The fund manager explains how the investment trust has excelled by tapping into rising regional consumer spending across emerging markets.
Having recently celebrated its 30th birthday, Templeton Emerging Markets Investment Trust (TEM) is one of the longest-running emerging market investment funds or trusts available to UK investors.
Over the period the trust has seen huge changes in the parts of the world it invests in, including the economic transformation in the Asia-Pacific region and the opening up of communist countries to global investment.
Over those decades, the trust has consistently outperformed the MSCI Emerging Market index. Figures from FE Analytics show that it achieved a total return of 837% between the start of 2001 and 1 October 2019, compared with 472% from the index.
For most of that time the trust was managed by its inaugural fund manager, Mark Mobius. He stepped back and handed the reins to Carlos Hardenberg in 2015. However, less than three years later Hardenberg also left, leaving Singapore-based Chetan Sehgal, the trust’s current manager, in charge.
Sehgal’s history at TEM and Templeton goes back to the 1990s. He joined Templeton in January 1995, having originally been hired to focus on Indian equities. However, he says: “This was a very early stage for emerging markets. We were waiting for a licence for India and for the funds to gain registration, but the bureaucracy was taking a lot of time.” As a result, Sehgal was asked to work on Russian equities instead.
Later he was put in charge of a number of emerging market small-cap funds for Templeton. Sehgal says: “Mark gave me responsibility for running some small-cap funds. Those funds were launched in 2008, so it was a low point in the market and they did well for us.”
In 2015 he joined TEM, following Hardenberg’s move into the trust’s driving seat. During that time he directed Templeton’s global emerging markets strategy. When Hardenberg left Templeton in 2018 to join Mobius in setting up an emerging market fund with an environmental, social and governance (ESG) mandate, Sehgal was made lead manager at TEM.
Sehgal says he views Mobius and Hardenberg’s new trust as distinctly different from the Templeton trust because of the former’s unique ESG strategy. He adds: “At some stage, people were talking about comparing performances. I said, listen, we are running totally different funds.”
The Templeton Trust has excelled since 2016
After Sehgal assumed control of TEM in 2018, the trust’s share price dipped by about 10% in the first half of the year. To some extent this can be attributed to investors selling out in response to the change in leadership. However, disruption was not an issue in practice, as Sehgal made minimal changes to the portfolio – something most market commentators seemed to acknowledge. Stockbrokers Numis Securities noted at the time that there would be “no significant change in investment approach, given that Carlos and Chetan worked closely together and have been jointly managing a number of portfolios”.
According to Sehgal, the biggest changes to the trust actually occurred in 2015 and were implemented by Hardenberg and himself. He says: “At that stage our risk management was evolving. There were a lot of changes in terms of what went into the fund. We had a very high commodity exposure, so we decided it was better to become more diversified.”
He adds: “We recognised a lot of opportunities in the technology space and bought many tech companies, which made the fund far more diversified. At the same time, there was a move towards making more stock selection calls, rather than macro calls.”
Sehgal believes the dip in performance in 2018 is better explained by two macro factors: trouble in Russia and the US-China trade war. He says: “Immediately after taking over, we were hit by US and European sanctions on Russia – and we had a big exposure to Russia. But we stood our ground as we were convinced that there were good valuations there – and that has paid off.”
The trade dispute between the US and China has weighed heavily on the trust’s holdings. But, again, Sehgal has held the portfolio steady and resisted the temptation to sell out of positions.
Focus on fundamentals
According to Sehgal, this response to the twin risks of Russian sanctions and trade war reflects the current management’s approach. Rather than attempt to make macro calls, it focuses on the fundamentals of businesses: He says: “We invest in a company when we are convinced about its earnings sustainability and the discount it is trading at. Only then do we include it in the portfolio.”
This approach is driven by the trust’s 80-strong team of analysts spread across 18 cities. “Their research involves meeting a company, doing a model of the business and looking at all the qualitative factors,” says Sehgal. “We look for companies with sustainable earnings trading at a discount.”
That is one reason why Sehgal is not especially worried about the trade war. “Supply chains will respond. Trade issues have posed challenges before, but these are not insurmountable for companies,” he says.
In general, Sehgal avoids country and macro calls. He says there are markets he avoids outright, such as those in Venezuela and Zimbabwe, but otherwise he is open to all emerging markets. He adds that while some countries have better growth prospects and greater political stability than others, “if we find a company is doing well in a market, we are going to buy”.
However, although TEM does not make top-down macro calls in its stock selection, the portfolio’s holdings reflect the trends driving growth and returns in emerging markets, so the fortunes of companies must be being driven by identifiable trends if they are to be deemed worthy of portfolio inclusion.
Many portfolio stocks are geared towards capturing consumer spending growth in emerging markets – although this is not immediately apparent from a glance at the portfolio’s sector weightings. Consumer discretionary is 17.96% of the portfolio (as of 30th September 2019). However, Sehgal says his weighting towards consumer growth in emerging markets is really much higher once the consumer-focused nature of his technology and financials holdings is taken into account.
For example, the growth of tech companies – such as China’s Alibaba, which makes up more than 5.61% of TEM’s portfolio – is driven by their facilitation of consumer spending. Technology companies constitute roughly 22% of the portfolio.
Similarly, the potential upside for many financial businesses in emerging markets is rooted in retail banking services growth, which is also a facet of the phenomenon of rising consumer spending. Sehgal says: “If you look at the financial services we are exposed to, they are primarily retail banks that provide credit to retail customers. In emerging markets especially, mortgage lending rates are growing from a very low level of penetration – just 10% in Russia, for example.” Financials comprise 24.53% of TEM’s portfolio.
In fact, when the portfolio’s technology, financial, consumer, defensive and cyclical stocks are considered as a whole, it can be argued that more than half the portfolio is geared towards consumer spending growth.
Sehgal argues that over the years the emerging market sector has become an indispensable option for investors; it is no longer just a hub for low-cost manufacturing. He says: “China now sells more cars than the US does, and consumers in emerging markets continue to upgrade their consumption choices.”
Chetan Sehgal in six
1) My best investment was...ICICI Bank – not because of returns but because I had the conviction to take a contrarian approach.
2) My worst investment was...The Korean satellite broadcasting provider KT Skylife. The lesson I learnt was that a moat (a firm with competitive advantages) without growth and good corporate governance is a value trap.
3) Alternative career would have been...A researcher or writer.
4) In my spare time, I like to...Read history.
5) The one thing I would like to see change in financial services is...A higher bar for corporate governance.
6) Do you invest in the fund? Sadly, I don’t. However, I am invested in our Global Emerging Strategy – which follows a similar investment strategy as TEM, via other vehicles that are more efficient, because I am based in Singapore
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