By James Thorneley Templeton Emerging Markets' disappointing final results have led to calls for mor...
By James Thorneley
Templeton Emerging Markets' disappointing final results have led to calls for more drastic action from Mark Mobius, the trust's manager, and the board to narrow the discount and improve NAV growth.
Over the year to 30 April the trust's NAV rose by 3.9% compared to a rise in the MSCI Emerging Markets Free index of 25.7%. This underperformance is reflected in the 21% discount on the trust.
Carolyn Coke, investment trust analyst at Deutsche Bank, said: "Given the underperformance and slippage in the rating, the announcement of final results was the ideal opportunity for the chairman, Templeton Investment Management and Mark Mobius to discuss the performance issues and potential solutions to resolving the discount problem. We were, therefore, disappointed that only a small reference was made to both points."
Coke believes the trust should embark on an aggressive buyback strategy, which would at the very least have a positive impact upon the asset value. Even so, she is unconvinced that the board will embark on any corporate strategy in the near future.
This view is shared by Tom Tuite-Dalton, an investment trust analyst at Credit Lyonnais. Tuite-Dalton, who met with Mobius in June, said: "At the lunch Mobius made it reasonably clear that Templeton Emerging Markets, on account of its large size, would be able to buy back shares aggressively without pushing up the expenses significantly and without impacting on liquidity. Conversely, with Templeton Latin American, he argued, buying back shares was less desirable on account of its smaller size. I am somewhat puzzled therefore, that only Templeton Latin has bought back shares to date."
With a share buyback strategy unlikely to be forthcoming, Tuite-Dalton believes Schroder Emerging is more attractive as it has a superior performance record compared to Templeton Emerging. Over the three years to 17 July the Schroder trust's NAV has fallen by 1% while Templeton's has declined by 3%.
Mobius believes the trust's poor performance is due to his value oriented investment style. He said his bias towards undervalued assets and his avoidance of the technology stock bubble led to the underperformance. Looking forward he said the value approach will underpin strong performance in the trust over the next few years. He added: "The recovery in many Asian and Eastern European countries has reached a level of sustainability and growth should continue over the next three to four years."
The trust has recently increased its exposure to South Korea and Mexico by reducing its cash position to 10%. Korea's weighting has increased from 5.4% to 10% with low inflation and rising exports indicating a recovery is on its way, according to Mobius. He added: "I expect South Korea to continue to progress as local demand leads to increased domestic consumption eventually leading to a self-sustained recovery."
Mexico's portfolio weighting has increased by 2.7% to 10%. Again Mobius believes recovery is on track with retail sales strengthening, inflation decelerating and unemployment falling.
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