Templeton Emerging Markets 06 July 2022

Templeton Emerging Markets (TEM) has a long track record going back over 30 years. Chetan Sehgal joined Franklin Templeton in 1995 and has been the lead portfolio manager since February 2018, and prior to that was co-manager from October 2015. Andrew Ness joined as the co-manager in September 2018. They are supported by a 60+ analyst team based in 14 key emerging market countries. The trust invests in emerging market stocks, with the managers taking a bottom-up stock selection approach. The team seek companies that offer quality growth over a five-year horizon that are trading at a discount to their intrinsic value. Chetan and Andrew run a fairly concentrated and high conviction 60-80 stock portfolio.

After Chetan and Andrew took over, TEM’s Performance beat the MSCI Emerging Market Index benchmark and the AIC Global Emerging Markets peer group average during the first two full calendar years in 2019 and 2020. 2021 started off reasonably well for the trust, but since the middle of the year, it faced very challenging conditions as China started to clamp down on large tech companies. Russia’s invasion of Ukraine added further woes to the portfolio at the start of 2022.

These events have led to a widening of discounts in the sector, and TEM now trades at a Discount of 13.9% (as at 10/06/2022, which is wider than the five-year average of 11.1%). The trust pays a semi-annual dividend, and the current historic yield is 2.6% at the time of writing. TEM has the ability to use gearing of up to 20%, but Chetan and Andrew, to date, have used little debt to enhance performance.

TEM is an interesting proposition for investors looking for long-term capital growth. The team have a long track record in managing emerging market assets and has bedded in their investment process well with solid performances in the first couple of years. There are challenging conditions in the market at the time of writing, but we believe the team remain right to be unfazed since the Portfolio is aligned to key long-term secular growth themes in the emerging markets. These economies are rapidly digitalising, and we think TEM’s technology bias, especially towards semi-conductors, is a good setup as these chips become pervasive in daily life. TEM is also positioned for rising income levels and the inevitable consumerism that is taking hold.

The team see four challenges ahead: China’s zero COVID-19policy, the Russia/Ukraine war, Federal Reserve interest rate hikes and climate change. The hope for the first two is that they are short-lived and temporary. With regards to Federal Reserve rate hikes, the team point out that emerging markets are better positioned today than in previous rate hike cycles, and most key emerging market currencies have held their value in this hiking cycle to date. Meanwhile, the climate change challenge is one where the portfolio can align itself for positive change with investment opportunities being created in renewable energy and electrification.