Templeton Emerging Markets has published results covering the six month period that ended on 30 September 2015. emerging markets had a tough time during this period, selling-off sharply and underperforming developed markets by 9.1% (comparing the two relevant MSCI Indices). Over the six months the fund generated a negative total return on net assets and underperformed its benchmark by 9.2% (TEM fell by 28% and the MSCI Emerging Markets Index fell by 18.8%). the return to shareholders was -27.0%.
The manager’s report says underperformance arose largely because of stock selection in China, Thailand, Brazil and South Africa. An overweight exposure to Indonesia and stock selection in that country also had a negative impact. In terms of sectors, selection in consumer discretionary, financials, materials and energy detracted the most. Focusing on individual companies, Brilliance China Automotive, Astra International and Kumba Iron Ore were the largest detractors, taking 3.9% off the NAV between them and falling by 39.9%, 44.9% and 56.8% respectively.
Brilliance China Automotive has a joint venture with German car manufacturer BMW to produce vehicles under the BMW marque for sale in China. Current weakness in overall vehicle sales in China, pressure on margins in the luxury car market and higher costs associated with the opening of two new plants and promotion of three new model launches scheduled for late 2015 and 2016 played a role in reduced earnings in the first half of 2015. While they trimmed holdings in the stock to reduce concentration and raise funds to invest in new opportunities, they believe that Brilliance is well positioned to benefit over time from the greater demand that they expect for luxury cars in China and thus they continue to maintain a significant exposure.
Astra International is an Indonesian conglomerate with key investments in the automotive, financial services, heavy equipment and agribusiness sectors. Its automotive division produces both cars and motorcycles under license from Toyota, Isuzu, Honda, and other global manufacturers. Muted second quarter corporate results and concerns that general macroeconomic weakness may impact auto sales in the near term coupled with a market-wide correction resulted in a weak share price performance. They continue to hold the position in the stock and expect ongoing reforms in Indonesia, continued economic growth and rising consumer wealth to lead to increased consumer demand for cars and financial services.
Kumba Iron Ore, a South African producer, where the share price declined by more than 50% in the reporting period amid weak iron ore prices and low confidence in a recovery in the near term. While they initially added to this stock over the reporting period, in view of the continued weakness in the sector and the company’s decision to suspend dividends, they started to reduce our holdings shortly after the period end.
Positive contributors to TEMIT’s performance relative to the benchmark included an overweight allocation to the United Kingdom (via the holding in Unilever), which is not part of the benchmark index. Lack of exposure to the Malaysian ringgit, which depreciated during the period, and good stock selection in South Korea had a positive impact. The portfolio’s cash position also helped as a result of the weak market environment. Companies which contributed to relative performance included Unilever, Hyundai Development and Samsung Electronics, which was added to the portfolio during the reporting period.
TEM : Templeton Emerging suffers in EM sell-off