains a long-term secular growth story on the urbanisation of over five billion people." On that basis, the widening discount looks like an opportunity. Buy.

Key fund data:

TEMPLETON EMERGING MARKETS INVESTMENT TRUST PLC (TEMIT)
PRICE:623p*NAV:674*
SIZE OF FUND:£2.051bn*PRICE DISCOUNT TO NAV:8.12%*
No OF HOLDINGS:48**1-YEAR PRICE/NAV PERFORMANCE:14.07%/16.01%
SET-UP DATE:12 June 19893-YEAR PRICE/NAV PERFORMANCE:15.2%/13.89%
MANAGER START DATE:12 June 19895-YEAR PRICE/NAV PERFORMANCE:16.91%/15.98%
TURNOVER:0.7%TOTAL EXPENSE RATIO:1.29%
VOLATILITY:21.8YIELD:0.6%*
TRACKING ERROR:8.3GEARING:100
SHARPE RATIO:0.3MORE DETAILS:franklintempleton.co.uk

Source: TEMIT & *Morningstar

Notes: **As at 31 March 2010

Top 10 holdings as at 10 October 2009

HoldingCountryPercentage
Brilliance China Automotive Holdings LtdChina6.1
Vale SA, ADR, pfd. ABrazil6.1
Itau Unibanco Banco Multiplo SA, ADRBrazil5.6
Banco Bradesco SA, ADR, pfdBrazil4.8
Akbank TASTurkey4.6
Tata Consultancy Services LtdIndia4.3
Sesa Goa LtdIndia4.1
SK Energy Co. LtdSouth Korea3.8
Dairy Farm International Holdings LtdHong Kong3.2
PT Astra International TbkIndonesia3.2

Geographical allocation

CountryPercentage
Hong Kong/China22.9
Brazil19.4
India12.1
Thailand9.2
Indonesia6.8
Russia6.4
Turkey6.1
Other17.1