Templeton Emerging Markets Fund

Analysis: Since Patricia Perez-Coutts bolted from AGF, we have been taking a more detailed look at many other of the emerging market funds available, and one that has come up on our radar is the Templeton Emerging Markets Fund. It is managed by Mark Mobius, who is largely considered to be one of the pioneers of emerging market investing. While this fund is no longer the biggest in the country, Franklin Templeton remains one of the largest players in the emerging market space globally.

The fund is managed using a value oriented, stock selection process that looks for companies that have healthy balance sheets and strong earnings growth that happen to be trading at a level of valuation that is attractive. Investment candidates are first identified using a range of quantitative screens that weed out the undesirable companies. The team then conducts detailed analysis on the potential buy candidates, often meeting with management to gain a stronger insight into the company, the industry and the region in which it operates.

The selection universe is limited to companies that are located in, or make at least 50% of their revenues in the emerging markets. Being bottom up, they pay little attention to the benchmark weightings and sector and country exposures are a result of stock selection. As a risk management measure, sector allocations are capped at 25% of the fund, while individual holdings are capped at 10%.

Recently, the portfolio has been positioned to benefit from two main themes; consumers and commodities. They believe that as per capita incomes continue to rise, so too will the demand for consumer goods. With commodities, they believe that there are two factors driving them higher. The first is the belief that global commodity demand will outstrip supply, which provides a strong fundamental case. A second driver will be the continued weakness in the U.S. dollar, which should support commodities.

As of August 31, the fund was largely concentrated in energy, banks and materials, much like the Canadian market. In our opinion, this may limit its effectiveness as a diversifier in a Canadian focused portfolio. Not surprisingly, the biggest country weight was China, which held a nearly 20% weight in the fund.

Portfolio turnover has been relatively modest, averaging around 27% for the past five years. The MER of the fund is high, coming in at 3.13% in 2011. Thus far in 2012, the company has opted to eat a lot of the operating expenses, which has brought the MER down to 2.95%. If the company had opted not to do this, the MER would have been 3.64%.

On balance, it is our view that this is not a bad emerging markets fund, but we do have a couple of concerns about the fund. The biggest is of course cost. Even with an MER of 2.95%, it is well above the category average. Our second concern is that the makeup of the fund is very similar to the Canadian market, which in our opinion limits its effectiveness as a diversifier in a Canadian focused portfolio. But, should Franklin Templeton continue to reduce costs for this fund, it will definitely become a more attractive option for investors seeking EM exposure.