The Templeton Emerging Markets trust (TEM) is proposing a five-for-one share split after an impressive recovery from the pandemic crash helped restore the £2.4bn investment trust to the top of its sector and push its shares over £10.
Shareholders will be asked to approve the split at next month’s annual general meeting. The move is designed to make the stock easier to buy and trade after the price more than doubled in the past five years.
There will be no impact on shareholders because while the number of shares will quintuple, their price will be reduced to a fifth – for example, £10 becoming £2 per share.
The proposal to split the shares follows a stunning year to 31 March in which the trust’s underlying net asset value (NAV) soared 54.5%, boosted largely by Asian internet and technology stocks, which underpinned a 59.5% total return with dividends included. This beat the MSCI Emerging Markets index, which rallied 42.8%.
There was good news on dividends too. After a surprise 10p per share special dividend in January following the receipt of an historic tax rebate, shareholders were told the ordinary dividends had been held at the previous year’s 19p per share level. This was because core earnings from investments fell less than feared in the Covid-19 downturn, leaving the board happy to dip into the trust’s ample revenue reserves to make up the shortfall in income.
Although the sell-off in tech stocks since February has slowed the trust’s advance since the financial year-end with NAV flat and shares up just 2% over three months, the underlying investment return over five years is the best in its Global Emerging Markets sector at 127%. That again beats the 91% total return of the MSCI benchmark.
The five-year shareholder return of 156% is even better because of the narrowing in the discount – or gap between the share price and NAV – over the period. Back in mid-2016, the shares languished 13% below their asset value as investors doubted if the trust could successfully move on as its founding fund manager, Mark Mobius, stepped back after a tenure of over 25 years.
Those reservations have been banished, chairman Paul Manduca suggested, as he praised the five consecutive years of ‘excellent’ outperformance the trust’s investment team had notched up over the index, helping to narrow the discount to 7%.
Part of the credit goes to Carlos Hardenberg, who succeeded Mobius as lead manager and started to shift the trust into more technology and higher-growth stocks before quitting Franklin Templeton to rejoin his former boss and manage the Mobius (MMIT) trust.
Having built on Hardenberg’s work, shareholders will hope the duo go on to deliver more success picking good value sustainable stocks in countries with positive long-term economic growth prospects.
At this rate, the trust looks like it will sail past a target of beating the MSCI benchmark in the five years to 2024. If not, and NAV returns lag the index, shareholders can take some comfort from knowing the trust will offer to buy back up to a quarter of its shares, providing an exit at close to asset value for investors who want out.
Next month’s annual general meeting will see investors asked to approve other changes in investment policy aimed at giving the fund managers the flexibility they need to maintain their good run from a portfolio spread mainly across China, Hong Kong, South Korea, Taiwan, India, Russia and Brazil.
For example, it is proposed the maximum they can hold in one stock be lifted from 10% to 12%. This will enable them to avoid taking too many profits in their two biggest stocks and best performers from 2020/21: TSMC, the world’s biggest computer chip maker, and Samsung Electronics, which accounted for 12% and 11.1% of the trust at the end of March.
It will also give them room to maintain big positions in China’s internet giants Alibaba and Tencent which, despite domestic regulatory pressure, retain the managers’ long-term support. They accounted for 8.9% and 8.3%, respectively, of the trust on 31 March.
The Franklin Templeton pair also want to follow rivals such as Baillie Gifford and Fidelity into unquoted or unlisted stocks. Although private equity brings a risk of getting stuck in illiquid or hard-to-sell positions, it can provide attractive opportunities as more companies delay their debuts on public stock markets. Sehgal and Ness want the ability to invest up to 10% in such stocks, with a cap of 2% on any single unquoted holding.
They also want the freedom to double gearing – or borrowing – from the current ceiling of 10% to 20% if they feel that will boost long-term returns. Gearing can make short-term returns more volatile and can backfire if markets crash, and the board says there are no plans to increase gearing to that level.
Rebound from a low point
Gearing stood at just 0.5% at the end of March, which typifies the managers’ cautious but positive approach, expecting further volatility as Covid infections rise and fall. They believe emerging markets will remain resilient due to lower debts than developed economies and new technology and consumption driving superior growth.
‘We are mindful of the dispersion in valuations across the internet space, and we seek to invest in quality companies trading below what we consider to be their intrinsic worth,’ said Sehgal.
‘Overall, we expect a sharp earnings rebound in emerging markets this year from a low base last year,’ he added.
That could serve as a good summary of the trust’s progress in the past five years as well.