Templeton Emerging Markets IT — Solid upward performance trend is encouraging

TEMIT is a high-conviction portfolio made up of quality companies with sustainable earnings growth that are trading at a discount to their intrinsic value. The managers are part of a very well-resourced team of more than 80 investment professionals based in 14 countries around the globe. Its local presence helps to identify interesting investment opportunities that are not included in the MSCI Emerging Markets Index or may be overlooked by other investors.

Since inception in June 1989 until the end of H125 (ending 30 September 2024), the trust has generated an NAV total return of +4,462.1%, which is considerably ahead of the benchmark’s +1,891.1% total return.

Emerging markets generate most of the global growth and, according to Ness, the disparity between economic growth in emerging versus developed regions is likely to widen. Factors favouring emerging markets include positive demographic trends, an abundance of natural resources, higher productivity due to wider use of technology and increased innovation, along with significant infrastructure investment. The manager highlights that an investment in emerging markets is different compared to 10 years ago; now, there is a selection of growth themes available, such as semiconductors, electric vehicles, batteries, e-commerce, gaming and digital entertainment, and wealthy economies in the Middle East with structural reforms.

Ness believes that the 40% discount between the emerging markets and world indices on a forward P/E basis (Exhibit 2, right-hand side) should narrow over time. He reiterates his view that emerging markets are under-owned, underestimated and undervalued. In aggregate international investors have a c 5.5% allocation to emerging markets compared with a c 10.6% weighting in the MSCI AC World Index. The manager points to above-average growth, economic resilience, quality of leadership and policies, and stronger sovereign balance sheets in emerging markets, which should ensure that these regions perform relatively better over time. He notes that some emerging market economies are healthier than many developed market economies.

Highlighting other valuation measures, Ness says that emerging markets are trading at a 50% price-to-book multiple basis versus developed markets despite having just a 25% lower return on equity. On a cyclically adjusted price-to-earnings multiple basis, the US is looking very stretched at 33x versus 22x over its 45-year history, while emerging markets are trading on 12x. Current consensus earnings growth estimates for 2025 are c +14% for emerging markets, c +10% for developed markets and c +12% for the US.

Performance – TEMIT’s NAV and share price total returns of +7.2% and +12.0% respectively compared with the benchmark’s +7.5% total return. The largest positive relative contributors to the trust’s performance were its holdings in: Alibaba and Prosus (+both 0.8pp); and Taiwan Semiconductor Manufacturing Company (+0.5pp). On the other side of the ledger, the largest relative detractors were: Grupo Financiero Banorte (-0.8pp); Samsung Electronics (-0.6pp) and Naver Corporation (-0.5pp).

Revenue and dividends – revenue per share in H125 was 3.60p, which was 7.8% higher than 3.34p per share in H124 (most of TEMIT’s revenues are earned in the fist half of the financial year). The board has declared an unchanged interim dividend of 2.00p per share and has announced its intention to at least maintain the final dividend at 3.00p per share.

Share repurchases – as previously flagged, TEMIT’s board is increasing the rate of share repurchases. During H125, c 46.2m shares (c 4.1% of the share base) were bought back at a discount to the prevailing NAV, at a cost of c £74.3m, which added 0.57% to NAV per share.

At the end of November 2024, TEMIT’s portfolio had 81 holdings with the top 10 making up 45.9% of the fund, which was a higher concentration compared with 44.3% 12 months earlier; seven names were common to both periods. The trust has diversified exposure across the market cap spectrum, which was broken down as follows: above $50bn (c 48%); $25–50bn (c 7%); $10–25bn (c 19%); $5–10bn (c 14%); $2–5bn (c 7%); and less than $2bn (c 5%).

Looking at some of the trust’s transactions in Q324, there was a new holding in Swiggy, an Indian online food delivery platform (which at the time was TEMIT’s first investment in an unlisted company and has recently successfully listed). Other new positions were initiated in Ola Electric Mobility (India – electric vehicles) and Weichai Power Company (China – automobiles and components). Exits from the portfolio were Brilliance China Automotive (China – automobiles), Meituan (China – local products and services platform) and One97 Communications (India – financial services).

Exhibit 4 shows TEMIT’s sector breakdown at the end of November 2024, which, along with the trust’s geographic exposures, are a result of bottom-up stock selection. Over the prior 12 months the largest sector changes were a 3.4pp higher weighting to communication services and a 3.7pp lower weighting to materials. The largest positive active weight is IT (+6.8pp), which is diversified across semiconductors, hardware and software, while the largest negative active weight is materials (-3.9pp).

In the 12 months to the end of November 2024, the largest changes in TEMIT’s geographic exposures were a 3.6pp higher weighting in India and 2.7pp lower allocations to Brazil and South Korea, although this remains the largest overweight versus the index (+8.3pp).

India is one of the trust’s largest single-country below-index position (-3.8pp). Sehgal and Ness recently visited the country, which reenforced their view about the availability of substantial growth opportunities, including the government’s commitment to growing the economy, the benefits of infrastructure spending and a growing digital infrastructure, such as street vendors having QR codes so they can receive digital payments. However, the managers believe that, in aggregate, share prices are already reflecting Indian growth opportunities, so they employ a selective approach, using market weakness to add exposure to companies with sustainable earnings power.

TEMIT is one of 10 funds in the AIC Global Emerging Markets sector (we have excluded the specialist funds from Exhibit 8 to provide a more relevant comparison). Sehgal and Ness consider that TEMIT’s closest peers are Fidelity Emerging Markets (FEML) and JPMorgan Emerging Markets Investment Trust (JMG). Of these three funds, TEMIT has the highest NAV total return over the last three years and the second highest over the other periods shown. All three funds have generated similar returns over the last 12 months.

TEMIT is by far the largest of the emerging market funds shown in Exhibit 8 and is currently trading on the widest discount. The trust has an average ongoing charge and, in line with most of its peers, no performance fee is payable. TEMIT is one of four funds that is currently ungeared. The trust has the second highest dividend yield, which is 1.0pp above the mean of the selected peer group.

Commenting on TEMIT’s performance this year, Ness emphasises that the improvement has been based on successful stock selection. Positive contributors include Taiwan Semiconductor Manufacturing Company, which is the leading global semiconductor foundry; industry capex momentum is providing the company with a long growth runway. Other examples of holdings that have performed well are MediaTek (Taiwan – multimedia integrated circuits), Hon Hai Precision Industry (Taiwan – electronic manufacturing services) and Brilliance China Automotive Holdings. A stock that has detracted from the trust’s performance is Alibaba. However, the managers are sticking with this position as the company’s market share is stabilising and it is exiting underperforming businesses. Ness says that investors are being paid to be patient as Alibaba is generating strong cash flows, and has increased its sizeable share repurchase plan, while consensus expectations are modest.

Exhibit 12 shows TEMIT’s relative returns; its NAV has outperformed the MSCI Emerging Markets Index over all periods shown.

Exhibit 13 shows TEMIT’s upside/downside capture rates over the last 10 years. They are very similar, with an upside capture of 110.1% and a downside capture of 110.0%, suggesting that the fund is likely to modestly outperform its benchmark in months when emerging market share prices rise and underperform to a similar degree during months of emerging market share price weakness.