Continuity will be key to ensuring that the £2.47 billion flagship Templeton Emerging Markets Investment Trust (Temit) maintains its stellar recent return to form.
Chetan Sehgal has now been at the helm of Temit for a month, following a period of relative change at the firm’s emerging markets group.
He became lead manager after the incumbent, Carlos Hardenberg, who had run the trust since 2015, quit earlier this year. January also saw emerging markets legend Mark Mobius, the original manager turned chairman, retire after 26 years with the trust.
Citywire AA-rated Sehgal (pictured) is keen to point to the continuity at the firm however, as he has been at the company for 22 years. He has served as director of global emerging markets equity and small cap strategies since the start of 2016.
‘There is nothing in the portfolio that is dramatically different to what it was when Carlos was managing the trust,’ Sehgal said.
‘Because we generate ideas in a collegiate culture and discuss ideas centrally, Carlos leaving shouldn’t lead to changes.’
Turning things around
After a difficult 2015, in which Temit lost 16% and the group saw £300 million of outflows from its emerging markets franchise, the trust’s investment process was overhauled and it has rebounded sharply, retuning 77.31% in share price terms over the two years to 19 March, versus the sector average gain of 60.98%. Despite this, it is still behind the peer group over five years, up 24.7% versus 33.5%, and trading on a 13% discount to net asset value, compared to the sector average of 10.9%.
Sehgal puts Temit’s recent run of success down to the firm’s decision to focus on a ‘higher conviction’ team approach, with the managers working closely with the analysts.
‘The idea is to work with the analyst on the idea, even if it’s their idea, so that you build the same level of conviction in the trust. The moment that you have the same level of conviction between the analyst and the trust manager you know that you have a good idea,’ he said.
‘The improvement in performance was first down to getting the analysts to refocus after the changes we made in 2015. It was a very important step because we needed that foundation to be able to make the investment choices we made.’
One theme that came out of this process was a benchmark overweight holding in Russian equities, owing to the trust’s positions in banks.
Sehgal said the consensus view at Temit is that global cyclical growth is making the sector attractive, with appealing valuations still on offer, despite the political headwinds around the country. The trust’s key holding in the country is Sberbank and it has a 9.3% portfolio weighting to Russia.
‘Our investments in Russia last year paid off because overall valuations in that country remain low, making it by far the cheapest market in emerging markets. What is interesting is that when the markets bounced back in 2017, they had the biggest returns.
On the recent nerve gas attack in Salisbury, Sehgal added: ‘We will have to wait and see what sanctions, if any, are applied to Russia,’ noting that despite the increasingly heated rhetoric, the political tensions have yet to spill over into stock markets.
Temit is also overweight technology, with a particular focus on Asian companies. At 31.4%, the sector is the largest exposure in the vehicle, with Samsung its largest single holding and both Taiwan Semiconductor Manufacturing and Tencent being top 10 positions.
‘Our analysts focus on sustainable earning at a discount. One of the things we got right was recognising the earning potential of technology in Asia. For example we have big positions in the platforms like Alibaba and Tencent. These trends continue with valuation in tech still lower relative to a lot of consumer stocks in Asia,’ he said.
‘Another example is cyclical hardware manufacturers like Samsung, which have achieved a dominant market position, meaning that they can protect their earning potential.
‘We think the companies that
produce these components could hold multi-year earnings growth potential, which the market does not seem to fully appreciate yet. This changing dynamic provides us with opportunities, and also challenges to find specific non-crowded trades, for example within the sub-sectors of technology.’
The macro backdrop
Sehgal is sanguine about the recent equity sell-off, which saw the MSCI Emerging Markets index fall by 5.8% in the first week of February, while the MSCI World fell by 5.1%. He points out that from the start of the year through 8 February, the emerging markets benchmark was still ahead of its developed counterpart, up 0.4% compared to a 2.8% fall in the MSCI World index.
‘Emerging markets are proving to be somewhat resilient. Our observations tell us that the asset class is underrepresented in many investors’ portfolios based on the percentage of global market capitalisation emerging markets currently hold,’ he said.
‘Valuations also remained relatively cheap overall versus developed markets last year, and this current market turbulence could serve to make emerging market equities even more attractive to bargain hunters.’