Holly Cook: Morningstar analysts rate well over 1,000 funds and to talk about one specific rating, I'm joined today by Jackie Beard, director of closed-end fund research.
Jackie, thanks very much for joining me.
Jackie Beard: Hi, Holly.
Cook: So we are talking about Templeton Emerging Markets [Investment Trust] and you've given that a Bronze analyst rating. Now, this is run by a very well-known name, Mark Mobius. Is it actually him calling the shots?
Beard: It's a really good question. So, we need to put this into some context. Yes, in so far as he is very aware of every investment decision that is made. Is he the one sitting there at his desk every day and making those decisions all the time? No, because that's not his role. So, he is surrounded by a team of very longstanding colleagues, many of whom have been there since pretty much the very early days of this fund. In particular there are three, what they call portfolio allocators attached to this fund and they've been alongside him since the late 1980s. So, that's a pretty a long tenure and very much consistency.
Mark's role himself is more to do a lot of travelling and actually see what's going on the ground because the process that they follow is very much about fundamental bottom-up research, but it’s also being aware of some of those bigger risks which he believes he can only understand by actually visiting those companies and those countries.
Cook: So team really is very important here?
Beard: Yes it is and it's very stable as well. So, the average tenure across the analysts is something like 10 years. They are based all across the region, which can prove challenging in terms of communication; I think in this fund it's working pretty well and the responsibilities are very clear.
I think the analysts stay [at Templeton] because the career path is quite well structured and it's very clear the path that they will follow. So they start as an analyst covering particular stocks, they look at that from a sector perspective; they are encouraged then to understand that sector on a more global basis and then to overlay that as well with regional understanding and how that sector fits within the global context of what's going on. So they are not isolated in the way that they are looking at things and they are very much encouraged to talk to their colleagues globally, just to get a better understanding of each stock.
Cook: Tell me a bit about the process that they follow in actually making their investment decisions.
Beard: They are not doing anything wildly different from anybody else. It's very much fundamentals, running through the numbers, looking at the analyses, meeting with company management. But there is this macro overlay, which I mentioned earlier, which Mark is much more involved with. It's about understanding political risks.
It doesn't mean that if there is political risk, they won't invest in the country, but it is making sure they understand the implications of those risks and how they are going to impact on each stock. They've been doing it this way for a very long time. Mark himself, when he joined, he was trained by Sir John Templeton, one of the founders of the business. It's very much a long-term approach: look for undervalued stocks and keep the long-term in context and don't get distracted by that short-term noise.
Cook: So has this approach actually been converted into good returns for the shareholders?
Beard: It has. So, at this fund we’ve got a very long history to look at, which is great. It has been quite volatile. It's not going to be a smooth ride. They've had some quite big swings in both directions depending on the markets. Little bit surprised that volatility is as high as it is, you expect it in emerging markets, but they are not using gearing at this fund either.
Cook: Why aren’t they using gearing, isn't that one of the actual structural characteristics for a closed-end fund?
Beard: It is and they debate it long and hard at every board meeting and I think the board's view--and also Mark's view and his team--is that they like the simplicity of this product. They think if it's simple, it will be easy for people to understand and it makes it more attractive. Their focus is very much on just picking the right stocks and getting them into the portfolio at the right time. So, they don't really want to be distracted by having to make short-term market calls or have the expense of long-term structural gearing, because they want that flexibility and they want to just focus on their core skills, really.
Cook: And what’s the discount look like?
Beard: So the board has a strict discount control mechanism and they don't release what their target is because they are worried that people will automatically start trading around that. Having said that, when you look at those numbers, it doesn't tend to go beyond 7%. So to keep it in single digits I think is very good, it's encouraging that that's the guidance--they are giving guidance in so far as they are following through on their actions and keeping it fairly tight. So, for investors who are worried about funds going to wide discounts, then this probably fits the bill quite well, because it's just not going to happen hopefully.
Cook: So, sum this fund up for us then.
Beard: So, for a long-term investor looking at emerging markets equities, I think it’s doing a very good job. It's a bit more volatile than some of its peers, so understand that that's going to be the pattern of returns. I think be aware of the fact that if anything were ever to happen to Mark Mobius or if for whatever reason he stepped down, whilst I don't think it would impact the way this fund is run, I think there could be an impact from a sentiment perspective because his name is on a lot of funds run by Franklin Templeton, but I don't think that should distract from the fact that this is a very decent fund, doing exactly what it should be doing.
Cook: These are really essential insights. Thanks very much for joining me, Jackie.
Beard: Thanks.
Cook: For Morningstar, I'm Holly Cook. Thanks for watching.
