aluxum
Thesis
Templeton Emerging Markets Fund (NYSE: EMC) is a closed-end emerging market equity fund. The vehicle invests in large cap stocks issued by companies incorporated in an emerging market jurisdiction. According to his literature:
The fund seeks long-term capital appreciation by investing, under normal market conditions, at least 80% of its net assets in equities of emerging countries.
Chinese stocks make up around 27% of the fund, followed by South Korea and Taiwan at 17% and 14% respectively. The problems associated with Chinese ADR delisting fears are well documented, but have been mitigated by recent developments which have seen relevant US regulators gain access to the necessary information. We believe that China understands its need to be able to access international capital markets when needed, via the NYSE, and will ensure that the door remains open.
Technology and financials are the main sectors of the fund, accounting for more than 50% of holdings. Performance-wise, the fund beats an ordinary ETF in the space, namely iShares MSCI Emerging Markets ETF (EEM). EMF does what it’s supposed to do – takes exposure to emerging market equities and turns it into dividends with a slight outperformance versus a regular instrument, even after taking fees into account. However, the asset class as a whole is probably not adequately compensating an investor for the risks taken. As it stands, EMF has posted an annual total return of less than 2% with a standard deviation of 21 over a decade window. It’s disappointing and makes it a cyclical instrument in our minds. Not a buy and hold. The fund’s Sharpe ratio, which is close to zero, reflects this setup – not enough return to justify the volatility here.
EMF is best traded as a recovery asset class. From this perspective, the bloodshed we saw in 2022 would indicate a good setup for 2023. A discerning reader should remember that JP Morgan called Chinese stocks non-investable earlier this year. We believe that the EMF will post a total return figure of more than 10% in 2023 thanks to the reopening of China and the recession which will finally be fully integrated. Long term, however, this CEF is not a true buy-and-hold, especially due to a risk/reward lens.
Analytic
AT M : $0.18 billion
Remittance to NAV: -11%
Z-stat: 0.8
Yield: ten%
Saint Dev: 21
Sharp Report: 0.01
EMF Holdings
The fund has a China-centric allocation in its current format:
Country (Fund)
More than 27% of the portfolio is allocated to stocks incorporated in China. South Korea and Taiwan come next with a respective allocation of 17% and 14%. From a sector perspective, technology is the main concentration of the portfolio:
Sectors (Seeking Alpha)
The 3 main sectors represent more than 60% of the fund’s holdings. From an individual name perspective, we recognize most of the most prominent names in this CEF:
Top Names (Fund Fact Sheet)
The fund is composed of large cap stocks mainly:
Market capitalization (fund fact sheet)
These are large, well-known multinational companies, which come from an emerging jurisdiction. The issues associated with Chinese ADRs listed in the US are well documented, but we believe this is no longer a hot topic as the audit committee finally has access to the requested information.
Performance
The fund is down -20% since the start of the year:
Total Return (Seeking Alpha)
We compare the performance of the CEF with a regular ETF, namely the iShares MSCI Emerging Markets (EEM) ETF. Both structures have similar compositions from a geographic point of view and an underlying capitalization size.
Over a 5-year period, EMF outperforms:
Total Return (Seeking Alpha)
We can note that the CEF had a long stretch in 2020/2022 when it was significantly ahead of the ETF from a total return perspective. As a reminder, total return numbers are the good ones to look at here since CEF distributes capital gains via dividends. Simply comparing prices would always disadvantage a CEF structure.
We also observe the same dynamic over 10 years:
Total Return (Seeking Alpha)
However, both funds are not very exciting from a total return perspective. Annualized total returns are below 2%, with a standard deviation of 21. Too little reward for a high volatility product.
Premium/Rebate to NAV
This fund has always traded at a discount to net asset value:
Premium/Rebate to NAV (Morningstar)
The current discount is roughly in line with historical averages. We believe that the poor results posted by this asset class are the cause of the fact that the market value of the CEF is lower than its net asset value. We typically see this for underperforming asset classes. Don’t expect this fund to suddenly move to a stable net asset value from a market price perspective.
Conclusion
Templeton Emerging Markets Fund is an emerging markets closed-end equity fund. The vehicle invests in large cap stocks from emerging market jurisdictions. Currently, Chinese stocks make up around 27% of the fund, followed by South Korea and Taiwan at 17% and 14% respectively. The fund is trading at a -11% discount to net asset value, but this level is in the middle of its historical range. Emerging equities have been an underperforming asset class, with EMFs posting an annualized total return of less than 2% over the past decade. EMF beats a regular vanilla ETF in the space, but exhibits cyclical returns (i.e. not ideal as a true buy-and-hold vehicle). CEF is doing what it’s supposed to do in terms of turning exposure to emerging market equities into dividends, and in our mind it will have a total return of over 10% in 2023 as China reopens and that the current recession will be fully integrated.