Templeton Emerging Markets 24 June 2024

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.

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.