Templeton Emerging Markets 07 December 2023
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Templeton Emerging Markets (TEM) is well-established, having launched in 1989. It’s the largest and most liquid investment trust in the emerging markets sector, providing access to some of the world's fastest-growing economies. Managers Chetan Sehgal and Andrew Ness seek out companies that can deliver long-term sustainable growth and aim to buy them when they are trading below fair value. The portfolio is well-diversified across regions and sectors, and offers a broad exposure to emerging markets. In our view, this positions TEM well as a core long-term allocation to these markets, while offering diversification to a broader portfolio focused on developed markets.
Over the last 12 months, TEM’s outperformed the index, driven by a number of well performing stocks (see Performance section), including POSCO, which they sold following an increase in valuation. Given recent market volatility, valuations have largely fallen across the market, so the managers have taken advantage by investing in companies in some secular growth areas, like financials and renewable energy.
TEM trades on a double-digit discount, which at the time of writing is 13.9%. We note that the discount has tended to narrow when sentiment improves towards emerging markets, which could contribute to shareholder returns, if it were to repeat. TEM has been awarded a Kepler Income & Growth rating for 2023.
An allocation to emerging markets offers exposure to incredibly diverse economies, which in general have some very attractive characteristics, such as fast economic growth, low debt, large consumer bases and vast resources. These features can mean greater potential for earnings growth. At present, we think this diverse set of countries looks attractive thanks to this earnings potential and to low valuations. While there are risks involved in an allocation to EM, we think the return potential looks attractive from here, and for investors with an appetite for risk they could be a valuable addition to a portfolio.
TEM, in our opinion, is a good way to access these markets, and is well suited as a core investment for investors wanting long-term exposure. We believe the managers’ experience, along with the depth of resource available from the on-the-ground emerging markets equity team, gives TEM an advantage over peers in the sector. Meanwhile their measured, long-term investment approach should allow them to look through short-term market noise, capitalise on long-term secular growth trends and focus on adding meaningful levels of alpha through stock selection.
TEM’s current double-digit discount, in our opinion, adds to the attraction, particularly given the cheapness of the underlying markets, and could act as an extra kicker to shareholder returns once sentiment decisively improves towards emerging market equities. There are still challenges for the global economy, which could see discounts widen, but in our view, if global investors are prepared to look through periods of above-average stock market volatility, they may benefit from the differentiated source of returns from TEM’s broad exposure to emerging markets.
- Benefits from a very large and well-resourced team offering good coverage of the market
- Given the managers’ balanced approach, it should be less exposed to style rotations than many in the sector
- Emerging market valuations look attractive versus developed markets
- Political risks remain high in many key markets, such as China
- Discount could persist or widen if investors’ risk appetite remains weak
- Large cap focus means small caps or frontier markets are unlikely to make up meaningful positions