Templeton Emerging Markets (TEM) is paying jittery investors to hang on as it cuts charges for a second year running and hikes its dividend by 81%.
The £2 billion investment trust has been rocked this year by the unexpected departure of manager Carlos Hardenberg, who shareholders were only getting to know three years after he hit the headlines by replacing the fund's founding manager, Mark Mobius.
Although Hardenberg's successor, Chetan Sehgal, is presented as the continuity candidate, having been in the running to replace Mobius and since working as Hardenberg's deputy on the portfolio, the restructuring of Templeton Emerging Markets Group behind the 29-year-old fund with the departure of eight investment staff, has unsettled some investors.
All this at a time when emerging market countries are under pressure from a triple Trump whammy: higher US interest rates making their dollar debts more expensive, US sanctions against Russia and a growing trade war between America and China.
The silver lining in all these clouds is the trust's board knows it has to keep shareholders happy if it is to avoid its share price’s 14% discount to net asset value widening further.
From 1 July 2018, the fee for managing the £2 billion fund will drop to 1% of net assets up to £1 billion and 0.85% thereafter. Franklin Templeton currently charges 1% on net assets up to £2 billion and 0.85% thereafter – an arrangement that was only put in place last July.
The latest move trims the effective management fee from 0.98% to 0.91%, which isn’t much, but given last year its total ongoing charges were 1.12% it should be enough to bring it under the 1.07% annual cost of its main rival JPMorgan Emerging Markets (JMG).
More impressive is the 81% hike in the annual dividend to 15p from 8.25p and the move to up payments to shareholders to twice from just once a year.
This has been enabled by a surge in earnings per share, which more than doubled from 6.59p to 15.9p. This was caused by an increase in dividends from underlying investments but also by the board's decision last year to inflate revenues by allocating 70% of the management fee and its borrowing costs to the company’s capital account.
‘In light of the increased revenue and recognising that many investors place a high value on a regular income, your board believes that it would be beneficial in future to pay two dividends per year,’ the board announced.
The first interim dividend will be declared with the trust’s half-year results for the six months to September 2018, with the second announced in the full-year results.
Nevertheless, the board said the trust would not target a particular level of income and stressed capital growth remained its core objective. With the final dividend declared the trust yields 2%, just below its sector average of 2.2%.
Both developments follow a pretty good year for performance given heightened market volatility and the decision of Hardenberg to quit in February and rejoin Mobius at his new firm. In the 12 months to 31 March, the trust’s net asset value (NAV) grew 12.4% in sterling terms, compared to an 11.8% rise in the MSCI Emerging Markets index.
Over the year the trust’s discount to NAV ranged from 9.2% to 14.5%, steadily improving until the end of January when a global market sell-off saw the shares lag further behind the portfolio. To tackle the discount the board bought back 9.7 million shares, or 3.4% of share capital. Buying back the cheap shares added 0.4% to NAV. Since the financial year-end the board has purchased an additional 3.6 million shares.
Sehgal (pictured) said emerging market equities had been buoyed by the dual tailwinds of synchronised global economic growth and rising commodity prices. He said TEM’s exposure to Chinese stocks, representing the fund’s largest geographical allocation at the end of March, drove performance.
‘Investment opportunities were plentiful as growing affluence and consumer demand propelled a broad array of industries ranging from e-commerce to luxury cars,’ Sehgal said. For example, Chinese financial services group Ping An Insurance saw its share price rise 81%.
Sehgal said he would continue to monitor rising trade tensions, particularly between the US and China, although he noted international trade flows were still robust. 'The scope and strength of international trade flows should not be underestimated, as the growth in intra-Asia trade over the years shows, reducing the importance of the US and other developed markets to emerging markets,' he added.
The fund’s Russian investments did surprisingly well with internet company Yandex enjoying a 60.7% share price return. Although investors remain concerned about additional sanctions from the US and Europe, Sehgal pointed out Russia had been helped by the recovery in oil prices.
‘Importantly, Russia's stock valuations remained attractive relative to the emerging market universe, and Russian companies appeared well-positioned for earnings growth amidst the economic turnaround,’ said Sehgal.
While the team is mindful of the fallout from ongoing sanctions, they continue to spot selective opportunities. As a result, they added to TEM’s Russian exposure over the year to April.
Over five years, the investment trust has delivered a total return to shareholders of 37.8%, a performance that lags the sector average of 41.8% but masks the improvement under first Hardenberg and so far, it would appear, his successor Sehgal.