Carlos Hardenberg’s resignation as manager of Templeton Emerging Markets Investment Trust (TEM) in January came as a shock. The surprise was compounded a few months later when he co-founded a new asset manager with renowned emerging markets investor Mark Mobius, and Greg Konieczny, another emerging markets manager. All three had worked together at Franklin Templeton, and had been discussing the idea of a new emerging markets fund for two to three years.
“We decided our real passion is to invest very proactively in emerging markets through a concentrated portfolio and to focus on one single investment strategy,” Mr Hardenberg says. “There’s always a big conflict of interest at [large asset managers] where the aim is to add more assets under management and more strategies. It doesn’t necessarily add to the investment management. So, we decided let’s separate from that and set up our own fund.”
The new fund, Mobius Investment Trust, is expected to be launched at the end of the month when it has its initial public offering (IPO). It will target a total return of 12-15 per cent a year over five years via a portfolio of 20-30 small to mid-cap stocks with an average market cap of $2bn. This, Mr Hardenberg says, should help differentiate the strategy from its rivals, which tend to invest with a higher $37bn average market cap. The managers also hope to be a bit more diversified than other funds, which have tended to focus on China and India, committing not to invest more than 35 per cent of assets in a single country.
In line with the trends in emerging markets, the manager will target certain specific sectors. For example, Mr Hardenberg says around half the portfolio will be in consumer-focused companies, tapping into the trend of people in emerging market countries increasingly choosing local brands. Technology will be the next largest sector, with about 20 per cent of assets, followed by financials at around 10 per cent and healthcare also at roughly 10 per cent. The trust is not going to invest with a benchmark in mind and so should be substantially different to any emerging or frontier markets index.
“There are lots of bad habits that come from focusing on an index, such as buying companies just because they are in the index, or because you can’t afford not to hold a particular company [to make sure you match performance],” says Mr Hardenberg. “We will not have exposure to companies that are owned by exchange traded funds (ETFs)."
Aside from focusing on smaller companies, there is another layer to where Mr Hardenberg argues returns will come from. Engagement is a growing concept among fund managers – where they invest in companies not only to reap rewards of share price returns, but to use their influence to enhance these returns. Often this can come across as aggressive and meddling, however Mr Hardenberg believes it can be done "in a friendly way".
The idea is to improve environmental, social and governance (ESG) standards at companies owned by the trust. Mr Hardenberg believes the team can add value by convincing companies to redesign “suboptimal” balance sheets, hold less cash, increase transparency on dealmaking, and have better ESG-standards disclosure. This, he says, can create better-value and functioning companies.
“Many academic studies show that shareholders can create excess returns of 7 to 8 per cent, even in a short period, through engagement as the wider market starts to realise that these companies are becoming cleaner,” Mr Hardenberg says. “There are also lots of other outcomes such as higher distribution, lower cost of capital and lower business risk. [We see engagement] as just a more thorough risk-management process.”
Once fully invested, the trust is planning to pay a yield of around 3.5 per cent, which the managers say they will be able to generate due to the active ownership style – and convincing companies to return cash to shareholders.
Meanwhile, the trust can borrow up to 20 per cent of its net asset value (NAV), known as gearing, in order to fund additional purchases or manage its working capital. Gearing can amplify returns by increasing an investor's exposure to the market above the value of the investment, however it has a similar effect in market downturns.
The trust's board has also said it will employ a discount management policy, whereby it will buy back 15 per cent of shares when an average one-month discount to NAV exceeds 5 per cent. The annual management charge (AMC) is set to be 1 per cent up to £500m of net assets, but then falls to 0.85 per cent for assets between £500m and £1bn, and falls further to 0.75 per cent for anything above.
Mr Hardenberg and Mr Konieczny will be running the trust on a day-to-day basis. But Mr Mobius, who will be on the trust’s investment committee, will have final say on investment decisions and will remain very involved. All three partners, together with other employees at Mobius Capital Partners, will be putting a total of £5.7m into the IPO.
“When we started conceptualising the fund, emerging markets were 40 per cent higher than they are now, so timing wise this is absolutely perfect [as an entry point],” Mr Hardenberg argues. “While there’s a lot of fear out there, I think the old saying that it’s best to invest when other people are fearful still holds true.”
