I’m a big fan of investment trusts. For decades now, I’ve relied on them to give me a cheap way into smart, professionally managed funds. In areas where I’m relying on in-depth knowledge of specific sectors, I think it’s sometimes best to hand over the investment reins. And if you can reduce fund management fees, then the performance of the fund is likely to streak ahead of more expensive rivals. Investment trusts allow you to do both of those things.
Last week, I explained why I think it’s essential you invest overseas. And I showed you how specialist advice goes a long way when you’re investing in emerging markets (EM). I told you about Lars Henriksson, the Swede in Malaysia who brings the hottest investment opportunities from that booming region.
This week, I want to talk about another emerging markets ‘expert’. I want to show you one of my favourite emerging-market investment funds. And I make no apology for the fact that it’s going to be an investment trust. It’s traded in London, you can buy it through your regular broker, and the broker fee is the only fee you’ll pay.
The annual management charge of 1.3% is taken directly from the fund itself. But don’t worry, that’s more than covered by the dividends the company earns. In fact, there’s still enough cash left for a small dividend to boot.
But what we’re really after with emerging-market investments is long-term capital appreciation. I laid out my case for that last week. And on that score, this fund has played a blinder.
Why they call him ‘the dean’
For me, the best investment manager in the emerging markets is the legendary Mark Mobius of Templeton investments. Templeton is an American outfit, and it’s got a massive presence in the emerging markets. Mark presides over 17 regional offices, and he is often referred to as the ‘dean of emerging markets’ – a title that’s probably got something to do with his PhD in economics.
The Templeton Emerging Markets Trust (Lon: TEM) is a London-listed investment trust that has been around since 1989 and is the biggest EM fund in the UK. Its track record is impeccable…
Over ten years, the fund is up 367%, which compares very well against its benchmark, the MSCI emerging markets index, up ‘only’ 241%.
And over a rather rough and tumble five years, the fund is up 48.7% versus the index’s 35.3%.
Of course, we never rely solely on past performance, but it’s nice to know that the manager has form. And anyway, my main criterion for investing in EM isn’t particularly stock specific. It’s just that I want to have currency exposure to the emerging world. I want to have an investment link with the corners of the globe that I think will gain in prosperity as the West loses its grip.
A story that will run for decades
The fund’s biggest three holdings are Brilliance China Automotive, Tata Consultancy services, and Dairy Farm International Holdings.
What you’ve got there are three key firms that are playing a massive part in Chinese and Indian growth. Brilliance Auto is a play on China’s growing middle class. To my mind, that’s a story that will run and run for decades.
Though Tata is an Indian company, it is a massive force in global commerce, operating in IT, engineering, materials, energy, chemicals and consumer products. Of course, we’re familiar with Tata as the owner of Jaguar Land Rover – but in reality, this is but a small area of operations.
Dairy Farm International is an Asian retail giant. It’s a food processor and wholesaler, as well as personal hygiene products titan. Though it might sound boring to the uninitiated, this is a high-growth business that’s going like the clappers right now.
These big three businesses make up about 20% of the fund. But there’s plenty more in there to get excited about.
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As of the last investment report, the fund was overweight energy, consumer discretionary, materials and financials. Excepting financials, I really like the areas the fund is focusing on. The fact that financials makes up a whopping 27.7% of the fund is as much to do with the success of the sector over recent years.
I guess we’d do well to remember that the financial services sector in emerging markets is still in its infancy – it’s a massive growth sector. I’ll have to trust Mark’s expertise on this one!
In terms of countries, the fund is overweight China, Thailand, Brazil, India, Indonesia and Turkey. This is a roll-call of the developing world’s big hitters. Mark has chosen to go underweight what could be considered to be the ‘already emerged’ Russia, South Korea and Mexico. With 68% invested in Asia, the focus is very much one of Eastern opportunity; something that chimes with my long-term perspective.
The opportunity and the risk
Emerging markets are not in vogue right now. I made that point last week. And that’s exactly why I think now is a good time to go shopping! In fact, though this fund has a fantastic record, it is currently trading at a 10% discount to the value of its assets. Try finding that with a unit trust!
Bear in mind, that when investment trusts are popular, you’ll find them trading at a premium to assets, it means this fund could outperform any rise in the underlying market.
Of course, things could the opposite way too. The fund operates with 8% gearing, which means if the underlying market sours, the fund’s share price could drop even quicker. And that’s exactly what happened over the last quarter: the fund was off 12.6% versus the index’s 7.9% fall. Investing overseas like this exposes you to a few different risks too, like currency risk or the risk that Mark Mobius might not be able to do his job.
This fund can be tucked away in an Isa, Sipp, or junior Isa, or it can be bought in a regular trading account. Given that it’s a highly liquid fund, the shares have a tight spread and are currently bought and sold at 556p – 557.5p and trade under the stock ticker TEM.
If you visit the company website, you can see that there’s an offer to invest a regular monthly amount into the fund too. Maybe that’s not a bad idea given the volatility in emerging markets investment. At the site you can access the latest company report as well as the fund’s factsheet.
While the emerging markets can be considered risky and volatile, that can be a good thing. And anyway, over the long run, I believe the emerging markets will grow faster than the West. All reasons why I see this as a very worthy investment.
• This article is taken from the free investment email The Right side. Sign up to The Right Side here.
Information in The Right Side is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. The Right Side is an unregulated product published by Fleet Street Publications Ltd. Fleet Street Publications Ltd is authorised and regulated by the Financial Conduct Authority. FCA No 115234. http://www.fsa.gov.uk/register/home.do
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