Fund profile: Templeton Emerging Markets Investment Trust

Fund profile: Templeton Emerging Markets Investment Trust

Templeton Emerging Markets Investment Trust, the flagship fund run by Dr Mark Mobius for Franklin Templeton Investments, has an impressive track record, returning 377 per cent over the past 10 years compared to 243 per cent from its benchmark, MSCI Emerging Markets.

Currently celebrating its 25th anniversary, the Money Observer Rated Fund is the oldest in the Association of Investment Companies' global emerging markets sector and has been well served by Mobius' long-term, value-driven approach, which he has adopted since the trust's inception.

However, in recent years performance has dwindled and the trust has delivered third-quartile returns over one, three and five years; a fact reflected in its current share price discount to net asset value (NAV) of 8.7 per cent, although this has recently narrowed from 11.3 per cent.

Bullish on china

The main driver behind these disappointing returns is Mobius' overweight to basic materials - currently 21 per cent of the portfolio compared to 9 per cent of the MSCI Emerging Markets index - as the sector has largely underperformed since 2008/09 due to a drop-off in demand, particularly from China.

However, Mobius's conviction on basic materials remains strong: 'The sector has fallen out of favour now and a lot of people ask "why are you still in materials, don't you think it's out of fashion?" My answer to that is China; a lot of people talk about a slowing down in the Chinese economy, but they fail to recognise that the base of the economy has expanded dramatically.

'In 2000, 10 per cent growth meant about $800 billion [£470.15 million] expansion in the Chinese economy, while 7 per cent growth now means $900 billion, so the economy is still generating an incredible demand for all sorts of materials,' he says.

As the veteran manager explains, Asia - particularly China, but also Thailand - has been 'the big winner' for the trust since its inception in 1989. As the two markets 'blossomed' Mobius says he enjoyed significant success in stocks such as China-based BMW manufacturer Brilliance Auto alongside Thailand's Siam Commercial Bank and Siam Cement.

The trust remains keenly focused on Asia with 68 per cent of the portfolio currently invested in the region, including 29 per cent in China, 13 per cent in Thailand and 12 per cent in India. The remainder of the fund is spread across Latin America, Eastern Europe and Africa.

INVESTMENT PROCESS

Mobius takes a characteristically long-term view in his investment process, considering all of the factors that might affect the future of a company before committing any money.

'We'll look at the current earnings, then the history; how has this company performed, has it shown growth over the last five years? If they haven't then we really have to ask what we expect for the future.

'Sometimes there is a turnaround story that might be attractive, but equally if you have a company with a good record of growth you have to ask whether that can carry on, i.e. is there something in the country or the economy that could negatively impact the firm?,' he explains.

Alongside the basic materials story, this process is another factor behind the veteran manager's bullish stance on China as he believes that the reforms being implemented in the country can only lead to stronger, healthier companies with sustainable growth prospects.

'China is moving to a market-orientated economy where state-owned enterprises are going to have to stand on their own feet. This means you'll read about bankruptcies, you'll read about defaults, but in my way of thinking this will be good news as it will mean we are moving towards reform,' he says.

On accessing investment opportunities, Mobius prefers not to use gearing, which he describes as 'expensive' and 'unreliable' as banks can recall their loans at short notice which could cause disruption to the trust.

currency movements

The manager also prefers not to hedge against currency movements as, he says, by doing so managers can work against the firms they are invested in, which often employ hedges themselves.

Currency movements also provide the occasional boon to the trust, as seen during the recent devaluation of the rupee which added significant value to the Indian stocks in Mobius's portfolio that are priced in US dollars, but whose fixed costs are in rupees.

Mobius and the board of Templeton Emerging Markets try to keep the ride as smooth as possible for investors by also keeping a close eye on the share price discount to NAV, which the manager says is monitored and managed on a daily basis.

'We're constantly in the market, no question about that; we don't want our discount to get out too far so every day I'm getting a report and our traders are looking at the discount and if there is an opportunity to buy in. Investors don't like to see huge volatility in the discount,' he says.

Commenting on the next 25 years of the Templeton Emerging Market fund, Mobius is unreservedly enthusiastic, predicting a shift in focus towards current frontier markets in Africa and Europe.

'It's going to be exciting because we're now in another phase of emerging market where frontier markets become bigger and bigger and the whole field opens up. When we started in 1989 we only had about five markets and now it's 16; that's a really significant change and it will only keep growing,' he says.

Templeton Emerging Markets regional weightings
Region% of portfolio
Pacific basin29.75
Europe ex UK21.86
Americas14.03
International12.54
Asia Pacific10.94
South Africa5.48
Money market5.4

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