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Templeton Emerging Markets Investment Trust
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== Current portfolio positioning<ref name=":2" /> == At end-May 2022, TEMIT’s top 10 holdings, which represent a range of countries and sectors, made up 52.6% of the portfolio, which was a lower concentration compared with 58.7% 12 months earlier; nine positions were common to both periods. Stocks are selected on a bottom-up basis and so the trust’s sector and geographic weightings are a by-product of this process. {| class="wikitable" |+Exhibit 2: Top 10 holdings (at 31 May 2022)<ref>Source: TEMIT, Edison Investment Research. Note: *N/A where not in May 2021 top 10.</ref> ! rowspan="2" |Company ! rowspan="2" |Country ! rowspan="2" |Sector ! colspan="2" |Portfolio weight % |- !31 May 2022 !31 May 2021* |- |Taiwan Semiconductor Manufacturing |Taiwan |Information technology |12.1 |11.8 |- |Samsung Electronics |South Korea |Information technology |10.4 |10.9 |- |ICICI Bank |India |Financials |6.0 |3.9 |- |Alibaba |China/Hong Kong |Consumer discretionary |5.4 |8.2 |- |Tencent |China/Hong Kong |Communication services |4.0 |8.4 |- |MediaTek |Taiwan |Information technology |3.9 |3.0 |- |Naver Corporation |South Korea |Communication services |3.3 |4.3 |- |LG Corporation |South Korea |Industrials |2.6 |2.5 |- |China Merchants Bank |China/Hong Kong |Financials |2.5 |2.4 |- |Banco Bradesco |Brazil |Financials |2.4 |N/A |- |Top 10 (% of portfolio) | | |52.6 |58.7 |} Exhibit 3 shows that over the 12 months to end-May 2022, the notable sector changes are lower exposures to communication services (-7.2pp) and consumer discretionary (-5.5pp) and a higher IT weighting (+4.6pp). Ness explains this sector remains the largest overweight position (+14.2pp versus the benchmark) due to positive consumption and innovation-led growth trends. However, this positioning has detracted from TEMIT’s performance in recent quarters as technology stocks’ valuations have declined due to Chinese regulatory pressure, which then spread into other sectors in the country such as education, property and banking, and in response to higher interest rates. The trust is overweight banks within the financials sector due to developments in the consumer space; there are low levels of credit penetration in emerging compared with developed markets. TEMIT’s holdings tend to be in leading incumbent banks that are working hard to digitise their businesses to counter the competitive threats from fintech businesses. Ness highlights that the trust’s weighting to the materials sector has increased due to adding to TEMIT’s exposure to renewable energy and electric vehicles, but ‘not at any price’. {| class="wikitable" |+Exhibit 3: Portfolio sector exposure versus benchmark (% unless stated)<ref>Source: TEMIT, Edison Investment Research. Note: Numbers subject to rounding.</ref> ! !Portfolio end-May 2022 !Portfolio end-May 2021 !Change (pp) !Index weight !Active weight vs index (pp) !Trust weight/ index weight (x) |- |Information technology |35.3 |30.7 |4.6 |21.1 |14.2 |1.7 |- |Financials |22.4 |19.7 |2.7 |21.8 |0.6 |1.0 |- |Consumer discretionary |11.7 |17.2 |(5.5) |12.8 |(1.1) |0.9 |- |Communication services |9.9 |17.1 |(7.2) |10.2 |(0.3) |1.0 |- |Materials |9.8 |5.6 |4.2 |9.1 |0.7 |1.1 |- |Consumer staples |4.0 |4.1 |(0.1) |6.0 |(2.0) |0.7 |- |Industrials |3.6 |2.6 |1.0 |5.5 |(1.9) |0.7 |- |Energy |1.8 |2.2 |(0.4) |5.0 |(3.2) |0.4 |- |Healthcare |1.7 |1.1 |0.6 |3.6 |(1.9) |0.5 |- |Real estate |0.7 |0.3 |0.4 |2.1 |(1.4) |0.3 |- |Utilities |0.4 |0.0 |0.4 |2.7 |(2.3) |0.1 |- |Other net assets |(1.2) |(0.6) |(0.6) |0.0 |(1.2) |N/A |- | |100.0 |100.0 | |100.0 | | |} There are more modest changes to TEMIT’s geographic exposure over the 12 months to end-May 2022 (Exhibit 4). Its Russian stocks were written down to zero at the beginning of March 2022 following the invasion of Ukraine. Ness reports that in January 2022, TEMIT’s Russian exposure was c 6.5% of the fund, which was c 3.0% overweight versus the index. He says the managers decided to hold on to TEMIT’s Russian securities rather than selling them at any price, as a sale would likely be to a Russian interested party and would lock in a capital loss. The manager comments that, as an example, LUKOIL is still making money, so holding on to this position could realise some money for clients in the future. TEMIT’s largest overweight country exposure remains South Korea (+10.7pp) and the trust is underweight India on valuation grounds (-3.9pp). Ness reports that the trust’s underweight to China/Hong Kong has reduced over the last 18 months (it was 9.2pp at the end of December 2020) and the managers have used market weakness to diversify TEMIT’s exposure towards those companies that are aligned with the Communist agenda. Ness comments that Chinese internet stocks have been under regulatory pressure, and the trust’s exposure has been reduced in favour of further diversification. Also, the zero-COVID policy has negatively affected Chinese economic growth, along with rising commodity prices and the costs of dealing with climate change. Ness says these factors highlight the importance of having a well-diversified China/Hong Kong exposure. The manager also reports that the trust’s underweight Middle East exposure has detracted from TEMIT’s performance as the region has benefited from the flight out of Russian securities and rising energy prices. Sehgal and Ness did not believe Russia would invade Ukraine and are mindful of the political tensions between China and Taiwan; hence, they highlight the need to insulate the portfolio as much as possible from geopolitical risk. {| class="wikitable" |+Exhibit 4: Portfolio geographic exposure versus benchmark (% unless stated)<ref>Source: TEMIT, Edison Investment Research. Note: Numbers subject to rounding.</ref> ! !Portfolio end-May 2022 !Portfolio end-May 2021 !Change (pp) !Index weight !Active weight vs index (pp) !Trust weight/ index weight (x) |- |China/Hong Kong |27.2 |30.4 |(3.2) |30.8 |(3.6) |0.9 |- |South Korea |23.4 |22.6 |0.8 |12.7 |10.7 |1.8 |- |Taiwan |16.9 |16.3 |0.6 |16.0 |0.9 |1.1 |- |Brazil |9.7 |6.7 |3.0 |5.6 |4.1 |1.7 |- |India |8.9 |6.4 |2.5 |12.8 |(3.9) |0.7 |- |US |3.6 |6.3 |(2.7) |0.0 |3.6 |N/A |- |Thailand |2.1 |1.3 |0.8 |1.9 |0.2 |1.1 |- |Mexico |1.7 |1.4 |0.3 |2.3 |(0.6) |0.7 |- |UK |1.5 |1.6 |(0.1) |0.0 |1.5 |N/A |- |South Africa |0.8 |4.0 |(3.2) |3.8 |(3.0) |0.2 |- |Rest of the world |5.4 |3.6 |1.8 |14.1 |(8.7) |0.4 |- |Other net assets |(1.2) |(0.6) |(0.6) |0.0 |(1.2) |N/A |- | |100.0 |100.0 | |100.0 | | |} The manager highlights some of the transactions in TEMIT’s portfolio in FY22. There is a new position in Guangzhou Tinci Materials Technology (Tinci), which is the largest worldwide producer of electrolytes used in batteries for electric vehicles. It is the lowest-cost producer with a 25–30% global market share and has also started to recycle batteries in China. Sehgal believes that Tinci has ‘huge growth opportunities’; it has a high return on capital as its business is not capital intensive and the company generates a significant amount of cash. Genpact was added to the portfolio. It is a US-listed business processing outsourcer with around half of its revenues in India. The manager explains that technology transformations involve the need to add more software and deploy tools, which benefits Genpact. Although the company is experiencing increased labour costs, this is due to high demand for its products, therefore Sehgal believes that top-line growth will outweigh any margin pressure. Another of TEMIT’s new holdings is Soulbrain, which manufactures chemicals for the semiconductor industry. It is a dominant supplier to SK hynix and Samsung Electronics. The company is benefiting from high demand for and the increased complexity of semiconductors. Complete disposals from the portfolio include Naspers, which was to reduce the overall Tencent exposure (Naspers owns c 30% of Tencent). ‘Naspers has a potential capital gains tax liability, so the discount to NAV is not as appealing as it appears to be’, says the manager. Flat Glass Group manufactures solar glass and is a play on the renewable energy theme. The stock was sold on valuation grounds and due to rising energy and soda ash costs, as well as industry overcapacity. Moneta Money Bank was a smaller position in the fund and Sehgal participated in the company’s tender offer.
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