Bag high growth with Templeton Emerging Markets

If you have a long-term investment horizon a good way to get exposure to the potential growth of emerging markets could be IC Top 100 Fund Templeton Emerging Markets Investment Trust (TEM). This has substantial exposure to the growth in domestic consumption in emerging markets. Its three largest sector exposures are information technology, financials and consumer discretionary stocks, which together account for three-quarters of its assets. Asian equities account for 45 per cent of its assets, with China the largest single country exposure at 22.9 per cent, followed by South Korea at 15 per cent and Taiwan at 9.8 per cent.

Carlos Hardenberg became manager of the trust in October 2015 after a long period of underperformance under former manager Mark Mobius. Since then the trust has performed much better. In 2016 it made a net asset value (NAV) return of 49.2 per cent and share price return of 47.9 per cent compared with 33.1 per cent for its benchmark, MSCI Emerging Markets index. And in 2017 it made NAV and share price returns of 30.8 per cent and 32.5 per cent, respectively, compared with its benchmark's 25.8 per cent return.

Mr Hardenberg has achieved this improvement in performance by lowering the risk of the trust's portfolio, reducing concentration in individual shares and sectors, and investing in a wider range of countries. But despite the improvement in performance Templeton Emerging Markets is still trading at a discount to NAV of about 9 per cent. However, if investors start to recognise the improvement in performance the discount could tighten.

Mr Hardenberg and his team evaluate a company's potential for earnings and growth over a five-year time horizon. They model a company's potential future earnings, cash flow and asset value relative to its share price, and their research includes visiting companies. 

Although the trust's top 10 holdings include large tech companies such as Samsung Electronics (SMSD), Tencent (HKG:700) and Alibaba (US:BABA), it also invests in small- and medium-sized companies. Around 13 per cent of the trust's assets are in companies with a market capitalisation of less than $2bn (£1.41bn), with a further 15 per cent in companies with a market capitalisation between $2bn and $5bn.

Emerging markets are generally riskier than developed markets, and the trust's exposure to small- and medium-sized companies increases its risk and potential for volatility. Its discount to NAV has also been wider than 9 per cent, with the trust having hit levels wider than 14 per cent even after Mr Hardenberg started to manage it.

However, the performance turnaround so far suggests Mr Hardenberg is picking the right shares and if the trust continues to outperform, its discount could tighten further.

So if you want to get exposure to emerging markets growth potential and are able to invest for five years or longer, Templeton Emerging Markets Investment Trust's good management team and improvement in performance make it an attractive opportunity. Buy. EA