Templeton Emerging Markets has published its results for the year ended 31 March 2016. TEMIT’s benchmark index declined by 8.8%. Unfortunately, the NAV suffered a much worse decline of 17.1% and the return to shareholders was -17.0% (all figures on a total return basis). Without the gains from share buy backs, the relative performance would have been rather worse. The Chairman says “This result continued a deteriorating relative performance over the last three and five years, due in part to the portfolio’s emphasis on market-leading natural resources companies. The end of the boom in commodities and oil has been reflected in a dramatic decline in the share prices of these companies. Your Board is both disappointed and acutely conscious of the need to bring this extended period of underperformance to an end.” At least, under Carlos Hardenberg, who has been managing the fund since 1 October, Templeton Emerging Markets has outperformed its benchmark by 2.9%.
Earnings per share in the year under review were considerably lower than last year at 7.05 pence (2015: 9.28 pence). Nevertheless the Board has decided to recommend the same annual dividend of 8.25 pence per share.
Top Contributors to relative performance by Security (%)(a)
Share Price Relative Contribution
Top Contributors Total Return to Portfolio
SK Innovation 86.8 1.2
Unilever(b) 8.6 1.0
Guangzhou Automobile 15.8 0.4
China Life Insurance(c) (37.9) 0.3
Baidu, ADR (8.3) 0.3
Hanergy Holding Group(c)(100.0) 0.3
Astra International (11.0) 0.3
Akbank 1.7 0.3
Itaú Unibanco, ADR (4.5) 0.3
China Construction Bank(c) (16.6) 0.2
(a) For the period 31 March 2015 to 31 March 2016.
(b) Company not in the MSCI Emerging Markets Index.
(c) Companies not held by TEMIT.
SK Innovation is a South Korean refiner and distributor of oil and gas and owner of the nation’s largest oil refinery. Despite energy industry headwinds, the company reported its highest operating profits since 2012 in 2015 and also announced a higher than expected dividend. Healthy refining margins and expectations that the rebound in oil prices in early 2016 would be likely to lead to higher than expected earnings in the first quarter of 2016 and a positive management outlook on Asian gross refining margins in 2016, further supported sentiment in the share price. They used this opportunity to realise gains.
Listed in the UK, but with a significant exposure to emerging markets, Unilever performed relatively well. Better than expected 2015 corporate results and continued demand in emerging markets supported the stock. They believe that this global consumer company has the experience and range of products to take advantage of the growing demand for personal care, food, refreshment and home care products from the billions of people in emerging markets.
Guangzhou Automobile Group is a major Chinese car and commercial vehicle manufacturer. The business is most noted for its partnership with Honda and Toyota. Stronger than expected 2015 earnings thanks to sales volume growth and effective cost controls and a strong product pipeline, especially for sports utility vehicles drove the share price in the second half of the reporting period. While they reduced holdings, they believe that the Chinese car market has great potential and that the company is a well-managed means to address rising demand.
Top Detractors to relative performance by Security (%)(a)
Share Price Relative Contribution
Top Detractors Total Return to Portfolio
Brilliance China Automotive (44.0) (3.7)
Kumba Iron Ore (76.1) (1.1)
Dairy Farm (33.6) (1.0)
PetroChina, H (36.3) (0.7)
Tencent(b) 11.3 (0.6)
Kasikornbank (26.2) (0.5)
Oil & Natural Gas (30.1) (0.5)
Siam Commercial Bank (21.6) (0.5)
PTT Exploration & Production (35.6) (0.4)
Impala Platinum (32.0) (0.4)
(a) For the period 31 March 2015 to 31 March 2016.
(b) Share Price Total Return since security purchased is 7.5%, with a relative contribution to the portfolio of 0.03%.
Brilliance China Automotive is a major Chinese automobile manufacturer with a joint venture with BMW for the production and sale of BMW 3-series and 5-series vehicles in China. Reduced earnings in 2015, resulting from price cuts and larger dealer incentives, and muted sales growth hurt the share price. Concerns about competition and loss of market share also played a role. Investor sentiment, however, improved in March on expectations that new product launches could drive sales and profitability in the second half of 2016. While they trimmed our holdings in the stock to reduce concentration and rebalance the portfolio, they believe that Brilliance China Automotive will continue to have an attractive product range which will enable it over time to benefit from the greater demand that they expect for luxury automobiles in China and thus continue to maintain a significant exposure to the stock.
Kumba Iron Ore (a South African producer) declined by more than 75% 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 began reducing our holdings in the latter part of the reporting period.
Dairy Farm is a Hong Kong based regional supermarket, drug store and convenience store operator with a presence across Greater China and Southeast Asia. The shares experienced subdued performance during the reporting period. 2015 corporate earnings declined, in part due to higher labour and rental costs, despite a growth in revenue in most segments. They trimmed holdings in the stock to reduce concentration.
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