Annual General Meeting (AGM) 2023

Paul Manduca, Chairman, introduces the 2023 TEMIT Annual General Meeting at the prestigious Barber Surgeons’ Hall in London. Lead Portfolio Manager, Chetan Sehgal, delivers a presentation on the results, portfolio activity and his outlook for emerging markets. The panel is then joined by Andrew Ness, Portfolio Manager, to answer shareholders’ questions.
 

Meeting transcript
 

Paul Manduca, Chairman

Ladies and gentlemen, welcome to the Annual General Meeting of Templeton Emerging Markets Investment Trust PLC (TEMIT). It is now 12 o'clock, so I'd like to begin.

On behalf of your board, I would like to thank you all for attending today.

First, I would like to introduce the directors who are present: Simon Jeffries is Chair of the Audit Committee and Senior Independent Director, David Graham, Magdalene Miller, Charlie Ricketts and Abigail Rotheroe. Abigail Rotheroe was appointed as a director with effect from the 1st November 2022. Abigail has over 20 years of investment experience and most recently as the Investment Director at Snowball Impact Management, a sustainable and impact-focused investment manager. We also have with us Chetan Sehgal and Andrew Ness in the front row, our portfolio managers.

Shareholders will have seen in the Annual Report that the year was a volatile period for TEMIT shares the second half of our financial year was better than the first. At the half-year stage, we reported a decline of minus 8.3% in our net asset value (NAV), whereas in the second-half returns improved, and we ended the financial year with a small positive return over 12 months of plus 0.8%, outperforming our benchmark index which produced a total return of minus 4.5.% And that better relative performance has continued in the current year.

Shareholders will also have seen in the Annual Report that environmental, social and governance (ESG) continues to play a key element of the board strategy for the company.

Following last year's positive feedback, this year we have published a second Stewardship Report for TEMIT, which explains the investment manager's approach and we encourage shareholders to download a copy from TEMIT’s website.

The net revenue earnings for the period under review amounted to 5.72 pence per share. The Board recommends a final dividend of three pence per share, which shareholders will be asked to approve at this meeting.

At the half year, we announced an increase in the interim dividend from one penny to two pence. If the final dividend is approved, this will result in a total dividend of five pence per share, an increase of 32% over the previous financial year.

We do believe that share buybacks are a key tool in managing the balance between supply and demand for our shares. In total over the year, £29.2 million was spent on share buybacks and as all buybacks were at a discount to the prevailing net asset value, this resulted in an increase to the NAV of 0.23% to the benefit of our remaining shareholders.

The notice convening this meeting is found on a page 105 of the report of the directors and accounts which were sent to all members on the 19th of June 2023. Copies of the report are available in the room today. The notice sets out the full text of the resolutions to be proposed at this meeting with explanatory notes. I ask your permission for the notice convening the meeting to be taken as read - thank you.

I would now like to ask Chetan Sehgal and Andrew Ness, our portfolio managers, to make a presentation to the meeting on the Company and its investment strategy. The presentation will be followed by a question and answer session and then we will return to the formal business of the Annual General Meeting. If asking a question after the presentation, please can you state your name and confirm that you are a shareholder in TEMIT or a duly authorised proxy or corporate representative of a shareholder. I would remind all of you that only members present in person or by proxy or corporate representatives or corporate members may speak at this meeting. Chetan and Andrew…
 

Chetan Sehgal – Lead Portfolio Manager, TEMIT

Thank you, Chairman. A copy of the presentation which I'm making will be available for you to take back after the end of the presentation. As the Chairman mentioned, emerging markets were quite volatile over the last one year, but it also is very important to note that emerging markets continue to add value to the global growth and account for 65% of the growth global GDP growth which has taken place last year.

As you know, TEMIT is an investment trust which primarily invests in emerging markets and there are obviously risks associated with those kind of investments. For example, we may not be able to earn the same amount of income as we project and that can go up and down, the net asset value can go up and down and we may also have currency risk as well. In addition, the Trust has access to gearing and once we deploy the gearing, it could lead to more volatile outcomes as compared to the underlying benchmarks.

But let's go back to what TEMIT as a trust is all about. It's been around for over 30 years. This is the 34th AGM. It's an active high conviction investment trust investing in emerging markets. It is the largest of its kind by far, and it gives exposure both to large caps as well as smaller cap and unlisted names in emerging markets. It is controlled and governed by the Board which has instituted various shareholder-friendly measures including the deployment of gearing for additional returns (potential) as we deem fit.

Let's go to the investment philosophy of TEMIT. Our central philosophy is all about generation of alpha, which is the returns over the benchmark in the marketplace, and we believe the alpha can be generated by focusing on sustainable earning power at a discount to intrinsic worth. By sustainable, we not only consider ESG factors, but we look at the competitive advantage and resilience of the kind of companies we invest in. We evaluate the earning power in terms of not just the earnings, but the long-term potential for earnings and we buy companies based on a discount to what we believe they are worth. As our founder Sir John Templeton, way back in 1957 said, that “The best bargain stocks are not those stocks whose prices are down the most, but those who are cheapest in relation to possible earning power in the future.”

So how do we do that? Essentially, we are quite differentiated from most of the other investment trusts which basically operate out of a single location or one or two locations. We are probably spread the widest amongst all the trusts. We are local in most markets. We have large teams and we believe that this pool of talent and information which we get from these teams throughout the emerging markets helps us have a competitive advantage over our peer group. So, on the slide you can see the names of my colleagues who are there and it's not just me and Andrew who are managing the Trust, but this entire team is supporting the management of the Trust. We also have Prayesh Patel, who's our Head of ESG activities in the room right now should you have questions on ESG.

So let me just talk about the market and the new realities of emerging markets. Number one, emerging market institutions have made policy improvements. And this is very important because if you see the last one year, we've had a banking crisis in Europe where one of the largest banks failed. We had some banking crises in the US where two of the largest banks actually went through troubles. But emerging markets, by and large, have been resilient. So there have been policy improvements. They are far more conservative because previously they've gone through this period of stress.

The second thing about emerging markets, as compared to previously when emerging markets were a source of commodities and cheap manufacturing, is the fact that emerging markets have moved up in consumption and in technology.

The third is emerging markets have really leapfrogged through innovation and technology and many of these companies which have done so find their way into the TEMIT portfolio.

So I'll just talk to through performance right now. The Chairman did mention that over the last year and, we are showing here data to the end of June, we have actually done better than the index. And over the last five years barring the year 2021 and 2022, which were particularly difficult for both the markets as well as the Trust, we have actually done better than the market and generated positive returns in in all those last four years.

These are small gains, but if you look at it over a long period of time since inception, the returns of TEMIT over the index and over many other indices and on a positive basis, TEMIT has done quite well, significantly over other such benchmarks, as well as on an absolute basis.

So, if you look at the long-term performance, this is the TEMIT NAV and the benchmark MSCI [Emerging Markets] index is shown in green below and you can see that compounding through small gains over a period of time makes a large difference over a long period of time. In addition to just financial performance we are actually proud to report that the Trust has used less carbon versus the benchmarks in achieving its results. For example, the weighted average carbon intensity of our portfolio is less than the index as well as the carbon emissions per dollar invested is lower than the index. This is a useful measure to say that we are not only just focusing on economic returns, but also on climate, which is becoming more and more important for shareholders as well.

I'll just talk about some of the performance of individual securities. This is a slightly busy slide, but as I said, the presentation material will be available after the end of this presentation. We've had good gains from ICICI Bank in India, Petrobras and Unibanco in Brazil. Our largest holding, and this is very interesting because TSMC and ICICI Bank are our largest two holdings in terms of active weights and that has also done quite well over the last one year.

There are some detractors as well, many of them are in China. You can see out of the last, out of the five detractors, four of them are in China. I'm sure there will be questions around China after the end of this presentation, but by and large, we are committed to China. We believe China has many interesting companies. It has a population which is quite dynamic. They are willing to work hard and we believe that the Chinese market is quite depressed at this juncture.

So, what has led to near-term performance? Essentially it has been the recovery in semiconductors. Demand has not yet improved, but as you may be reading things about generative AI and the, you know, use of chips in many more sectors; semiconductors have started to come back.

We've done very well on in our investments in India, especially in both the Financial sector and the Internet sector. And we were overweight Brazil as and underweight South Africa. So those have been the recent drivers of performance. But we do keep, you know, looking at it from a long-term perspective and this just gives you a near-term perspective of how we have actually done.

How do we position ourselves? This is quite important; I spoke earlier about sustainable earning power at a discount. This actually reflects it in terms of numbers. We invest in companies with sound business models with sustained earning power and at a discount. So essentially, the return on assets of the portfolio is better than the index. The growth rate is not compromised versus the index and the valuations which we are paying is actually lower than the index.

And that I think is the Holy Trinity of fund management. How do you get growth without compromising on profitability and valuations?

Just some examples of stocks, this is active overweight positions, that is how we have positioned versus the index. You can see our largest two overweight positions at TSMC and ICICI Bank. In addition, we have Korean companies like LG and Naver, Chinese Internet companies are included in the process, Samsung Life in Korea, Itau Bank and Tinci make up the top 10.

In absolute terms, it's slightly different. We also have Samsung Electronics out there and we have Tencent as well, but we are not that overweight in in those two securities.

Just in terms of allocation, Asia is our largest weight. We are slightly overweight. Asia, we are slightly overweight. Latin America, we are slightly underweight [Middle East/Africa] and we are slightly overweight Europe as well. The North American exposure is basically exposure to securities which are engaged in IT and IT outsourcing and which are basically classified internally as India-based companies. So, we also talk about the sectors, we are overweight on IT and semiconductors on which we're quite confident that semiconductors will be all pervasive. On Financials, you know that the rates have actually gone up quite significantly in the recent past and financials have been a good place to actually invest. They would do even better as dollar weakness sets in and we think that there's gains to be made on the Financial sector. We are slightly underweight Consumer Discretionary, we are. underweight Energy, predominantly coal, that's not where we are invested. We are underweight Real Estate; we’ve been following what's happening in the real estate sector in China and that actually makes up the trust sector allocations.
 

I'll just talked about the outlook and how we see it. First is the potential peak of interest rates and inflation in many markets. I think that's very important because last one year has been a kind of a shock. You know when interest rates have gone up from very low levels to high levels, inflation has gone up quite significantly. I think it's coming to an end. Supply is picking up, it is responding to this kind of inflation which is seen. So I think that is a peak and what we see as a result of that is that the confidence which was lacking in emerging markets will come back as inflation and interest rates start peaking.

The risk on the geopolitical front, I must say, remains elevated. We haven't solved the war [in Ukraine] and there's always questions on whether there can be another war. So I think geopolitical risks are elevated. For us, semiconductor demand will recover from a cyclical low and we are actually playing on that. We see semiconductors becoming more and more pervasive. You see the amount of electronics in the car today, it is far more than what it was 10 years back and therefore we think that this this industry will continue to grow. In fact, many of the countries are now subsidising the setting-up of semiconductor factories because they see that this is one industry which has growth and has the potential to disrupt.

A lot of people talk about generative AI and what it means. In fact, we met someone yesterday was very concerned about the job losses which will occur as a result of the deployment of generative AI, and it’s our belief is really that it will unleash human potential. So one need not be worried about it. It will lead to additional productivity, and we look forward to using more of these tools ourselves in making better decisions for you guys.

The other issue is on electric vehicles and renewable energy. These are structural themes. They have just started in China and now 30% of the cars which are being sold are already electric vehicles and Europe is getting there and the US will get there as well. We believe in the electrification of everything. People will shun fossil fuels. Renewable energy is getting cheaper. Solar is being deployed.

But lastly and most interestingly, I think the emerging market story is still not well understood. They remain under owned, they remain undervalued and they remained under-appreciated and we believe that over a period of time all these three things can get corrected.

So that is my presentation and Andrew and I and Priyesh, I will be happy to take any questions.

Paul Manduca, Chairman, Chetan Sehgal, Lead Portfolio Manager and Andrew Ness, Portfolio Manager

Paul Manduca: We can now move to the question and answer session, both on the investment presentation and any other matter you wish to raise. I'm going to ask the managers to step up here to answer questions please … but questions please. Anything you'd like to ask? 

Shareholder: Probably very easy question. We are told. I keep reading that Vietnam is a wonderful place to invest, but there are no holdings there. Can you say a few words about that?

Andrew Ness: It's one of many market opportunities that we find ourselves facing. We currently don't have any active exposure as you're aware, to Vietnam, and we've got a research partnership with the local research firm there. So, we've got plenty of opportunity and quite broad coverage of the marketplace. But I think the benefit of being a global emerging market investor, as we are, is that there's a world of opportunity and currently we find better opportunities elsewhere than Vietnam.

To dive a little bit into more detail that that the country has faced some challenges. There's an ongoing corruption investigation programme that's spilt into the capital markets. There's been some uncertainty in some of the bond issuance that's taking place in the country. So, I think they're going through a period of development. You know it's still young economy, it's a young capital market environment. I think there's a great opportunity long term for the country, but at this this current point in time, we find better opportunities elsewhere.

Shareholder: TSMC, it's a major component. It's got, it's had, very good prospects. It's a wonderful semiconductor company. My question might be the size of the holding at 11.1%. We're thinking through the geopolitical risks in that area, it just seems a huge exposure to one company which has very substantial geopolitical, let's say a material geopolitical risk. And the question I suppose I ask is (a) are you comfortable with that size of that holding? And secondly, are you pressing the company, or whatever, to diversify the areas in which it operates to try and reduce its exposure, to be blunt, it's exposure to Korea, in the event of … sorry, it's exposure to Taiwan, in the event of the worst geopolitical outturns?

Andrew Ness: Yes, we are very comfortable with the position in answer to your first question. And secondly, yes, we have engaged with the company in terms of their diversification of operating footprint, and you may be aware that they're in the process of investing substantially into the US for a large major manufacturing facility. They're in discussions in Japan and also discussions in other countries. And again, that's in order to be able to satisfy demand from a global client base.

They are the world's leading semiconductor foundry and are clients to everyone. It's a tightrope for them to navigate that given the geopolitical challenges that Chetan alluded to earlier but, so far, they've been capable of doing so. I think the worst-case scenario that you, you you hint at would be war with China invading Taiwan and a possible US response. That's not our base case today.

Shareholder: One other follow-up question, if I may, very quickly. And you have inevitably a high exposure to Chinese IT stocks and so forth. If they were barred from the US market, would that really impact on their prices and is that a worry to you in this fund because a lot of it still is invested in the US and it sort of keeps their price up? I don't know. It's just a thought that it seems that there's a risk there.

Yeah, I think the Chinese/US rivalry won't go away. I think it will ebb and flow in terms of how intense it becomes. And I think you may have witnessed the visit of [Antony] Blinken and Janet Yellen to China in recent months. I think there's a recognition for a need to re-engage. So, I think that's potential signs of a positive trend there in the short term. With regards to the companies in the technology space that we own in China, they are vastly and predominantly domestically oriented. They do have global businesses. The likes of Tencent’s a global gaming company, Alibaba has its AliExpress, which some of you may use to make affordable, good quality goods imported.

At the moment there's not a blanket ban of Chinese businesses doing business in the States for the obvious reason that China and the US are very much interdependent trade partners. I think the targeting of specific industries where the US sees China is a strategic rival: semiconductors, biotechnology and other, you know, AI we talked about generative AI, I think those areas will be in focus for targeted US action. But I don't think we're going to see a wholesale blockade of Chinese businesses being barred from doing business in the US because the corresponding response would be US businesses - and we know Apple’s a major business in in mainland China - I don't think that's sanctionable on either side.

So, I think the risk you talk about would be very specific to some of those strategic areas and we are acutely aware of that when we're looking at the portfolio positioning and our Chinese exposure.

Paul Manduca: Well, thank you. There was a question here I think, on this side, further up. This gentleman here. Thanks.

Question: Can you tell us about a little more about the increase in revenue over the years, which seems to be dramatic? Is it sustainable? Or are there good stock picking by you? Or what are you attributing it to and what do you see on the way forward?

Paul Manduca: Definitely, definitely good stock picking!

We aren't an income stock and we make we make that clear in income and dividends, not necessarily dividends because we try not to be volatile, but the revenue we receive will be volatile. We've had special dividends from companies in the past.

So, what the board's trying to do is have a sort of steady hand on this. You'll have seen some money go into the revenue reserve this year. We could have paid out more, we haven't, because looking forward the outlook at the moment doesn't look quite as buoyant as that. But quite often the board’s surprised by what comes in.  So look we're delighted we had an increase but we can't forecast forward dividends.

Shareholder: It's a very pleasant surprise.

Paul Manduca: Good. I mean we like those!

Shareholder: I would like to attribute some of the increase to the skill of our fund managers.

Paul Manduca: Yes, I agree with you.

Andrew Ness: Thank you. Nice to see you again. Just as a couple of follow-ups.... I think if you look at the overall portfolio, we've got close to 20% of this that the fund today is distributing dividends of over 5% and it's quite widespread across geography and by industry. I think there's two aspects to that. One, and we've got companies with good strong internal cash generation. Two, we've got this governance trend and it's something I think I discussed last year that we're seeing ongoing improvements in corporate governance, transparency of businesses and better balance sheet management and that's leading to an increased awareness of balance sheet inefficiencies. So, we're seeing more dividends being distributed, we're seeing more corporate buyback action. Now some of that is company led, others being driven by engagement. We've written a lot – Chetan’s a great letter writer - we've got lots of letters this last 12 months we've been sending off to corporate saying your balance sheet’s inefficient. You know, if you don't have strong investment ideas today, then please let's redistribute some of that that capital back to shareholders like ourselves because we recognise the power that it then allows us to distribute, as Chairman said, to our end investors and it is meaningful and it's a positive, nice surprise.

In terms of the sustainability, I would caution that that the current yield in the portfolio close to 4% is high. I think that reflects an element of the economic environment. Of caution, we know it's a difficult environment. I think there's an element of caution there. I would imagine if we get to a period where we're much more confident about the state of the world, then our companies we would be encouraging to start reinvesting perhaps more aggressively and as a result there'll be less capital available to distribute. So not to rob you of another positive surprise, but I think the consequence of a lower dividend should be greater confidence in future growth. So there's some compensation there.

Paul Manduca: What Other questions? Any others? If not, thank you very much. One more, one more … sorry.

Shareholder: I just wanted to ask, you say in your annual report that you've been chairman for nine years and you're getting itchy feet, and I understand…
 

That’s not the case. There are governance rules in the UK where you cease to be independent in some shareholders minds after nine years.

Shareholder: Yes, I appreciate that, and I see that it is. Is that an absolute ruling or is it just a recommendation?

It's a recommendation in the hands of your shareholders, but I wouldn't want to be seen as anything controversial or indeed not independent.
 

Shareholder: I understand why that would apply to a normal trading company where we're clearly a chairman might go native after a while if he hangs around with the staff for too long. But as far as the investment trust is concerned, there's nothing that you have that would threaten your independence, and it seems to me that it it's just an advantage that there's a degree of continuity on a board and a good managing director and for that matter the rest of the board are our benefit to shareholders and should go on as long as they possibly can.

Paul Manduca: Experience is obviously always useful and I'm flattering myself, but the reality is independence is important, particularly if things go wrong. And there was quite a lot of publicity of course at Scottish Mortgage where the chairman had stayed 15 years and was quite strongly criticised in the Financial Times. You know, these are, these are ... it's not science and hard lines but I like to be very correct and the company does and the managers do, and I think objectivity is very important and nine years is nine years, you know, and I thoroughly enjoyed my, so far, eight years, but I think nine years is a good time. So, thank you for your support.

Shareholder: I’m sorry to see you go.

End of recording; meeting progresses to the formal voting on resolutions.

Please note that shareholders’ names have been removed to preserve anonymity.

The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the securities discussed here were, or will prove to be, profitable.