Templeton Emerging Markets: Can the grand-daddy regain its crown?

The Templeton Emerging Markets Investment Trust (TEMIT), the original Emerging Market investment trust, enters its thirty-fifth year with investors asking Quo vadis? regarding the future direction of emerging markets.

The spectre of Mark Mobius, the famed emerging markets investor who retired from the game at the end of last year, hangs heavy on this fund, given it was the principal platform for his emerging market investment philosophy.

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Today the GBP1.9bn fund is managed by Chetan Sehgal from Singapore and Andrew Ness from Edinburgh. Benchmarked against the MSCI Emerging Markets Index, Templeton Emerging Markets aims to provide long-term capital appreciation through investment in companies in emerging markets or companies which earn a significant amount of their revenues in emerging markets but are domiciled in, or listed on, stock exchanges in developed countries.

The majority of the fund’s investment are in listed equities and the investment trust has the mandate to gear up to 20% of AUM.

Turbulent times for emerging markets

It hasn’t been a great time for emerging market equities since the throes of the coronavirus pandemic. The reduction in consumption during the lockdown period stymied global trade, and the role that emerging markets played – often as exporters of resources to developed industries – was affected by the pandemic. Emerging market economies were also initially hit harder by Covid due to their generally less comprehensive healthcare infrastructure and their more feeble economic resilience compared to developed economies.

When the world came out of its slumber, emerging markets – China especially – were slow to get back to full productivity. At the same time the ongoing strength of the US dollar has put a lot of pressure on emerging markets economies, principally because their debt is predominantly denominated in US dollars and coupled with higher a higher global interest rate environment, repayments (and access to new credit or refinancing) has become more onerous. Moreover, domestic savers have been bailing out of emerging markets at a higher volume, leading to domestic capital flights.

The macro environment hasn’t helped emerging markets either. When Russian tanks rolled over the Ukrainian border two years ago, a big chunk of emerging markets was taken out of the matrix with Russia being financially ostracised, and the heightened sabre rattling between China and its principal market the US has cast a pall of uncertainty over global trade, seeing investors fly to greater stability and security in developed markets. The more recent spike in tensions in the Middle East are also not helpful for emerging markets, and with the Red Sea unsafe to traverse due to Houthi rockets from Yemen the import-export game has to deal with another issue.

Not all emerging markets are the same

But that said, the term ‘emerging markets’ is a bit of a vague-ism as it describes a collection of nations different in structure, with different economic dynamics, education levels, populations and all at different levels on the economic ladder. Not all emerging markets are the same, and readers of The Armchair Trader will note that we have been particularly bullish on markets like India, which we covered in more detail with our recent piece on the India Capital Growth Fund [LON:IGC] manged by Ocean Dial Asset Management which has a large, diversified economy, unlike some of the other countries that its is grouped with that are single-commodity exporters.

And although recent performance has been subdued, emerging economies still hold the potential for significantly higher growth than developed economies – that themselves are going through turmoil and have their own demographic and structural problems to deal with.  And some of the main themes that emerging markets have in their favour is demographics in that they have young populations (oftentimes in large numbers) that are becoming wealthier and growing in consumer power and are in the engine room of the next industrial revolution: technology innovation, either as producers, innovators, or supplying the commodities that will rule a future world.

Developing nations can also piggy-back on previous infrastructural innovations and jump straight to more efficient technologies, such as electric vehicles and renewable energy, and not have to deal with the legacy infrastructure and consume assets that old (economic) world economies are trying to patch up and make fit for future purpose.

Emerging markets although volatile are also cyclical in nature and arguably the leas economic cycle is coming to an end and the world is once again on the cusp of expansion.

A more prominent role in the global economy?

It is this story that Sehgal and Ness are tub-thumping about and just as their predecessor, Mobius, are firmly fixed on the future direction of the global economy, where emerging markets will, if the themes above play through, take a more prominent role. In a recent interview with the Daily Mail Sehgal said: “There is no shortage of excitement when it comes to emerging markets […] Emerging market countries need energy security, and solar energy provides it. My view is that access to such low-cost energy will transform the emerging markets landscape.”

Templeton Emerging Markets performance has been dragged down by its Chinese positions. Mobius, whilst starting off his career as a China bull cooled a fair bit on the prospects of China as he neared retirement. Templeton Emerging Markets is still fairly exposed to China, though the fund is gradually decoupling and at the end of last month had a smaller allocation than its MSCI benchmark to China, at 22.2% against a benchmark exposure of 24.9%.

Instead, following the technology theme, the fund has circled around to being bullish on South Korea (20.1% vs. 12.2%) with other notable allocations to Brazil, Thailand and Hong Kong. Thematically the managers are big on information technology, with a sector allocation of 28.1% against a benchmark allocation of 22.2% and financial services (growing consumer wealth and consumption) with an allocation of 26.9% against the MSCI at 23.1%

Over the longer-term, the fund (in NAV terms) is comfortably ahead of benchmark, returning 85.5% over 10-years, outperforming the benchmark by 7.8 percentage points, and similarly beating benchmark by 4.7 percentage points to return 15.3% over five-years to end-January.

However, on a cumulative (NAV) basis over the shorter term, performance wasn’t as rosy. Over three years, the fund returned -17.3%, underperforming the benchmark return of -13.7%, and although the fund outperformed its benchmark by nearly two percentage points over one-year, it still only retuned -3.88%.

On a discrete annualised basis, for one year periods to end-January between 2020 and 2024, the fund outperformed (on a NAV basis) the benchmark three-times-out-of-five, with the funds best years being 2020 and 2022.

Templeton Emerging Markets Investment Trust top five holdings

Source: Frankin Templeton Investments 31/01/24

Emerging markets have had a rough ride over the last few years, but stories like India and South Korea are too big to not notice and EMs could be set to come back in vogue. The Templeton Emerging Markets Investment Trust, grand-daddy of the sector is a great way to get access to this compelling story.

• Find the latest research for Templeton Emerging Markets on the AIC website