Mobius’ £1.8bn investment trust is the best-known closed-ended emerging markets portfolio and has outperformed the index substantially over the longer term. However, returns over the past three years have been below the benchmark, and Scouller warns that the lead manager may be tough to replace.
“Mark Mobius, with over 40 years’ experience in emerging markets was the founding manager of Templeton Emerging and has been both an innovator and good manager over the years,” he said.
“However, we are concerned that there does not appear to be a clear succession plan in place such as a deputy manager to lead this investment trust.”
“Templeton emphasises that Mark is the figurehead for Templeton Emerging Markets because of his profile in the region but the fund is managed on a team based approach,” he added. “However we do note that Dr Mobius has a following and is now 77 years of age.”
Templeton Emerging Markets has made 366.15 per cent over 10 years in share price terms, according to data from FE Analytics, and 291.5 per cent in NAV terms. The MSCI Emerging markets index has made 244.74 per cent over that time.
Performance of trust vs index over 10yrs
Source: FE Analytics
However, most of the outperformance came in the first five years of that period in the long bull market for emerging market equities.
Over three years the trust is behind the index, having lost 7.11 per cent as the benchmark is down 3 per cent. NAV is down
Performance of trust vs index over 3yrs
Source: FE Analytics
It is a concentrated, high conviction portfolio, Scouller explains, with 15 per cent of NAV in the top two holdings and 45 per cent in the top 10. It owns 48 stocks and has a low turnover approach which Scouller says has been working against it.
“The manager claims to have a value oriented, bottom up investment style seeking to buy stocks at a discount to their estimated projected future intrinsic value,” he said.
“The investment team value and buy stocks based on their five year investment outlook, resulting in a portfolio that can appear fully valued on first appearances but is considered to be below intrinsic value once the future earnings are factored in.”
“We worry that this approach combined with the low turnover of the portfolio leaves the portfolio exposed to growth shocks and reduces the margin of safety the management thought they had embedded in an investment, especially if economic or company growth rates do not match initial expectations.”
Scouller prefers the £750m Genesis Emerging Markets trust, managed by a team of 12 at the boutique emerging markets specialist.
It has been more successful in recent years, returning 6.01 per cent in share price terms as the index has fallen.
Performance of trust vs index over 3yrs
Source: FE Analytics
Scouller says that the current discount of 8 per cent is attractive compared to a range of 5 to 10 per cent given the strong results the team have produced.
The managers follow a bottom up philosophy and are primarily business analysts, Scouller says, with a five year investment horizon and a typical holding period of seven years.
The fund is heavily underweight China, reflecting their caution on the country’s economy and also concerns about corporate governance. This has not always been the case in the past.
It is more diversified than Templeton, with 165 holdings, 12.5 per cent of which are off-benchmark.
“The fund’s strategy of investing in quality businesses with trustworthy management tends to mean that the fund has historically been a good protector of capital,” Scouller said.
The analyst also tips JPM Emerging Markets Income for investors seeking a yield. FE Data shows that it has done very well since launch in July 2010, returning 35.61 per cent against the benchmark’s 7.96 per cent. Over three years it is up 21.1 per cent.
Performance of trust vs index since launch
Source: FE Analytics
The fund, managed by Richard Titherington with a team of 39, has a yield of 4.1 per cent and thanks to this trades on a 4.5 per cent premium.
“The attractive 4.1 per cent dividend yield should provide some insulation should emerging market capital values deteriorate, while also giving investors the opportunity to benefit from some of the capital growth should valuations recover from current low valuations,” Scouller said.
“The fund has performed strongly and income strategies continue to curry favour with investors. We are wary of the 4 per cent premium and investors may look to buy close to NAV possibly in a tap issue.”
Scouller says that the board have issued new shares more than once and are likely to do so again, which could be a better time to gain entry.
The fees on Genesis are 1.68 per cent and JPMorgan Global Emerging Markets Income 1.45 per cent, according to the AIC. Templeton’s fees are 1.31 per cent.
