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Investment Trust Watch: is Templeton a buy?
Mark Mobius’s successor on Templeton Emerging Markets has overhauled the portfolio. Is it enough to revive the former stalwart?
Is it possible that Carlos Hardenberg, the new manager of Templeton Emerging Markets (TEM ), could turn round this long-term underperformer?
To my mind half-year results from the former stalwart of the investment trust sector this week underlined the scale of the challenge facing Mark Mobius’s successor while also demonstrating he was rising to the task.
On the one hand the sorry plight of the trust was revealed by the fact that not one of its holdings rose in the six months to 30 September. All five of its ‘top contributors’ dropped in value, with the trust’s share price and net asset value tumbling 28% and nearly 29% respectively.
That means in the five years up to October, when Hardenberg formally took over the portfolio, shareholders lost nearly a third of their money. You have to look at the 10-year record to see the trust edge ahead of its benchmark, the MSCI Emerging Markets index, with an 84.6% return versus 83.1%.
Investors wouldn’t have done much worse with a tracker, which partly explains why the shares trail on a 11% discount below the battered net asset value.
Stock selection has been the problem. According to the trust’s figures, picking the wrong stocks in countries like China, Thailand, Brazil and South Africa accounted for all the underperformance. Currency movements and the choice of sectors actually had a small positive effect.
We knew from Winterflood, the trust’s broker, that Hardenberg planned sweeping changes. What’s impressive is how Hardenberg has distanced himself from his predecessor by making a total of 45 portfolio changes, while continuing with the same value philosophy that Mobius stood by for 25 years.
So, having made a more sober assessment of the prospects for commodities markets, the new manager has jettisoned a string of energy and materials companies, such as Vale of Brazil, OMV of Austria, Siam Cement in Thailand and Tupras-Turkiye Petrol in Turkey.
He has also made his mark snapping up information technology companies such as Samsung Electronics; SK Hynix, a South Korean manufacturer of computer memory chips; and Mail.Ru, a Russian internet company. The old Templeton would never have bought these but Hardenberg says they were trading on cheap prices during the summer stock market crash.
On the other hand Hardenberg is following what he calls ‘Templeton’s time-tested approach of buying when others were selling’ by increasing the trust’s holdings in Brazil. The country may be ravaged by recession, inflation and political corruption but it is cheap, trading on just 10 times forecast earnings and on a price to book ratio of 1 and a dividend yield of 4% at the end of September.
Hardenberg believes he can buy quality companies that can do well in a difficult environment, adding Lojas Americanas, a discount department store chain; M Dias Branco, a basic food retailer; MAHLE Metal Leve, an automotive parts manufacturer; and TOTVS, an international software provider.
Finally, he points out that the bad times will come to an end. Emerging markets are about to notch up their third, consecutive year of declines. The last time this happened was 2000-02, when it was followed by five years of double digit gains, he says.
All this has got me hooked but other investors are more cautious. The trust barely registers in terms of its Z-score, which is a measure that indicates when a share is trading above or below its normal range. Hence it does not appear in Numis’ table of ‘cheap’ trusts below.
In fact the trust has been cheaper than today: it fell to a discount of 15% below net asset value in the summer after the announcement that Mobius was stepping back as lead manager but remaining on the team.
Analysts are unconvinced too. Responding to the results, Charles Cade of Numis says ‘the jury is still out’ while Alan Brierley of Canaccord Genuity, who has kept an increasingly ‘contrarian’ ‘buy’ recommendation on the trust in recent years, says: ‘The reality is value is out of favour. One day that will change and at that point they’ll perform very well.’ Until then it looks ‘bombed out’, he says.
|'Cheap' trusts||Share price premium (- discount) to NAV %||12-month average premium (- discount) %||Z-score|
|Better Capital 2009 (BCAP)||-26.4||-17.5||-3.4|
|John Laing Environmental Assets (JLEN)||0.2||5.8||-3.3|
|Cambium Global Timberland (TREE)||-62.1||-36.9||-2.9|
|Blackstone GSO Loan Financing (BGLF)||-4.0||0.6||-2.8|
|Jupiter Green (JGC)||-7.3||-3.1||-2.7|
|Qannas Investments (QIL)||-8.9||2.9||-2.7|
|TwentyFour Income (TFIF)||1.2||5.9||-2.7|
|Juridica Investments (JIL)||-45.6||-4.6||-2.7|
|Duet Real Estate Finance (DREF)||-25.1||-8.1||-2.6|
|F&C Commercial Property (FCPT)||2.9||12.5||-2.4|
|BH Macro - £ (BHMG)||-7.6||-4.5||-2.4|
|Menhaden Capital (MHN)||2.0||9.0||-2.4|
|GLI Finance (GLIF)||-10.3||14.9||-2.4|
|British Empire (BTEM)||-14.2||-11.4||-2.3|
|UK Mortgages (UKML)||5.4||7.2||-2.3|
Source: Numis Securities
Hits to Better Capital
Also looking bombed out and appearing at the top of our table of ‘cheap’ trusts is Better Capital 2009 (BCAP ). The discount – or gap between NAV and the share price – widened to over 26% this week giving it a Z-score of -3.4.
Investors knew there were problems at Jon Moulton’s venture capital funds following a profits warning earlier this month. This week half-year results showed the value of three of their investments – SPOT, the office stationer; Everest, the double glazer; and CAV Aerospace – had been written down due to disappointing trading and, in the case of CAV, ‘considerable losses’ that will require an injection of cash.
The sister fund, Better Capital 2012 (BC12 ), has fared worse with its shares down 44% this year against a 6.5% decline in BCAP. It stands on a much bigger discount of 44% but a smaller Z-score of -1.9 and so is not in the table.
If you are interested in private equity funds, the latest issue of Investment Trust Insider, has a report on the sector.
Remember a Z-score of -2 or below shows a share is trading significantly below its normal range, while a Z-score of 2 or more shows it is above the historic average and looks ‘expensive’ (see second table below).
|'Expensive' trusts||Share price premium (- discount) to NAV %||12-month average premium (- discount) %||Z-score|
|Qatar Investment Fund ( QIF )||-1.5||-13.9||3.9|
|Jupiter European Opportunities (JEO)||4.3||1.2||2.9|
|RAB Special Situations (RSS)||3.3||-21.2||2.6|
|Standard Life UK Smaller (SLS)||-3.8||-8.0||2.5|
|Sequoia Economic Infrastructure Income (SEQI)||9.3||6.8||2.5|
|Duke Royalty (DUKE)||1.2||-23.7||2.5|
|City Natural Resources High Yield (CYN)||-11.4||-20.2||2.3|
|Lindsell Train IT (LTI)||33.6||17.9||2.1|
|Crystal Amber (CRS)||5.7||-0.5||2.0|
|Trinity Capital (TRC)||-13.0||-28.3||2.0|
|Alliance Trust (ATST)||-10.2||-12.3||2.0|
|JPMorgan European - Income (JETI)||0.0||-3.8||1.9|
|North Atlantic Smaller (NAS)||-17.3||-20.1||1.9|
|Unitech Corporate Parks (UCP)||62.5||-37.0||1.9|
Source: Numis Securities
Very expensive trust
Lindsell Train (LTI ) reappears in the list of ‘expensive’ trusts after its perennially pricey shares hit a record premium of 34%, up from 27.4% a week ago.
Half-year results this week showed another big rise in the value of its management company, Lindsell Train Limited, which now accounts for nearly a third of the fund’s assets. With funds under management having soared from £5 billion to £6 billion this year, the valuation of Nick Train and Michael Lindsell’s privately-owned boutique has jumped from £22.6 million to £25.6 million. This stake is the biggest provider of growth in the portfolio and a big reason why the trust’s shares are up a staggering 52% this year.
Julian Cazalet, the trust’s new chairman, issued what is now a standard warning to anyone thinking of making a new investment LTI: ‘In hostile market conditions a contraction of the premium and a fall in the NAV could conspire to generate a material loss of value for a new investor at current prices,’ he said.
Fortunately, Jupiter European Opportunities (JEO ), has not reached anything like the same extreme, although Alex Darwall's top-performing fund has also hit a new high premium of 4% above net asset value, giving it a Z-score of 2.9.
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Look up the shares
Look up the investment trusts
- Better Capital PCC 2009 (Ordinary Share)
- John Laing Environmental Asset (Ordinary Share)
- Cambium Global Timberland (Ordinary Share)
- Blackstone/GSO Loan Financing (Ordinary Share)
- Jupiter Green (Ordinary Share)
- Qannas Investments (Ordinary Share)
- TwentyFour Income (Ordinary Share)
- Juridica Investments (Ordinary Share)
- Duet Real Estate Finance (Ordinary Share)
- F&C Commercial Property (Ordinary Share)
- BH Macro GBP (Ordinary Share)
- Menhaden Capital (Ordinary Share)
- GLI Finance (Ordinary Share)
- British Empire (Ordinary Share)
- UK Mortgages (Ordinary Share)
- Qatar Investment Fund (Ordinary Share)
- Jupiter European Opportunities (Ordinary Share)
- Standard Life UK Smaller Co. (Ordinary Share)
- Sequoia Economic Infra Income (Ordinary Share)
- Vinaland (split) (Ord Income)
- City Natural Resources (Ordinary Share)
- Lindsell Train (Ordinary Share)
- Crystal Amber (Ordinary Share)
- Alliance Trust (Ordinary Share)
- JPMorgan European Income Pool (Ordinary Share)
- North Atlantic Smaller Cos (Ordinary Share)
- Templeton Emerging Markets UK (Ordinary Share)
- Better Capital PCC 2012 (Ordinary Share)
More from us
- Mobius’ successor overhauls Templeton Emerging Markets
- Mark Mobius steps down from Templeton Emerging Markets trust
- Investment Trust Watch: Better Capital, nasty profits warning
- Investment Trust Insider: issue 23 out now!
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by David Kempton on May 24, 2016 at 17:15