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Disclosure – Independent Investment Research

This is independent research issued by Kepler Partners LLP. The analyst who has prepared this research is not aware of Kepler Partners LLP having a relationship with the company covered in this research report and/or a conflict of interest which is likely to impair the objectivity of the research and this report should accordingly be viewed as independent.

Overview
TEM has seen a rebound in performance since a change of approach…
Overview

Templeton Emerging Markets (TEM) invests in stockmarkets of emerging countries with a bottom-up driven, stock-specific approach. It has more of a value tilt than any of its peers in the AIC Global Emerging Markets sector, and the managers tend to take a five-year view on companies’ growth potential.

The trust has outperformed a passive investment in the emerging markets over the past year, and over three- and five-year periods, thanks largely to the themes and stocks brought into the portfolio after a change of manager in 2015. We analyse the performance in detail in the Performance section below.

Chetan Sehgal took over as manager in February 2018, having worked with the previous manager Carlos Hardenberg, who took over in October 2015. He was joined by Andrew Ness as co-manager in 2018. We think the changes in the management team may be one reason the trust trades on a wider discount than the sector average, despite the strong performance. The discount is currently 11.6%.

Although the trust focuses on capital growth, recent policy changes have seen it become more income-friendly, and the payout has increased, as we discuss in the Dividend section.

Analyst's View

Templeton Emerging Markets has seen a significant improvement in performance in recent years thanks to changes made to the approach from late 2015 onwards. However, this is yet to be reflected in the discount, which remains wider than the sector average. We think the two manager changes in a short space of time have created uncertainty, despite these changes having so far been positive for relative performance.

On the other hand, we note there are well-known discount players high up on the shareholder register who are likely to sell into any closing discount, and therefore potentially keeping it wider than it might be. Nonetheless, over the longer term we think the current discount could be an interesting opportunity and should the good performance under the current management team continue, we would expect the discount to eventually become tighter.

bull bear
A large and well-resourced team Emerging markets could suffer if the developed world enters recession
A portfolio exposed to the exciting consumer and technology sectors A higher number of holdings can make it harder for a portfolio to add excess returns (the trust has 100)
Wide discount in absolute terms and relative to the sector Significant holdings by discount players could keep the discount wide despite good performance
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