Broad opportunities in public and private markets

Templeton Emerging Markets Investment Trust 13 January 2022 Review
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Templeton Emerging Markets IT

Broad opportunities in public and private markets

Investment trusts
Emerging markets equities

13 January 2022

Price

178.8p

Market cap

£2,112m

AUM

£2,440m

NAV*

197.4p

Discount to NAV

9.4%

*Including income. As at 11 January 2022.

Dividend yield

2.1%

Shares in issue

1,181.1m

Code

TEM

Primary exchange

LSE

AIC sector

Global Emerging Markets

52-week high/low

214.4p

173.2p

235.6p

194.0p

*Including income.

Gearing

Net gearing*

2.2%

*As at 30 November 2021

Fund objective

Launched in June 1989, Templeton Emerging Markets Investment Trust (TEMIT) was one of the first emerging markets funds in the UK. The trust seeks long-term capital appreciation through investment in companies operating in emerging markets or listed on the stock markets of such countries. This may include companies that have a significant amount of their revenues in emerging markets but are listed on stock exchanges in developed countries. Performance is benchmarked against the MSCI Emerging Markets Index.

Bull points

Large, diversified fund run by two very experienced managers.

Managers are part of a well-resourced team of more than 60 investment professionals based in 14 countries around the world.

Outperformance versus the benchmark over the past three and five years.

Bear points

Emerging markets can be more volatile than developed markets.

Modest dividend yield.

FY21 ordinary dividend was flat year-on-year.

Analysts

Mel Jenner

+44 (0)20 3077 5700

Victoria Chernykh

+44 (0)20 3077 5700

Templeton Emerging Markets Investment Trust is a research client of Edison Investment Research Limited

Templeton Emerging Markets Investment Trust (TEMIT) is by far the largest fund in the AIC Global Emerging Markets sector. Its two managers Chetan Sehgal (lead manager) and Andrew Ness seek companies with robust business models, sustainable earnings growth potential and which are trading at a discount to their estimated intrinsic values. The managers’ considerable experience, coupled with the deep resources of a broad investment team, enables them to identify interesting opportunities that may be overlooked by other investors. While TEMIT’s performance has been disappointing over the last 12 months, partly due to a tighter Chinese regulatory environment, the trust has outpaced the performance of the MSCI Emerging Markets Index over the last three and five years.

TEMIT’s NAV outperformance vs the benchmark (five years to end-Dec 2021)

Source: Refinitiv, Edison Investment Research

The analyst’s view

TEMIT’s managers now have a broader opportunity set as since July 2021 up to 10% of the fund can be invested in private companies (currently 0%). These will not be high risk, early stage investments but in businesses where there is a clear path to the company being listed. Investors with a higher risk tolerance are attracted to emerging markets for their above-average economic growth potential, helped by a rising middle class and urbanisation, along with relatively attractive valuations compared with developed markets. TEMIT offers a broad exposure to emerging regions via a fund that is diversified by sector, geography and market cap (as at the end of November 2021 around 25% of the fund was invested in companies below $10bn). All stocks are selected on a bottom-up basis, but in aggregate the managers have meaningful overweight exposures versus the benchmark in technology and South Korea.

Discount within the range of historical averages

In July 2021 there was a 5:1 share split with the objective of facilitating smaller investments and the reinvestment of dividends. TEMIT is currently trading at a 9.4% discount to cum-income NAV, which is within the range of 8.9% to 11.2% average discounts over the last one, three, five and 10 years. Dividends are paid semi-annually in January and July and the trust’s current yield is 2.1%. TEMIT is subject to a five-year continuation vote; the next is due in July 2024.

The manager’s view: ‘Cautiously optimistic’

Ness considers that TEMIT has a competitive advantage as he and Sehgal can draw on the broad resources of Franklin Templeton’s emerging markets team, which has more than 60 investment professionals located in 14 countries across the globe who are able to provide regional insights. The manager highlights the research process, which he says is transparent with a long-term focus, seeking companies on a bottom-up basis that have sustainable long-term earnings growth and are trading at a discount to their estimated intrinsic value.

A consideration of environmental, social and governance (ESG) factors is integrated into investment decisions and risk management mitigates unintended risks from top-down factors. Ness comments that TEMIT’s portfolio is distinctive, diversified and high conviction, with the potential to outperform the benchmark in a range of stock market environments. He suggests that there is now a wider range of investment opportunities available helped by a broadening China ‘A’ share market and a booming initial public offering environment.

Discussing his outlook for 2022, Ness is ‘cautiously optimistic’ based on the growth prospects and relatively attractive valuations available in emerging markets. He says that the Chinese economic slowdown has been due to a range of factors including regulatory crackdowns, problematic high levels of leverage in the property sector and energy curtailment policies with the aim of improving China’s environmental performance. TEMIT’s Chinese exposure has been increased following share price weakness, but the trust remains underweight versus the benchmark.

The manager comments that the global move to full COVID-19 vaccination is ongoing and will take time and while the level of mortalities has declined, there is an increasing acceptance that the virus is endemic. Ness believes that the omicron variant will negatively affect economic activity and he suggests that full normalisation in the travel sector is unlikely before summer 2022. The global chip shortage and securing semiconductor supplies has meant significant price increases as well as higher capex in those sectors. TEMIT is overweight the semiconductor stocks that have sustainable cost and technology advantages, and which are in favourable competitive positions. Higher energy costs, freight rates and raw material costs have led to inflationary pressures on company margins. The managers’ preference is to remain focused on low-cost firms that are operating in areas of secular growth.

Portfolio construction

At 30 November 2021 there were 75 holdings in the portfolio, with the top 10 making up 54.4% of the fund compared with 56.6% a year ago; six positions were common to both periods. In terms of market cap, 45.8% of the portfolio was invested in companies above $50bn, 30.4% between $10bn and $50bn and 23.8% below $10bn.

The manager explains that the characteristics of TEMIT’s portfolio reflect the investment approach of focusing on companies with sound business models and sustainable earnings power that are trading at a discount to their intrinsic worth. The fund has clear quality characteristics with higher returns and margins and lower leverage compared with the benchmark, along with a lower forward P/E valuation. Ness comments that he and Sehgal have been exposed to crises in the past, so they try to be ‘masters of their own destiny’. He says that they are ‘doing something different’ versus the competition, as within the stock market there has been ‘a lot of herding into long-term quality growth names at any price’.

Considering TEMIT’s high-conviction top 10 active weights, Ness says that there is a diversity of businesses across a range of industries, with a mix of well known large-caps such as Taiwan Semiconductor Manufacturing Company and Samsung Electronics, and lesser-known names such as NAVER, which owns the leading search engine in South Korea, along with a selection of other online businesses such as entertainment, payments and logistics. The manager comments that TEMIT’s top 10 overweight companies are typically leaders in their industries, with competitive moats and attractive growth profiles; he is ‘happy to own these in size’.

Exhibit 1: Top 10 holdings (as at 30 November 2021)

Company

Country

Sector

Portfolio weight %

30 Nov 2021

30 Nov 2020*

Taiwan Semiconductor Manufacturing

Taiwan

Information technology

13.1

10.8

Samsung Electronics

South Korea

Information technology

10.7

10.7

Alibaba

China

Consumer discretionary

5.6

9.5

Tencent

China

Communication services

5.2

8.5

ICICI Bank

India

Financials

4.8

3.1

NAVER

South Korea

Communication services

4.0

4.1

MediaTek

Taiwan

Information technology

3.7

N/A

China Merchants Bank

China

Financials

2.5

N/A

LUKOIL

Russia

Energy

2.5

N/A

Sberbank of Russia

Russia

Financials

2.4

N/A

Top 10 (% of portfolio)

54.4

56.6

Source: TEMIT, Edison Investment Research. Note: *N/A where not in November 2020 top 10.

TEMIT’s sector exposure, which is a product of bottom-up stock selection, is shown in Exhibit 2. Over the 12 months to end-November 2021 there is a higher technology weighting (+6.3pp) and this remains the largest active weight versus the benchmark by quite some margin (+13.3pp). The trust is overweight semiconductor and internet stocks and has a range of software companies; these are businesses that are benefiting from the rollout of the digital economy and increasing e-commerce volumes. Within the financials sector the trust is overweight emerging market banks, which are benefiting from increased demand from an expanding middle class in developing economies. Low levels of credit penetration will likely increase, and banks are well capitalised, ‘more so than 20 years ago’ reports Ness. Higher inflation should lead to higher interest rates, which is positive for bank net interest margins.

Exhibit 2: Portfolio sector exposure versus benchmark (% unless stated)

Portfolio end-Nov 2021

Portfolio end-Nov 2020

Change
(pp)

Index
weight

Active weight
vs index (pp)

Trust weight/
index weight (x)

Information technology

35.1

28.8

6.3

21.8

13.3

1.6

Financials

22.0

18.7

3.3

19.5

2.5

1.1

Communication services

13.9

18.7

(4.8)

10.8

3.1

1.3

Consumer discretionary

12.4

19.3

(6.9)

14.6

(2.1)

0.9

Materials

7.9

3.7

4.2

8.4

(0.5)

0.9

Consumer staples

3.9

4.6

(0.7)

5.7

(1.8)

0.7

Energy

2.9

3.2

(0.4)

5.6

(2.7)

0.5

Industrials

2.2

2.3

(0.1)

4.8

(2.7)

0.4

Healthcare

1.2

0.9

0.3

4.6

(3.4)

0.3

Real estate

1.2

0.0

1.2

2.0

(0.8)

0.6

Utilities

0.0

0.0

0.0

2.3

(2.3)

0.0

Other net assets

(2.6)

(0.2)

(2.4)

0.0

(2.6)

N/A

100.0

100.0

100.0

Source: TEMIT, Edison Investment Research. Note: Numbers subject to rounding.

Over 12 months to end-November 2021, TEMIT’s largest changes in geographic exposure are higher weightings in Taiwan (+3.7pp) and India (+2.7pp) with lower weightings in China (-2.6pp) and South Africa (-2.4pp). Compared with the benchmark, the trust’s largest active weights are an overweight in South Korea (+10.0pp) and underweight in China (-5.2pp); this is despite the manager adding to TEMIT’s Chinese exposure in recent months, taking advantage of market weakness. Also, of note, the trust has no exposure to Saudi Arabia, which made up 3.3% of the benchmark at end-November 2021.

Exhibit 3: Portfolio geographic exposure versus benchmark (% unless stated)

Portfolio end-Nov 2021

Portfolio end-Nov 2020

Change
(pp)

Index
weight

Active weight
vs index (pp)

Trust weight/
index weight (x)

China

28.9

31.5

(2.6)

34.0

(5.2)

0.8

South Korea

22.2

20.2

2.0

12.2

10.0

1.8

Taiwan

18.6

14.9

3.7

15.6

2.9

1.2

Brazil

6.0

6.3

(0.3)

4.1

1.9

1.5

Russia

7.7

6.6

1.1

3.8

3.9

2.0

India

8.5

5.8

2.7

12.1

(3.6)

0.7

South Africa

1.2

3.5

(2.4)

3.1

(2.0)

0.4

Mexico

1.7

1.4

0.3

1.8

(0.2)

0.9

UK

1.4

2.4

(1.0)

0.0

1.4

N/A

Thailand

1.6

1.8

(0.2)

1.6

(0.1)

1.0

United States

1.7

2.0

(0.3)

0.0

1.7

N/A

Rest of the world

3.3

3.8

(0.5)

11.7

(8.3)

0.3

Other net assets

(2.6)

(0.2)

(2.4)

0.0

(2.6)

N/A

100.0

100.0

100.0

Source: TEMIT, Edison Investment Research. Note: Numbers subject to rounding.

Performance: Mid-term outperformance

Exhibit 4: Five-year discrete performance data

12 months ending

Share price
(%)

NAV
(%)

MSCI Emerging
Markets (%)

MSCI World
(%)

CBOE UK All Companies (%)

31/12/17

32.5

30.8

25.8

12.4

14.0

31/12/18

(10.7)

(11.6)

(8.9)

(2.5)

(9.8)

31/12/19

27.1

24.1

14.3

23.4

19.3

31/12/20

17.1

15.7

15.0

12.9

(10.9)

31/12/21

(4.7)

(3.9)

(1.3)

23.5

18.4

Source: Refinitiv. Note: All % on a total return basis in pounds sterling.

Looking at TEMIT’s five-year discrete performance data in Exhibit 4, the trust has outperformed its MSCI Emerging Markets Index benchmark in three of the last five years in both NAV and share price terms.

Exhibit 5: Investment trust performance to 31 December 2021

Price, NAV and benchmark total return performance, one-year rebased

Price, NAV and benchmark total return performance (%)

Source: Refinitiv, Edison Investment Research. Note: Three-, five- and 10-year performance figures annualised.

TEMIT’s relative returns are shown in Exhibit 6. Its NAV and share price total returns are ahead of those of the benchmark over the last three and five years, while lagging over one and 10 years. Ness notes that the trust’s performance over the last year has been ‘challenging’, although he says that it is more important to focus on the mid to long term; the managers aim to outperform the benchmark over a rolling five-year period. It should be noted that TEMIT’s underperformance versus the MSCI World Index over the last decade is largely due to the very strong performance of the mature US stock market in recent years.

Exhibit 6: Share price and NAV total return performance, relative to indices (%)

 

One month

Three months

Six months

One year

Three years

Five years

10 years

Price relative to MSCI Emerging Markets

2.3

0.9

(3.9)

(3.4)

9.3

12.9

(4.0)

NAV relative to MSCI Emerging Markets

0.9

0.4

(3.2)

(2.6)

6.4

7.4

(2.0)

Price relative to MSCI World

(0.1)

(7.6)

(19.1)

(22.8)

(17.6)

(11.0)

(51.4)

NAV relative to MSCI World

(1.4)

(8.1)

(18.5)

(22.2)

(19.8)

(15.4)

(50.4)

Price relative to CBOE UK All Companies

(2.8)

(4.5)

(16.1)

(19.5)

12.7

29.7

(6.9)

NAV relative to CBOE UK All Companies

(4.2)

(5.0)

(15.6)

(18.8)

9.7

23.4

(5.0)

Source: Refinitiv, Edison Investment Research. Note: Data to end-December 2021. Geometric calculation.

Ness gives some colour on TEMIT’s performance over the last 12 months. Holdings that have made a positive contribution include ICICI Bank, which has benefited from higher economic activity and lending following COVID-19 lockdowns. The manager says that the bank has one of the strongest retail brands in India; its margins are supported by a low-cost deposit base and is trading at a discount to its private-sector peers. Within the electric vehicle (EV) supply chain, Chinese firm Guangzhou Tinci Technology Company is well positioned to benefit from increased demand for EVs and energy storage, and TEMIT has a large active weight in Taiwan Semiconductor Manufacturing Company, one of the largest global semiconductor suppliers, which has delivered strong earnings growth and has a robust operational outlook. Longshine Technology Group is a Chinese software and IT services provider to the power and electricity industries and is a relatively recent addition to the trust’s portfolio. Its businesses include online payment and EV charging payment services.

Moving on to the negative contributors to TEMIT’s performance, Ness reports that there has been significant share-price weakness in some of its Chinese names. Brilliance China, which has a joint venture with BMW, has seen its shares suspended since March 2021 following a delay in reporting its 2020 corporate results. Hence, the managers have imposed a fair value discount on the holding and are monitoring the situation very closely. Brilliance China’s operating earnings have exceeded consensus expectations as there is strong demand in China for European brands such as BMW.

There have been regulatory investigations into a range of leading businesses in China. Alibaba is the country’s largest e-commerce platform and has had some well documented challenges, including having to halt the planned listing of its fintech arm, and there has been an antitrust probe into online merchant pricing. Ness comments that the Chinese internet industry has seen heightened scrutiny in the past, and the strongest companies have proved to be resilient. He cites Alibaba’s distinct competitive advantages, which should support the firm’s long-term earnings growth in areas such as e-commerce and cloud computing.

Another of TEMIT’s holdings, Tencent, has been under pressure due to tightening online gaming regulation. Once again, the manager believes that Tencent’s businesses will thrive over the long term; the company is well diversified with a robust balance sheet. Ness believes that Tencent has a selection of attractive investments and long-term growth drivers. He suggests that within China we are ‘closer to the end of the regulatory process than the beginning’.

Peer group comparison

TEMIT is the largest of the 12 funds in the AIC Global Emerging Markets sector. Its NAV total returns are above average over three and five years, ranking sixth out of 12 funds and third out of nine funds respectively, while lagging over the last one and 10 years. As at 12 January 2022, TEMIT’s discount was modestly wider than the sector average, where just one fund was trading at a premium. It has the second-lowest ongoing charge, an average level of gearing and a dividend yield that is modestly below the mean.

Exhibit 7: Global emerging markets peer group as at 12 January 2022*

% unless stated

Market cap (£m)

NAV TR
1 year

NAV TR
3 year

NAV TR
5 year

NAV TR
10 year

Discount (cum fair)

Ongoing charge

Perf.
fee

Net gearing

Dividend yield

Templeton Emerging Mkts Inv Trust

2,111.7

(7.6)

35.6

54.1

90.3

(10.5)

1.0

No

102

2.1

Barings Emerging EMEA Opps

94.2

12.1

25.5

35.0

74.1

(13.9)

1.7

No

100

3.3

BlackRock Frontiers

245.2

16.4

20.1

29.2

163.2

(7.5)

1.3

Yes

106

4.0

Fidelity Emerging Markets

740.6

(7.9)

29.0

39.4

93.6

(11.1)

1.0

No

100

1.6

Fundsmith Emerging Equities Trust

352.3

(2.8)

22.1

40.6

(9.6)

1.3

No

101

0.1

Gulf Investment Fund

59.1

28.2

60.0

50.2

166.8

(9.7)

1.9

No

100

2.8

JPMorgan Emerging Markets

1,477.8

(3.0)

45.8

78.4

157.8

(7.9)

0.9

No

100

1.1

JPMorgan Global Emerging Mkts

435.5

3.2

40.8

55.9

126.0

(9.1)

1.0

No

107

3.5

Jupiter Emerging & Frontier Income

60.4

8.2

36.7

(10.9)

1.4

No

109

4.4

Mobius Investment Trust

160.3

23.9

48.1

1.2

1.5

No

100

0.0

ScotGems

39.3

5.8

(1.7)

(22.2)

1.5

No

100

0.0

Utilico Emerging Markets

457.5

8.2

6.6

22.5

95.3

(12.1)

1.1

No

104

3.8

Average (12 funds)

519.5

7.1

30.7

45.0

120.9

(10.3)

1.3

102

2.2

TEM rank in peer group

1

11

6

3

7

7

2

5

7

Source: Morningstar, Edison Investment Research. Note: *Performance as at 12 January 2022 based on ex-par NAVs. TR = total return. Net gearing is total assets less cash and equivalents as a percentage of net assets.

.

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This report has been commissioned by Templeton Emerging Markets Investment Trust and prepared and issued by Edison, in consideration of a fee payable by Templeton Emerging Markets Investment Trust. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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General disclaimer and copyright

This report has been commissioned by Templeton Emerging Markets Investment Trust and prepared and issued by Edison, in consideration of a fee payable by Templeton Emerging Markets Investment Trust. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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