Templeton Emerging Markets Investment Trust: four things investors need to know.

Templeton Emerging Markets Investment Trust (TEMIT) is managed by Chetan Sehgal, who is the lead portfolio manager, and Andrew Ness. They aim to generate long-term capital growth through investment in companies operating in emerging markets or listed on the stock markets in these countries. This may include companies that have a significant amount of their revenues in emerging markets but are listed on stock exchanges in developed markets. Below, we highlight the important elements of TEMIT’s investment story.

#1 TEMIT’s managers are part of a very well-resourced team.

Franklin Templeton has more than 75 years of investment experience, with greater than £1tn of assets under management. The firm’s emerging market operations go back more than 35 years.

Launched in June 1989, TEMIT was one of the first UK emerging markets funds. Sehgal, who is based in Singapore, and Ness, who is based in the UK, are members of Franklin Templeton’s very well-resourced emerging markets team, which is made up of more than 70 investment professionals, based in 13 countries, who cover more than 700 securities. It is a collegiate environment with daily and weekly investment and research meetings. The team uses a proprietary global research database, which has been build up over the last 20+ years.

#2 They follow a clearly defined strategy, with stocks selected on a bottom-up basis.

The managers’ investment philosophy is based on three Ss: focusing on structural opportunities, investing in companies with sustainable earnings that are trading at a discount to their estimated intrinsic value, and responsible stewardship of clients’ capital, which includes integration of material ESG factors into fundamental research.

There is a three-step investment process. Step 1 is idea generation – the emerging market team’s local presence is seen as a competitive advantage in terms of building relationships and gaining valuable insights. Step 2 is fundamental research – in-depth company models are built to evaluate a firm’s financial strength and profitability, and to project future earnings and cash flow. Step 3 is portfolio construction – the managers aim to deliver outperformance irrespective of the direction of, or the style bias prevalent in the stock market. Risk management is embedded at each stage of the investment process.

#3 TEMIT’s high-conviction portfolio has around 80 positions.

The trust has outperformed its MSCI Emerging Markets Index benchmark over the last five and 10 years and significantly since launch.

TEMIT’s portfolio is diversified by geography, sector and market cap. The top 10 holdings typically make up around 45% of the fund and portfolio turnover is relatively low at around 20% per year. There are a meaningful number of non-index positions, along with names that are not held by the trust’s peers. TEMIT’s portfolio typically has higher quality and growth metrics than the benchmark, but not at excessive valuations.

With stocks selected on a bottom-up basis, in aggregate versus the benchmark the trust is overweight technology (primarily semiconductors) and financials (primarily banks) with an underweight position in consumer staples. In terms of geography, TEMIT is overweight South Korea and Brazil, with underweight exposures to Saudi Arabia and India.

#4 Emerging markets offer interesting opportunities.

Emerging markets have higher growth prospects compared with developed regions. Over the last 15 years, emerging market economies have evolved and now have a much higher exposure to new-economy businesses. There is a high level of innovation in Asia, which is illustrated by more than half of global patents being granted in China, South Korea and Taiwan.

Exposure to several broad growth themes is available from investing in emerging markets. These include consumer staples and e-commerce companies, and banks, which all benefit from higher domestic consumption. Industries that benefit from powering the global economy include commodities, semiconductors, and those companies supplying the electric vehicle and solar businesses.

Despite these favourable attributes, emerging markets have been out of favour with global investors, who have gravitated towards large-cap US technology companies for example. This is reflected in historical valuation multiples in emerging regions, which may provide an interesting long-term opportunity for investors.