Fund Profile

Templeton Emerging Markets 24 June 2024

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This is a non-independent marketing communication commissioned by Franklin Templeton. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

Overview
TEM’s board has announced four key initiatives aimed at narrowing the discount…
Overview

Chetan Sehgal and Andrew Ness manage Templeton Emerging Markets (TEM), the largest and most liquid investment trust in the emerging markets sector. TEM provides shareholders access to some of the world's fastest-growing economies, comprising a portfolio of good quality companies identified by the managers across 24 emerging markets. These companies exhibit good cash flow generation, long-term repeatable earnings power and share prices below their intrinsic worth, with the managers avoiding businesses with high leverage and weak balance sheets (see Portfolio section).

The managers believe the opportunities within their universe are broad, citing that the current attractiveness of equity valuations has continued to widen the pool. They have added to existing high-quality businesses in the portfolio on weakness, such as Discovery, a South African health insurance provider. Additionally, several new names have entered the portfolio, including SK Hynix, which the managers believe is poised to benefit from the rising demand for memory chip products, particularly for artificial intelligence applications.

Despite performing closely to the index over the last 12 months, TEM’s Discount of 14.9% continues to exceed its five-year average of 11.8%. The board believes this discount does not adequately reflect its strong investment performance. Therefore, it has announced four key initiatives to improve the rating of its shares, aimed at significantly increasing the scale of future distributions to shareholders: a buyback programme, commitment to maintaining a dividend of 5p per share totalling a minimum distribution over the next five years of £278m, a new conditional tender offer, and reduced management fees (see Charges section).

TEM has been awarded a Kepler Income & Growth Rating for 2024.

Kepler View

The board has unveiled a comprehensive plan aimed at heightening the demand for TEM’s shares, which we think has the potential to deliver real value to shareholders. The measures include enhanced share buybacks, with plans to repurchase up to £200m of shares over the next 12 to 24 months, representing up to 10% of current net assets if Discounts persist, and a Dividend commitment maintaining 5p per share for the next five years. Furthermore, it has also proposed a performance-based tender offer and a phased cut to its management fees. We think that this comprehensive plan is indicative of the board’s conviction and potentially makes the current discount rating attractive, particularly if TEM continues to perform well and the prospect for emerging markets improves moving forward.

We also believe that TEM is well-positioned as a possible core investment for investors seeking long-term exposure to emerging markets. The portfolio comprises quality stocks within incredibly diverse economies offering fast economic growth, low debt, large consumer bases, higher consumption driven by a rising middle class, and vast natural resources. Whilst there are risks involved in an allocation to emerging markets, we think , for investors willing to tolerate that risk, it could be a valuable addition to a portfolio.

Exposure through a trust like TEM could make a compelling case for those wishing to diversify their global portfolio via some specific EM exposure or serve as a complement to a portfolio focussed on developed markets, given the differentiated opportunities and return sources on offer.

Bull

  • Benefits from a very large and well-resourced team offering good coverage of the market
  • Board initiatives to boost demand for TEM’s shares make the discount more attractive
  • Emerging market valuations look attractive versus developed markets

Bear

  • Political risks remain high in many key markets, such as China
  • Lack of gearing reduces downside exposure but also limits upside when markets are strong
  • Large-cap focus means small-caps or frontier markets are unlikely to make up meaningful positions
Continue to Portfolio
2024 Kepler Income & Growth Rated Fund

This trust has been awarded a rating by Kepler Trust Intelligence for income & growth... Find out more

Fund History

24 Jun 2024 Fund Analysis
TEM’s board has announced four key initiatives aimed at narrowing the discount…
17 Apr 2024 Pretty, pretty, pretty good
Do investment trusts really protect capital and income against inflation? Let's take a look…
27 Mar 2024 Seoul searching
South Korea is looking to to tackle its ‘discount’ versus other Asian countries by introducing governance reforms, very similar to Japan's…
17 Jan 2024 Top of the Pops
We reveal the winners of our investment trust ratings for 2024…
07 Dec 2023 Fund Analysis
TEM offers broad exposure to the growth potential in emerging markets…
20 Sep 2023 Five questions about emerging markets
We track key developments in the diverse emerging markets universe…
30 Mar 2023 Fund Analysis
TEM offers broad exposure to the growth potential in emerging markets...
11 Jan 2023 Solving the Rubik’s Cube
We reveal the winners of our investment trust ratings for 2023…
10 Nov 2022 Light at the end of the tunnel
Our speakers struck an optimistic note this week as we considered the prospects for investors at the end of a difficult year…
10 Nov 2022 Slides and Audio: Templeton Emerging Markets
Download the presentation and listen to the audio from our webinar from 7 November...
13 Jul 2022 Ready player one
We wonder where, if anywhere, should investors look for returns after a tumultuous first half of the year…
06 Jul 2022 Fund Analysis
A tough year so far but well-positioned for future growth...
30 Oct 2019 Fund Analysis
TEM has seen a rebound in performance since a change of approach…
10 Oct 2018 Information overload
Our analysis shows the long-term case for emerging markets remains largely unaffected by much of the negative newsflow surrounding the sector...
09 Oct 2018 Fund Analysis
Templeton Emerging Markets invests in emerging markets equities on a global basis aims to maximise total returns over the long run with a value-based, bottom up approach...
30 Aug 2017 Fund Analysis
A value-orientated trust run by an experienced team, tending to outperform when sentiment is positive...
12 Oct 2016 Fishing for discounts
Despite a resurgence among emerging market equities, discounts continue to yawn among trusts in the sector – we highlight three that stand out...
11 Oct 2016 Fund Analysis
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