Become a Creator today!Start creating today - Share your story with the world!
Start for free
00:00:00
00:00:01
43. Uncovering Trusts – Templeton Emerging Markets Investment Trust (TEMIT): A well-performing ‘one-stop-shop’ for investment in emerging markets
0 Plays1 second ago
In this episode, our director of content, investment trusts Milosz Papst discusses Templeton Emerging Markets Investment Trust, which is by far the UK’s largest emerging markets investment trust. He starts by providing some background to the current emerging markets opportunity. He elaborates on the trust’s strong performance as well as measures announced by the board in June 2024 aimed at improving liquidity in the trust’s shares and increasing shareholders’ potential total returns. He highlights the trust’s recent announcement related to the use of derivatives. He delves deeper into the trust’s investment process and portfolio structure. He provides examples of the trust’s significant portfolio holdings, such as TSMC, ICICI Bank and Tencent, as well as recent additions including Nari Technology and Ather Energy. He concludes by commenting on the trust’s dividends, revenue and special distributable reserves, discount to NAV and gearing.
***********************************************************
About ‘Uncovering Trusts’
'Uncovering Trusts': is a podcast run by Edison analysts released every two weeks. Subscribe to hear analyst interviews on how investment trusts maximise returns while managing risks for investors.
About Edison:
Edison is a content-led IR business. We believe quality investment content should inform all investors, not just brokers. Our mission: engage and build bigger, better-informed investor audiences for our clients.
Edison covers 50+ investment trusts, read about them here: https://www.edisongroup.com/equities/investment-companies/
Recommended
Transcript
Introduction to Uncovering Trusts Podcast
00:00:06
Speaker
Welcome to Uncovering Trusts, a podcast by Edison Group. I'm your host, Will Manuel, and today today I'm joined by Milos Papst, Director of Investment Company Content at Edison, who will talk about Templeton Emerging Markets Investment Trusts, commonly known as Teamit.
00:00:21
Speaker
Milos, thanks for joining us today. Thank you. I'm looking forward to our discussion as ah although we have been covering the Trust for many years, ah this is the first time the Trust has been a headliner in one of our podcasts.
Growth Potential in Emerging Markets
00:00:32
Speaker
Okay, so before we launch into the Trust, can we talk a bit about emerging markets? um Of course. For listeners that are interested, there is a series of articles about emerging markets on the Trust's website at timid.co.uk.
00:00:46
Speaker
um According to the Trust's managers, emerging markets generate most of the global growth and um the disparity between economic growth in emerging versus developed regions is likely to widen.
00:00:58
Speaker
up Factors favoring emerging markets include positive demographic trends and abundance of natural resources, ah higher productivity due wider use of technology and increased innovation, along with significant infrastructure investment.
00:01:13
Speaker
ah The managers suggest that an investment in emerging markets now is different compared to 10 years ago in terms of um available growth themes. ah Current opportunities include electric vehicles, batteries, e-commerce, gaming, and digital entertainment.
00:01:28
Speaker
um Despite their exciting growth prospects, emerging markets continue to trade at a substantial discount to develop markets, ah contributing to the manager's view that emerging markets are under-owned, underestimated and undervalued.
00:01:42
Speaker
Good. Thanks for setting the scene. um So moving on to T-Med, can we trust with a high um some of the high-level view of the trust?
Overview of Teamit Trust
00:01:50
Speaker
Well, first up, the trust is by far the UK's largest emerging markets investment trust with a market cap of around £2 billion pounds and so could be considered as a one-stop shop for investment in emerging markets.
00:02:03
Speaker
It was launched in June 1989 and its shares are quoted on both the London and New Zealand stock exchanges. and The trust is managed by Franklin Templeton Emerging Markets Equity, which is a pioneer in emerging markets investing with around $35 billion dollars of assets under the management. so ah The trust has two managers who are both AAA rated by Citywire.
00:02:24
Speaker
um Singapore-based Chetan Seigal has been the trust's lead manager since the 1st of February 2018 and was joined by Edinburgh-based Andrew Ness in September 2018. um Both managers have more than 30 years investment experience.
00:02:39
Speaker
Segal and Ness aim to generate long-term capital growth by investing in companies listed in emerging markets, so those listed in developed markets that earn a significant amount of their revenues in emerging markets.
00:02:50
Speaker
Right. um Thank you. So it'll be good to gain a more detailed understanding Teamit.
Performance and Strategy of Teamit Trust
00:02:55
Speaker
Sure. ah The trust performance is measured against the MSCI Emerging Markets Index. ah There are no specific restrictions on the fund's geographic or sector exposure.
00:03:04
Speaker
But to mitigate risk at the time of investment, a maximum 12% of assets may be held in a single issuer and up to 10% of assets may be invested in unlisted securities, a maximum 2% in a single issuer.
00:03:16
Speaker
ah gearing of up to 20% of NAV is permitted, and the trust is subject to a five-yearly continuation vote with the next due at the the July 2029 AGM. Okay. um Did I see a ah recent announcement about T-MIT involving derivatives?
00:03:31
Speaker
but yeah and Yes, indeed. um In the mid-September um this year, the board announced that the managers can now invest ah within strict limits in equity options and equity contracts for difference, which will enable more flexibility and potentially lower costs in managing the portfolio's gearing ah geared exposure to equities.
Recent Developments in Teamit's Investment Approach
00:03:53
Speaker
Okay. i And are there any other developments that listeners should be aware of? Yes, actually there are. um In June 2024, the board announced a series of measures intending to improve liquidity in the trust shares and to increase shareholders' potential total returns. um These were to at least maintain the level of the annual dividend, to repurchase up to £200 million worth of ah team shares over the following 12 to 24 months,
00:04:22
Speaker
a conditional 25% tender offer if the trust underperforms its benchmark in the five years to the 31st of March, 2029, and a phased reduction in management fees.
00:04:34
Speaker
Okay, that's interesting. um So can we now turn to the trust's investment philosophy and their process?
Investment Philosophy and Process
00:04:41
Speaker
Yes, the investment approach is very clear and straightforward. The managers focus on companies with sustainable earnings power, which are trading at a discount to their estimated intrinsic value.
00:04:51
Speaker
They can draw on the considerable resources of Franklin Temelton's emerging market equities investment team to assist um with the three-step process. The first step is idea generation.
00:05:01
Speaker
um The team has more than 70 analysts and portfolio managers based in 13 offices around the globe who undertake more than 2,000 company meetings a year.
00:05:12
Speaker
ah The trust managers consider that the team's local presence provides an important competitive advantage. Step two is stock research, ah rigorous company analysis and undertaken to see if they fit the investment brief.
00:05:26
Speaker
The team's research platform has coverage of more than 700 companies. In-depth models are built to evaluate firm's financial strength and profitability and to project future earnings and cash flow.
00:05:37
Speaker
um Industry demand and supply models are incorporated into the analysis along with country and currency macroeconomic considerations. Step three is portfolio construction.
00:05:48
Speaker
Also, the managers aim to outperform the benchmark irrespective of the direction of the stock market. Risk management is also an important part of the process with scenario analysis undertaken to ensure the managers are not taking unintentional risks.
00:06:01
Speaker
and Okay, that seems very clear. um So shall we now move on to the trust
Portfolio Composition and Major Holdings
00:06:06
Speaker
portfolio? The trust has the diversified portfolio of 60 to 90 positions ah invested across the market cap spectrum.
00:06:13
Speaker
All holdings are regularly reviewed to ensure analysts' recommendations are up to date and reflect any changes in the company's fundamentals. um The managers believe that given the wide dispersion of share price returns in emerging markets, they can generate alpha via stock selection, which is deemed more important than sector and geographic allocation.
00:06:33
Speaker
The Trust's top 10 holdings generally make up around sorry make up more than 40% of the fund. ah Portfolio turnover is relatively low at typically less than 20% per year, and the Trust's active share typically ranges from 70% to 85%. This is a measure of how a fund differs from its benchmark, with 0% representing full index replication and 100% indicating no commonality.
00:07:00
Speaker
Okay, thank you. And so so how's it positioned versus the MSCI, Emerging Markets Index benchmark? So by geography, around 80% of the portfolio is invested in Asia, which is broadly in line with the index.
00:07:14
Speaker
Within that region, the trust has a meaningful overweight exposure to South Korea and underweight positions in India and China. That's where the trust is overweight Latin America and underweight the Middle East and Africa.
00:07:27
Speaker
um Turning to sectors, the largest absolute as well as the largest um overweight is technology, the biggest underweight materials, while most other sector weightings are not that dissimilar to those in the benchmark.
00:07:40
Speaker
Okay, so can we drill down a bit and can you give us some examples of names in the portfolio? Sure. ah Looking at the biggest positions in the portfolio, by far the largest holding is Taiwan Semiconductor Manufacturing Company, commonly known as TSMC.
00:07:54
Speaker
It is the world's largest semiconductor foundry company and is benefiting from structural demand growth. um The company has industry-leading technology, which gives the managers confidence in the resiliency of its business model.
00:08:07
Speaker
Other large holdings include ICICI Bank and Tencent. ICICI is a leading India-based private sector bank that is a long-term holding and has been a significant positive contributor to but the trust performance.
00:08:20
Speaker
The bank has a strong franchise and is well positioned to benefit from India's robust economic growth. Tencent is the largest gaming, communication, and social entertainment platform China. um It should be a major beneficiary of the growth in artificial intelligence.
00:08:35
Speaker
ah The company also has significant public and private investments in China and across the world. Tencent has an active share buyback program, which is adding to earnings per share growth.
00:08:47
Speaker
Moving to ah some relatively new names in the portfolio, Nari Technologies is a China-based supplier of power and automation technologies. The company is a market leader in China's power grid equipment industry, with its business spanning across the entire power system.
00:09:04
Speaker
Nari is expected to be an important beneficiary of increasing Chinese and global power grid capix, with overseas markets offering significant growth potential. Aether Energy is an Indian manufacturer of electronic two-wheeled scooters that participated in the company's IPO.
00:09:22
Speaker
ah It was an independent startup and is now one of the four largest manufacturers in this field. um Brigade Enterprises is a southern India-based property company, ah which is benefiting from rising real estate prices around the airport in Bangalore.
00:09:40
Speaker
Manufacturers setting up capacity in the area leading to higher land values. Taiwan-based Zheng Ding Technology Holding is a world-leading printed circuit board manufacturer operating in a formerly fragmented industry.
00:09:53
Speaker
As technology evolves, the number of layers on a PCB needs to increase to accommodate more sophisticated applications, and these more complex products, unsurprisingly, command higher prices.
00:10:04
Speaker
Right, thank you. um You've given us an interesting insight into some of the trust holdings, um but what about the performance?
Teamit's Performance and Market Standing
00:10:13
Speaker
Well, in short, it is looking good. The trust managers are enjoying a strong run of relative outperformance that started in early 2022. This means that the trust is ahead of the MSCI Emerging Markets Index over the last 1, 3, 5, and 10 years.
00:10:25
Speaker
five and ten years It also ranks highly among the six general emerging markets funds in the AAC ah global emerging market sector over these periods. Thinking a longer term perspective, the trust is significantly ahead of the benchmark since its 1989 launch date. no Okay, it's very impressive. um So we've covered a lot of ground today. Is there anything else you'd like to highlight before we wrap up?
Conclusion: Dividends and Valuation Insights
00:10:49
Speaker
Maybe just a few things. Number one, dividends. At the end of FY25, ending 31st of March, the Trust had around £570 million pounds in revenue and special distributable reserves, which combined are equivalent to more than 10 times the annual dividend.
00:11:05
Speaker
ah These can be used to enable continued um dividend growth in years of low revenue. Number two, valuation. Likely in part due to the trust's accelerated share repurchase program, the trust discount has broadly halved from around 15% the start of 2025.
00:11:23
Speaker
ah Number three is gearing. Although the trust has a £122 million multi-currency one-year unsecured revolving credit facility, um gearing is currently minimal.
00:11:35
Speaker
um On that note, I think we can come to the end of our discussion today. Okay. with Thank you. That was a very interesting rundown. And um thanks for a comprehensive session on this well-established emerging markets trust.
00:11:48
Speaker
ah You've been listening to Uncovering Trust, a podcast by Edison Group. If you want to find out more about teammates and other investment companies we cover, please visit www.edisongroup.com.