Preliminary Statement of Annual Results

RNS Number : 4395H
Templeton Emerging Markets IT PLC
07 June 2017
 

Preliminary Statement of Annual Results

TEMPLETON EMERGING MARKETS INVESTMENT TRUST PLC ("TEMIT" or "the Company") 

Strategic Report

 

The Directors present the Strategic Report for the year ended 31 March 2017, which incorporates the Chairman's Statement and which has been prepared in accordance with the Companies Act 2006.

 

The aim of the Strategic Report is to provide shareholders with the ability to assess how the Directors have performed in their duty to promote the success of the Company for shareholders' collective benefit, by bringing together into one place all the information about the Company's strategy, the risks it faces, how it is performing and the future outlook.

 

Financial Summary

 

2016-2017


Year ended

Year ended


Capital

Total



31 March

31 March


Return

Return(a)


Ref

2017

2016


%

%

Net Assets and Shareholders' Funds (£ million)


2,148.1

1,562.3




Net Asset Value (pence per share)


762.8

524.2


46.2

47.8

Highest Net Asset Value (pence per share)


780.6

688.6




Lowest Net Asset Value (pence per share)


503.3

428.4




Share Price (pence per share)


661.5

453.9


46.6

48.3

Highest Share Price (pence per share)


674.0

604.5




Lowest Share Price (pence per share)


435.0

371.5




MSCI Emerging Markets Index





31.6

35.2

Share Price Discount to Net Asset Value


13.3%

13.4%




Average Share Price Discount to Net Asset Value over the year


13.3%

12.3%




Dividend (pence per share)

(b)

8.25

8.25




Revenue Earnings (pence per share)

(c)

6.59

7.05




Capital Earnings (pence per share)

(c)

235.71

(124.47

) 



Total Earnings (pence per share)

(c)

242.30

(117.42

) 



Net Gearing

(d)

0.8%

-




Ongoing Charges Ratio

(d)

1.20%

1.22%




 

Source: Franklin Templeton Investments and FactSet.

 

(a)     Capital return with dividends reinvested.

(b)     A dividend of 8.25 pence per share on the Company's profits for the year ended 31 March 2017 has been proposed.

(c)     The Revenue, Capital and Total Earnings per share figures are based on the Earnings per share shown in the Income Statement below and Note 5 of the Notes to the Financial Statements.

(d)     Calculated in accordance with AIC guidance.

 

 

 

Ten Year Record

 

2007-2017

 

Total Net









Assets and


Share


Earnings per



Ongoing


Shareholders'

NAV

Price

Year-end

share -

Dividend


Charges


Funds

(pence

(pence

Discount

undiluted

(pence


Ratio(a)

Year ended

(£m)

per share)

per share)

(%)

(pence)

per share)


(%)

30 Apr 2007

1,925.5

359.2

327.3

8.9

4.16

3.13


1.32

30 Apr 2008

2,291.4

484.8

438.0

9.6

4.07

3.50


1.33

30 Apr 2009(b)

1,208.3

365.7

340.5

6.9

7.69

3.75

(c)

1.34

31 Mar 2010(d)

2,046.4

620.3

577.0

7.0

2.88

3.75


1.29

31 Mar 2011

2,368.4

718.0

660.0

8.1

6.14

4.25


1.31

31 Mar 2012

2,098.6

636.3

588.5

7.5

7.91

5.75


1.31

31 Mar 2013

2,302.7

702.3

640.5

8.2

8.45

6.25


1.30

31 Mar 2014

1,913.6

591.8

527.0

10.9

9.14

7.25


1.30

31 Mar 2015

2,045.0

641.2

556.0

13.3

9.28

8.25


1.20

31 Mar 2016

1,562.3

524.2

453.9

13.4

7.05

8.25


1.22

31 Mar 2017

2,148.1

762.8

661.5

13.3

6.59

8.25

(e)

1.20

 

2007-2017

(rebased to 100.0 at 30 April 2007)

 





MSCI








Emerging

Revenue






Share

Markets

Earnings




NAV total

Share

Price total

Index total

per share -

Dividend

Year ended

NAV

return(f)

Price

return(f)

return(f)

undiluted

per share

30 Apr 2007

100.0

100.0

100.0

100.0

100.0

100.0

100.0

30 Apr 2008

135.0

135.8

133.8

135.0

126.9

97.8

111.8

30 Apr 2009(b)

101.8

103.1

104.0

105.9

97.2

184.9

119.8

31 Mar 2010(d)

172.7

178.1

176.3

182.6

147.8

69.2

119.8

31 Mar 2011

199.9

207.2

201.6

210.3

166.1

147.6

135.8

31 Mar 2012

177.1

184.8

179.8

188.8

152.4

190.1

183.7

31 Mar 2013

195.5

205.3

195.7

207.7

164.1

203.1

199.7

31 Mar 2014

164.8

175.3

161.0

172.8

147.9

219.7

231.6

31 Mar 2015

178.5

192.2

169.9

184.7

167.4

223.1

263.6

31 Mar 2016

145.9

159.4

138.7

153.2

152.6

169.5

263.6

31 Mar 2017

212.3

235.6

202.1

227.3

206.4

158.2

263.6

 

(a)     From the year ended 31 March 2012, the Ongoing Charges Ratio (OCR) replaced the Total Expense Ratio. Prior year numbers have not been restated as the ratios are not materially different.

(b)     The results for the year ended 30 April 2009 reflect £633m returned to the shareholders as a result of the tender offer in 2008.

(c)     Excludes the special dividend of 2.50 pence per share in 2009.

(d)     11 months to 31 March 2010.

(e)     A dividend of 8.25 pence per share for the year ended 31 March 2017 has been proposed.

(f)     Includes dividends reinvested.

 

2007-2017 NAV, Share Price and Benchmark Total Return(a)

 

2007-2017 NAV and Share Price Total Return Relative to the Benchmark Total Return(a)

 

Annual NAV and Share Price Total Return Relative to the Benchmark Total Return(c)

 

(a)     This graph shows the value of £100 invested on 31 March 2007 at 31 March 2017. The Ten Year Growth Record performance above differs as it was rebased from the financial year end at 30 April 2007.

(b)     Rebased to 100 at March 2007.

(c)       Periods are TEMIT reporting periods (to 30 April up to April 2009 and 31 March thereafter).

 

 

Chairman's Statement

 

Market Overview and Investment Performance

 

In the year under review we experienced a recovery in the performance of emerging markets. As I reported at the half year stage, for UK-based investors the weakness in the value of sterling following the result of the UK referendum to leave the European Union enhanced the strong market returns.

 

The tables above set out performance over the year and over other key time periods and the drivers of our investment performance this year are described in detail in the Investment Manager's Portfolio Report.

 

31 March 2017 marks the end of the first full accounting year in which Carlos Hardenberg has been our lead portfolio manager and 18 months since Carlos took over this role. Our Investment Manager has increased exposure to stocks related to technology and also marginally reducing risk by increasing the number of stocks held. However, the fundamental approach has not changed and our Investment Manager has continued to focus on seeking long-term value. The Board is encouraged by recent performance but mindful that on a five year basis we still have some ground to make up relative to the benchmark. Nevertheless, Carlos and his team have made a very good start and we are grateful for their efforts over the year under review.

 

Asset Allocation and Borrowing

 

On 31 January 2017 we announced that TEMIT had entered into a three year £150 million unsecured multicurrency revolving loan facility with The Bank of Nova Scotia's London Branch. Under the facility up to £150 million in total may be drawn down in pounds sterling, US dollars and Chinese renminbi ("CNH"). The maximum amount of CNH which may be drawn down is the equivalent of £30 million. The Company has no other debt.

 

The Board recognises that gearing increases volatility but we have concluded that it may be in shareholders' interests to borrow at a time when the outlook for emerging markets remains positive and interest rates are low. The Investment Manager was granted discretion by the Board to draw down the debt as investment opportunities arise, subject to oversight by the Board. The Investment Manager has deployed the facility carefully and, as at 31st March 2017, the level of gearing (net of cash in the portfolio) was 0.8%. If all of the facility were to be drawn down and no cash were to be held in the portfolio, based on the net asset value as at close of business on 31 March 2017, gearing would be 7.4%.

 

Revenue, Earnings and Dividend

 

Revenue earnings per share in the year under review were 6.59 pence (2016: 7.05 pence). Your Board has decided to recommend to shareholders that we maintain the dividend at 8.25 pence, the same level as last year. Part of this dividend will be funded by TEMIT's substantial revenue reserves.

 

In light of the decision to employ borrowing, the Board has reviewed TEMIT's allocation of expenses and has decided that, with effect from 1 April 2017, 70% of the annual AIFM fee and 70% of the costs of borrowing will be allocated to the capital account. This allocation, which reflects the Board's assessment of the likely ratio of long-term capital and revenue returns, complies with the AIC Statement of Recommended Practice: Financial Statements of Investment Companies and Venture Capital Trusts and is in line with accepted market practice. The effects of this revision in future years will be to increase revenue earnings and reduce capital returns by equivalent amounts, and to reduce the volatility of revenue earnings per share. If this policy had been in place from the start of the financial year under review the revenue earnings per share for the year to 31 March 2017 would have been 11.72 pence.

 

Managing the Discount

 

During the year to 31 March 2017, TEMIT's shares traded at discounts of between 10.3% and 15.3%, and on 31 March 2017 the discount was 13.3%.

 

Your Board continues to exercise its right to buy back shares when it believes this to be in shareholders' interests. We dealt in the market on the majority of working days over the year and, in total, bought back for cancellation 16,395,704 shares, or 5.5% of the shares in issue at the start of the financial year. An effect of buying back shares at a discount was to increase the NAV per share for remaining shareholders by 0.8%. Having been so proactive with share buy backs, and in light of the strong investment performance which I describe above, it is disappointing that the shares continue to trade at such a wide discount to their net asset value and your Board continues to monitor the situation closely. Your Board has also agreed with Franklin Templeton that the resources devoted to marketing will be increased, with the aim of stimulating demand for the Company's shares.

 

Treasury Shares

 

All shares bought back to date have been cancelled. However, it is common practice in the investment trust sector for a company to cancel shares which are bought back or to place them into treasury. We are proposing TEMIT should place shares which it buys back into treasury or to cancel them, at the Board's discretion. The key advantage of shares held in treasury is that they can be reissued quickly and at minimal cost. If we do place shares which TEMIT buys back into treasury, in order to protect the interests of existing shareholders, they will only subsequently be reissued at a price at or above the prevailing NAV per share at the time of reissue.

 

AIFM Fees

 

The current annual AIFM fee is 1.1% of net assets per annum. We have agreed with Franklin Templeton that, with effect from 1 July 2017, the annual AIFM fee will be reduced to 1% of net assets up to £2 billion and 0.85% of net assets above that level.

 

The Board

 

Your Board has a succession plan which will result in a number of changes over the next few years.

 

As reported last year, Simon Jeffreys joined the Board at the conclusion of our Annual General Meeting ("AGM") on 15 July 2016 and David Graham joined the Board on 1 September 2016.

 

Peter Harrison and Chris Brady have both served as directors for nine years and will retire following this year's AGM. I would like to record the Board's thanks to Peter and to Chris for their diligence and wise counsel since both were appointed in 2007.

 

Following Peter Harrison's retirement, Simon Jeffreys will take over the role of Chair of the Audit Committee.

 

Hamish Buchan, the Senior Independent Director, will have served nine years in June 2017 and has agreed to stay on for a further year to ensure an orderly succession. Our current plan is that Hamish will retire from the Board at our AGM in 2018.

 

Investor Communications

 

The Board and Investment Manager aim to keep shareholders informed and up-to-date with information about the Company as well as seeking feedback and comment from investors. Our website (www.temit.co.uk) displays the latest news, price and performance information, portfolio details, updates from the Investment Manager and a blog dealing with topical issues in emerging markets. Via the website you can also ask to have the latest Company information e-mailed directly to you. I encourage all shareholders to register on our website and make full use of the facilities and materials available to help keep you informed about your Company.

 

I am aware that shareholders may, on occasion, wish to contact me or my fellow Board members directly and not via our Investment Manager. While our Investment Manager will, in most cases, be best placed to handle enquiries, I am at your disposal to receive any questions or comments, as is the Senior Independent Director or any of the other Directors, all of whom may be reached via our brokers whose contact details are enclosed at the end of this report.

 

Outlook

 

Following the recent recovery in emerging markets equities, some consolidation is likely. Nevertheless, relative to developed markets, many emerging markets are trading at interesting valuations and the prospects remain attractive. Your Board continues to encourage the Investment Manager to focus on finding value, and we are confident that this will lead to good long-term returns.

 

Annual General Meeting

 

I would like to invite all shareholders to attend the AGM to be held at Stationers' Hall, Ave Maria Lane, London at 12 noon on Thursday 13 July 2017. There will be an opportunity to meet the Board and the Investment Manager and to hear the latest news on your Company, its investments and the markets, as well as take part in the formal annual meeting of the Company.

 

Paul Manduca

Chairman

7 June 2017

 

 

 

Strategy and Business Model

 

Company Objective

 

Our objective is that the Company provides long-term capital appreciation for private and institutional investors seeking exposure to global emerging markets, supported by both strong customer service and corporate governance.

 

Company Strategy

 

Our strategy is that TEMIT:

•     Delivers superior long-term investment performance compared to our benchmark and peers;

 

•     Maintains liquidity in its shares to support buyers and sellers;

 

•     Provides stability in the discount to net asset value;

 

•     Through periodic continuation votes, affirms the shareholder mandate;

 

•     Through regular communication, keeps investors up-to-date with the progress of the Company, as well as seeking feedback and comment from investors; and

 

•     Outsources, where appropriate, to exceptional service providers.

 

Delivering the Strategy

 

Performance

 

At the heart of this strategy is the appointment and retention of highly regarded investment management professionals, who will identify value and achieve superior growth for shareholders. The Investment Manager, under the leadership of Carlos Hardenberg, continues to apply the same core investment principles of value investment and detailed company research to achieve long-term capital appreciation for shareholders.

 

Liquidity

 

The Company is listed on the London and New Zealand Stock Exchanges. The Company has engaged Winterflood as Financial Adviser and Stockbroker, who act as a market maker for investors wishing to buy and sell shares in the Company. They also continually monitor the market in our shares.

 

Gearing

 

On 31 January 2017, the Company entered into a three year £150 million unsecured multi-currency revolving loan facility with The Bank of Nova Scotia, London Branch. Under the facility up to £150 million total may be borrowed, with drawings available in pounds sterling, US dollars and Chinese renminbi (CNH). The maximum amount of CNH which may be drawn down is the equivalent of £30 million.

 

At the year end, CNH 214,100,000 and USD 73,338,000 (£24,900,000 and £58,500,000 respectively) had been drawdown which are repayable within one year. The Company's net gearing position was 0.8% (net of cash in the portfolio) at the year end.

 

The Board continues to monitor the level of gearing and considers gearing up to 10% to be appropriate.

 

Stability

 

The Board has powers to buy back the Company's shares as a discount control mechanism when it is in the best interests of the Company's shareholders. On a daily basis, the Board ensures that the share price discount to NAV is actively monitored. Discount management is reviewed regularly by the Board to ensure that it remains effective in the light of prevailing market conditions.

 

Affirmation of Shareholder Mandate

 

In accordance with the Company's Articles of Association, the Board must seek shareholders' approval for TEMIT to continue as an investment trust every five years. This allows shareholders the opportunity to decide on the long-term future of the Company. The last continuation vote took place at the 2014 AGM, when 99.74% of shareholders voted in favour.

 

 

 

Communication

 

We ensure that investors are informed regularly about the performance of TEMIT and emerging markets through clear communication and updates.

 

TEMIT seeks to keep you updated on performance and investment strategy through the website (www.temit. co.uk). Here you will find all the latest information on the Company, including monthly factsheets, stock exchange notices and updates from the Investment Manager on the latest news on emerging markets.

 

We also hold investor briefings and discussions in order better to understand investor needs.

 

Service Providers

 

The Board conducts regular reviews of the Company's primary service providers as discussed on pages 42 and 43, to ensure that the services provided are of the quality expected by TEMIT. The Directors also ensure that the Company's primary service providers have adopted an appropriate framework of controls, monitoring and reporting to enable the Directors to evaluate these risks.

 

Business Model

 

The Company has no employees and all of its Directors are non-executive. The Company delegates its day-to-day activities to third parties.

 

At least quarterly, the Board reviews with the Manager and the Investment Manager a wide range of risk factors that may impact the Company. Further analysis of these risks is described below. A full risk and internal controls review is held every September at the Audit Committee meeting.

 

Due to the nature of the Company's business, investment risk is a key focus and is reviewed on an ongoing basis as part of every investment decision of the Investment Manager. Further information on this process is detailed below.

 

The Board is responsible for all aspects of the Company's affairs, including the setting of parameters for the monitoring of the investment strategy and the review of investment performance and policy. It also has responsibility for all strategic policy issues, namely dividend, gearing, share issuance and buy backs, share price and discount/premium monitoring, and corporate governance matters.

 

Key Performance Indicators

 

The Board considers the following as the key performance indicators for the Company:

 

•     Net Asset Value total return compared over various periods to its benchmark;

 

•     Share Price, Discount and Use of Buy Back Powers;

 

•     Dividend and Earnings per share; and

 

•     Ongoing Charges Ratio.

 

The 10 year records of the KPIs are shown above.

 

Net Asset Value Performance

 

Net Asset Value performance data is presented within the Company Overview along with the 10 year record above.

 

The Chairman's Statement above and the Investment Manager's Report include a review of the main developments during the year and the market outlook.

 

Share Price, Discount and Buy Backs

 

The share price of TEMIT increased by 48.3% to 661.5 pence over the year to 31 March 2017, while the Company's share price discount to NAV narrowed slightly to 13.3% from 13.4% as at 31 March 2016 and has been in the range of 10.3% to 15.3%. On 25 May 2017, the latest date for which information was available, the discount had widened to 13.9%.

 

The Board has powers to buy back the Company's shares as a discount control mechanism when it is in the best interests of the Company's shareholders. The Board was authorised at the Company's AGM on 15 July 2016 to buy back up to 43,985,737 shares (or 14.99% of the Company's issued share capital on that date, whichever was lower). The present authority expires on the conclusion of the AGM on 13 July 2017. The Directors are seeking to renew this authority at the 2017 AGM, as further detailed in the Directors' Report.

 

Share Price Discount to NAV

 

During the year 16,395,704 shares were repurchased, representing 5.5% of the issued share capital as at 31 March 2016, at a cost to the Company of £89.4 million. These shares were cancelled which resulted in an uplift of 0.8% to the net asset value per share. They were bought back at discounts ranging from 10.9% to 14.7% and at prices ranging from 435.0 pence to 674.0 pence.

 

In the period from 1 April to 25 May 2017, 735,276 shares were bought back and cancelled by the Company.

 

Dividend and Earnings per share ("EPS")

 

Total income earned for the year was £46.1 million (2016: £45.0 million) which translates into net earnings of 6.59 pence per share (2016: 7.05 pence per share), a decrease of 6.5% over the prior year. The capital profit for the year was £680.4 million (2016: net loss £384.9 million) which translates to capital earnings of 235.71 pence per share (2016: net loss 124.47 pence per share). This gives a total earnings per share of 242.30 pence per share for the year (2016: net loss 117.42 pence per share).

 

The Board is proposing a dividend of 8.25 pence per share, which is the same as last year.

 

Ongoing Charges Ratio

 

The Ongoing Charges Ratio ("OCR") represents the annualised ongoing charges of the Company divided by the average daily net asset values of the Company for the year. The OCR fell to 1.20% for the year ended 31 March 2017, compared to 1.22% in the prior year. This was due to the increase in the average net assets during the year.

 

The fees paid to the AIFM will reduce from 1 July 2017, as detailed in the Chairman's Statement above.

 

Costs associated with the purchase and sale of investments are taken to capital and are not included in the OCR. Transaction costs totalled £2,756,000 (0.15% of average net assets) for the year to 31 March 2017 (2016: £3,873,000 (0.24% of average net assets)). The decrease from the previous year is due to a lower turnover of the portfolio.

 

Principal Risks

 

The principal risks facing the Company, as determined by your Board, are summarised in the table below. A more detailed explanation of the monitoring of risk and uncertainties is covered within the Report of the Audit Committee. Further information on the risks that TEMIT is subject to, including additional financial and valuation risks, are also detailed in the Notes to the Financial Statements.

 

Risk


Mitigation

 

Investment and concentration

The portfolio will diverge significantly from the MSCI Emerging Markets Index and may be concentrated in a more limited number of sectors, geographical areas or countries. This is consistent with the stated investment approach of long-term value investing.

 

Where possible, investment will generally be made directly in the stock markets of emerging countries. Emerging markets can be subject to greater price volatility and more rapid and more exaggerated re-rating than developed markets.


The Board regularly reviews the portfolio composition / asset allocation and discusses related developments with the Manager. The Investment Compliance team of the Manager monitors concentration limits and potential breaches are signalled to portfolio management for remedial action.

Market

Market risk arises from volatility in the prices of the Company's investments, from the risk of volatility in global markets arising from macroeconomic and geopolitical circumstances and conditions as well as from the leverage utilised by the fund. Many of the companies in which TEMIT invests are, by reason of the locations in which they operate, exposed to the risk of political or economic change. In addition, exchange control, tax or other regulations introduced in any country in which TEMIT invests may affect its income and the value and marketability of its investments.


The Board regularly reviews and discusses with the Investment Manager the portfolio and investment performance of the Company and the execution of the investment policy against the long-term objectives of the Company. The Board also reviews regularly risk management reports from the Manager's independent risk team.

 

 

 






Risk


Mitigation

Foreign currency

Currency movements may affect TEMIT's performance. In general, if the value of sterling increases compared with a foreign currency, an investment traded in that foreign currency will decrease in value because it will be worth less in sterling. This can have a negative effect on the Company's performance.


The Board monitors currency risk as part of the regular portfolio and risk management oversight. TEMIT does not hedge currency risk.

Political

Changes in the political landscape may impact the regulatory and fiscal environment in which TEMIT operates as well as negatively influencing investor confidence in global markets.


The Board keeps a watching brief and examines significant political events as they arise. They may also seek independent legal advice where appropriate. With regard to Brexit the Board continue to monitor developments and are also mindful of the increased likelihood of a second Scottish independence referendum. Political risks are also reviewed and discussed with the AIFM's risk team.

Credit

Certain transactions in securities that the Company enters into expose it to the risk that the counterparty will not deliver an investment (purchase) or cash (in relation to a sale or declared dividend) after the Company has fulfilled its responsibilities.


The Board receives regular reporting and reviews the approved counterparty list of the Manager on an annual basis.

 Operational and custody

Like many other investment trust companies, TEMIT has no employees. The Company therefore relies upon the services provided by third parties and is dependent upon the control systems of the Manager and the Company's other service providers. The security, for example, of the Company's assets, dealing procedures, accounting records and maintenance of regulatory and legal requirements depends on the effective operation of these systems.


The Manager's systems are regularly tested and monitored and an internal controls report, which includes an assessment of risks together with an overview of procedures to mitigate such risks, is prepared by the Manager and reviewed by the Audit Committee annually.

 

J.P. Morgan Europe Limited is the Company's depositary. Its responsibilities include cash monitoring, safe keeping of the Company's financial instruments, verifying ownership and maintaining a record of other assets and monitoring the Company's compliance with investment limits and leverage requirements. The depositary is liable for any loss of financial instruments held in custody and will ensure that the custodian and any sub-custodian segregate the assets of the Company. The depositary has delegated the custody function to JPMorgan Chase Bank. The custodian provides a report on its key controls and safeguards (SOC 1/SSAE 16/ISAE 3402) which is independently reported on by its auditor PwC.

 

The Board reviews regular operational risk management reporting provided by the Manager.

Key personnel

The ability of the Company to achieve its investment objective is significantly dependent upon the expertise of the Investment Manager and its ability to attract and retain suitable staff.


The Manager endeavours to ensure that the principal members of its management teams are suitably incentivised, participate in strategic leader programmes and monitor key succession planning metrics. The Board regularly discusses this risk with the Manager.

Regulatory

The Company is an Alternative Investment Fund ("AIF") under the European Union's Alternative Investment Fund Managers directive. The Company operates in an increasingly complex regulatory environment and faces a number of regulatory risks. Breaches of regulations could lead to a number of detrimental outcomes and reputational damage.


The Board is active in ensuring that the Company complies with all applicable laws and regulation and its internal risk and control framework reduces the likelihood of breaches happening. As appropriate the Board is assisted by the Manager in doing this.

Cyber

Failure or breach of information technology systems of the Company's service providers may entail risk of financial loss, disruption to operations or damage to the reputation of the Company.


The Company benefits from Franklin Templeton's framework designed to mitigate the risk of a cyber security breach.

 

For key third party providers, the Audit Committee receives regular independent certifications of their controls environment.

 

 

 

Strategy and Business Model (continued)

 

Environmental and Other Matters

 

As an Investment Trust, TEMIT has no direct social, community or employee responsibilities and does not undertake activities in the field of research and development. More information can be found in the Directors' Report.

 

TEMIT has no greenhouse gas emissions to report from the operations of the Company, as all of its activities are outsourced to third parties, nor does it have responsibility for any other emissions producing sources under the Companies Act 2006 (Strategic Report and Directors' Reports) Regulations 2013.

 

On 26 March 2015, the Modern Slavery Act 2015 ("the Act") came into force. TEMIT is not an organisation which provides goods or services as defined in the Act and thus the Company considers that the Act does not apply.

 

Diversity

 

The Board supports the principle of diversity. The selection policy of the Board is to appoint the best qualified person for the job, by considering factors such as diversity of gender, thought, experience and qualification. The Board currently comprises eight Directors, seven male and one female. The Board also encourages diversity at Franklin Templeton Investments.

 

Viability Statement

 

The Directors consider viability as part of their continuing programme of monitoring risk. In preparing the Viability Statement, in accordance with the UK Corporate Governance Code provision C.2.2, the Directors have assessed the prospects of the Company over a longer period than the 12 months required by the 'Going Concern' provision.

 

The Directors have considered the Company's business and investment cycles and are of the view that three years is a suitable time horizon to consider the continuing viability of the Company, balancing the uncertainties of investing in listed emerging market securities against having due regard to viability over the longer term.

 

In their assessment of the Company's viability, the Directors consider, on an ongoing basis, each of the principal risks as noted above and set out in Note 14 of the Notes to the Financial Statements. Financial measures, including the ability of the Company to meet its ongoing liabilities, are also reviewed. The Directors monitor income and expense projections for the Company, with the majority of the expenses being predictable and modest in comparison with the assets of the Company. The Company sees no issues with meeting the obligations of the new gearing facility. A significant proportion of the Company's expenses are in ad valorem investment management fees, which would naturally reduce if the market value of the Company's assets were to fall.

 

Taking into account the above considerations the Directors have concluded that there is a reasonable expectation that, assuming there will be a successful continuation vote at the 2019 AGM, the Company will be able to continue to operate and meet its liabilities as they fall due over the next three years.

 

Future Strategy

 

The Company was founded, and continues to be managed, on the basis of a long term investment strategy which seeks to generate superior returns from investments, principally in the shares of carefully selected companies in emerging markets.

 

The Company's results will be affected by many factors including political decisions, economic factors, the performance of investee companies and the ability of the Investment Manager to choose investments successfully.

 

The Board and the Investment Manager continue to believe in investment with a long term horizon in companies that are undervalued by stock markets but which are fundamentally strong and growing. It is recognised that, at times, extraneous political, economic and company-specific factors will affect the performance of investments, but the Company will continue to take a long term view in the belief that patience will be rewarded.

 

The Company's overall strategy remains unchanged and is expected to remain consistent with these aims for the foreseeable future.

 

By order of the Board

 

Paul Manduca

7 June 2017

 

The Investment Manager

 

The Templeton Emerging Markets Group ("TEMG" or the "Investment Manager") is a large, experienced team of emerging market equity specialists. TEMG is one of the pioneers of emerging market investment with more than 25 years' experience and a significant presence in these areas. With over 50 portfolio managers and analysts, TEMG is one of the largest asset managers dedicated to emerging markets investing. Their on-the-ground presence in 20 countries around the globe and years of relevant industry experience greatly assists their understanding of the companies researched for inclusion in the TEMIT portfolio. TEMG analysts are responsible for researching emerging markets and deciding which companies, in their opinion offer the strongest risk and reward opportunities for TEMIT investors over the long term.

 

Investment Objective and Policy

 

The Company seeks long term capital appreciation through investment in companies listed in emerging markets or companies which earn a significant amount of their revenues in emerging markets, but are listed on stock exchanges in developed countries.

 

It is intended that the Company will normally invest in equity investments. However, the Investment Manager may invest in equity-related investments (such as convertibles) where they believe it is advantageous to do so. The portfolio may frequently be overweight or underweight against the MSCI Emerging Markets Index and may be concentrated in a more limited number of sectors, geographical areas or countries than against the benchmark. The Company may also invest a significant portion of its assets in the securities of one issuer, securities domiciled in a particular country, or securities within one industry. No more than 10% of the Company's assets will be invested in the securities of any one issuer at the time of investment.

 

The Board has agreed that TEMIT may borrow up to 10% of its net assets.

 

Portfolio Manager

 

Carlos von Hardenberg is the lead portfolio manager for TEMIT. Carlos has considerable research and investment expertise in emerging markets and has worked with TEMG for 15 years. Carlos is supported by Chetan Sehgal, who also has considerable experience in emerging markets and whose key role is to act as the deputy portfolio manager for TEMIT, and by Dr. Mark Mobius, Executive Chairman of TEMG. The investment team also draws on the support of the entire TEMG.

 

Carlos von Hardenberg

 

Carlos was appointed as the lead portfolio manager of TEMIT in October 2015.

 

As well as managing the TEMIT portfolio, Carlos directs Franklin Templeton's Frontier Markets investment strategy and manages a number of emerging and frontier markets portfolios for institutional and private investors. He joined the TEMG in 2002 from Bear Stearns International and has significant experience in researching and investing in emerging market companies across the globe. He has a MSc in investment management with distinction from London City University Business School and a BSc (Hons) in business studies from the University of Buckingham. He speaks English, German and Spanish.

 

Chetan Sehgal, CFA

 

In his role as portfolio manager on TEMIT, Chetan is the deputy manager to Carlos Hardenberg. As part of his broader responsibilities within TEMG, Chetan is Director of Emerging Global Markets and Small Cap strategies.

 

He joined Franklin Templeton in 1995 from the Credit Rating Information Services of India, Ltd where he was a senior analyst.

 

Chetan holds a BE (Hons) in mechanical engineering from the University of Bombay and a post-graduate diploma in management from the Indian Institute of Management in Bangalore, where he specialised in finance and business policy and graduated as an institute scholar. Chetan speaks English and Hindi and is a Chartered Financial Analyst ("CFA") charterholder.

 

Mark Mobius, Ph.D.

 

Mark Mobius, Ph.D., executive chairman of TEMG, has spent more than 40 years working in emerging markets all over the world. He joined Franklin Templeton in 1987 as president of the Templeton Emerging Markets Fund, Inc.

 

Dr. Mobius has been awarded a number of accolades for investing in his career and holds bachelor and master degrees from Boston University, and a Ph.D. in economics and political science from the Massachusetts Institute of Technology.

 

Investment Manager's Process

 

Investment Philosophy

 

The Investment Manager employs a time-tested investment philosophy built upon a disciplined, yet flexible, long-term approach to value-oriented emerging markets investing which allows the portfolio managers to look beyond short-term news, noise, and emotion.

 

Value

 

Our goal is to identify those companies that appear to be trading at a discount to what our estimates indicate to be their projected future intrinsic value which, over time, should produce a strong share price return.

 

Patience

 

On a short-term basis, stocks may overreact to news and noise. On a long-term basis, we believe that markets are efficient and that patience will reward those who have identified undervalued stocks.

 

Bottom-up

 

We identify value through rigorous fundamental analysis and a worldwide network of experienced research resources. Research is carried out on a company by company basis - in different countries and industries -to determine what we consider the economic worth of a company to be, based on many factors including projected future earnings, cash flow or asset value potential as well as management capability and governance.

 

The Investment Manager follows a rigorous five step process:

 

1. Identify Potential Bargains

Does this stock meet TEMG's criteria of valuation, size and liquidity?

Is it a potential bargain within the global universe, its sector and on a historical basis?

All portfolio managers are also research analysts, resulting in a deep and experienced research team.

 

While our philosophy remains unchanged, continual refinement and improvement is part of the TEMG culture.

 

TEMG is able to leverage 60+ years of global investing by Franklin Templeton Investments to build an extensive network of local contacts around the world.

2. In Depth Fundamental Analysis

Is this stock a candidate for the TEMG Action List?

Is the stock trading at a substantial discount to what our research indicates the company may be worth over the long-term?

Within the framework of a disciplined, long-term approach, analysts look beyond short-term noise to estimate long-term economic worth.

 

Bottom-up fundamental analysis, industry knowledge and access to company management drive original research.

3. Review Team Evaluation

Has analysis met TEMG standards?

Does the recommendation pass the TEMG Review Team's approval?

A collaborative team culture that leverages the experience of the entire TEMG produces comprehensive research insights. 

4. Allocate Portfolio

What do we consider to represent the best combination of stocks for creating a diversified fund with the greatest   potential for appreciation?

Taking into account the investment objective and guidelines, the portfolio is constructed with attention to diversification and risk levels.

 

The process seeks to reduce portfolio turnover.

 

The fund combines the potential of our best ideas with the risk benefits of diversification.

5. Portfolio Evaluation and Attribution Analysis

What are the performance contributors/detractors?

Portfolios are subject to weekly review, while a semi-annual review evaluates methodology, resources, themes, country level issues and global trends.

 

TEMG investment process combines the benefits of individual and team portfolio management.

 

 

Investment Risk Management

 

Investment in emerging market equities inevitably involves risk in a volatile asset class, and portfolios constructed from the "bottom up" may be exposed to risks that become evident when viewed from the "top down". Franklin Templeton Investments ("FTI") uses a comprehensive approach to managing risks within our portfolios. The goal of our investment risk management process is not to avoid risk, but to ensure that risks are "understood, intended and compensated". This philosophy is integrated into each step of the investment process:

 

Risk management is led first and foremost by experienced portfolio managers. It is integrated within each step of their fundamental, research-driven process, and includes regular interaction with the independent Performance Analysis and Investment Risk ("PAIR") team. The PAIR team consists of over 100 investment risk and performance professionals across 20 global locations. PAIR is responsible for the independent preparation and monitoring of risk management information and for the reporting of any exceptions to senior management and the Board of the Company. A monthly executive risk summary report is reviewed by FTI's Executive Investment Risk Committee as an input to the senior management reporting process. PAIR also provides regular performance analysis versus the benchmark and peers to identify absolute and relative performance trends or outliers. Exposure and attribution analysis is another key measure to support the integration of investment risk insight into each step of the investment process.

 

Risk Management


Our approach




Recognised

•     Identify and understand risk at the security, portfolio and operational level

PORTFOLIO MANAGERS

Dedicated Risk Management Specialists

•     Provide robust analytics and critical, unbiased insight

•     Locally positioned to work consultatively with portfolio teams around the globe




Rational

•     Affirm that identified risks are an intended and rational part of each portfolio's strategy


Oversight Committees

Focus on most complex risk factors:

•     Counterparty Risk         •   Pricing and Liquidity

•     Complex Securities        •   Global Products




Rewarded

•     Verify that every risk provides the potential for a commensurate long-term reward


Tools and Platforms

Centrally supported, best-in-class platforms for:

•     Data Analytics and Modelling

•     Portfolio Compliance

•     Trade Monitoring and Execution

 

Building from this philosophy and within the boundaries of the overall investment strategy or potential regulatory restrictions, the portfolio manager and PAIR will agree upon guidelines that reflect the Company's risk profile.

 

As part of the ongoing risk management, potential performance in stressed markets or under anticipated scenarios are assessed and discussed. Using their specific expertise and with an independent view, the PAIR group can provide risk-related information to the Investment Manager which can provide valuable insight for consideration in the portfolio construction process.

 

For additional information with respect to the AIFM risk management framework, visit the Investor Disclosure document on the website.

 

Portfolio Report

 

Market Overview

 

Emerging markets returned to form in 2016 and, following an encouraging start to 2017, many of the factors that originally attracted investors to this sector may be coming back into play, including stronger earnings growth, higher economic growth and robust consumer trends. Even in regions that are still going through adjustment and rebalancing, we are seeing improved visibility and increasing signs of robust underlying economic conditions such as low debt, stabilising commodity markets, reduced currency volatility and improving consumer confidence. Growing scepticism surrounding the timing and the extent of US President Donald Trump's ability to enact a pro-business agenda was also countered by positive sentiment following signals from the Trump administration of potential moderation from its earlier protectionist stance on trade.

 

While TEMIT's NAV benefited in sterling terms from a reduction in the exchange rate following the decision to leave the EU, we believe that the long term impact of Brexit on emerging markets will be limited. Generally speaking, emerging markets' trade and investment is widely diversified and the amount of trade with the United Kingdom is relatively small for most emerging market countries.

 

The general landscape of emerging market corporations has undergone a significant transformation from the often plain vanilla business models of the past (tending to focus on infrastructure, telecommunications, classic banking or commodities) to a new generation of innovative companies that are moving into technology and higher value added goods and services. The information technology ("IT") sector represents over 24% of the MSCI Emerging Markets Index: in fact, the top four constituents by weight are IT companies (as of March 2017). Further, this is a larger weighting than information technology's proportion of the United States index. In comparison, in 2008, IT companies represented about 7% of the MSCI Emerging Markets index. Furthermore, we are starting to see the establishment of globally represented brands originating from emerging market countries.

 

The performance of emerging market currencies against the US dollar varied over the reporting period. The Mexican peso plunged to a record low against the US dollar in November but then recovered slightly to end the 12 month period down about 10%. Geopolitical issues weighed on the Turkish lira, which was down about 30% against the US dollar. The Russian rouble, Brazilian real and South African rand, however, strengthened. Waning confidence in the ability of the US government to stimulate growth or impose trade sanctions led investors to adopt a weaker view on the US dollar in the latter part of the year.

 

China's economy remains on a fast growth trajectory and is expected to grow by 6.5% in 2017. Chinese stocks rose over the 12 month period, despite a decline in late 2016 caused by the Chinese renminbi's depreciation and concern over potential protectionist policies from the incoming US presidential administration. Chinese internet stocks, in particular, came under pressure. The Chinese government, however, remains focused on its "Internet Plus" strategy, where the internet sector will play a key role in fuelling China's next stage of economic growth. There are numerous opportunities for companies to expand locally, especially in attracting consumers from rural areas, where more than 40% of the population resides. Since the sell-off, valuations also became more attractive, leading TEMIT to invest in select internet related stocks.

 

South Korean equities performed better than their emerging market peers, driven by strong performance in IT companies. After growing 2.8% in 2016, the Korean economy is forecasted to expand by 2.7% in 2017. An accommodative monetary policy and reform implementation have further supported the economy and stock market. Politically, however, President Park Geun-hye was impeached and subsequently arrested over her alleged connection to a corruption scandal which is also said to include major listed companies. While this event resulted in increased uncertainty in the interim, over the longer term the investigation could lead the government and corporates to address some of the concerns around corporate governance and reforms, which would be in the interest of all shareholders.

 

A robust performance in the IT sector also drove performance in Taiwan, with the MSCI Taiwan Index reaching a 5-year high in March 2017. Momentum in the equity market was supported by solid demand for smartphone and personal computer components. Taiwan's first quarter GDP growth exceeded expectations at 2.6% year on year, supported by domestic consumption and an increase in exports, compared to a 1.2% increase for 2016 as a whole.

 

Brazil stood out with a strong performance over the year as an expansionary monetary policy, approval of key reforms, appreciation in the Brazilian real, an improvement in business sentiment and generally positive economic data drove investor sentiment. Although we reduced our positions in Brazilian banks to diversify our holdings, we remain well positioned in financials as well as consumer related stocks in the country. Financial stocks are benefitting from positive sentiment towards the reform process. Banks are showing signs that the worst of the provisions for bad loans have been completed and we believe that we could see improved asset quality in 2017. In the consumer space, we continue to favour companies with low ticket cash sales that may be able to weather the weak consumer environment and whose balance sheets could benefit from the potential for a further decline in interest rates during 2017.

 

The uncertainties created by the new US administration in late 2016 led to lower valuations in Mexico, providing long-term investors such as TEMIT an attractive entry point. In our view, the valuations of both Mexico's currency and stocks are compelling as country risk is falling and unemployment remains at decade lows. Inflation expectations, however, continue to be revised upwards and consumer confidence remains depressed. We believe that the financial sector looks attractive, with sound asset quality and structural growth opportunities. The Mexican industrial sector is also globally competitive and trading at low valuations. We are also monitoring other sectors, including the consumer sector.

 

Several economists trimmed their 2017 GDP growth forecasts for India, expecting a temporary negative impact on consumption from cash shortages resulting from a surprise move to withdraw large denominated currency notes from circulation in late 2016. However, growth is still expected to be 7.2% in 2017 and accelerate to 7.7% in 2018, making India one of the fasting growing major economies in the world. The country also recorded better than expected fourth quarter 2016 GDP growth of 7.0%. We continue to favour companies that we feel are well placed to benefit from higher per capita income and growing demand for goods and services, which, in turn, should support the earnings growth outlook for those stocks.

 

The Russian economy is expected to return to growth in 2017, after two consecutive years of contraction, supported by a rebound in oil prices coupled with recoveries in mining, manufacturing and agriculture. Energy, financials and IT companies continue to look attractive due to their appealing valuations. Higher oil prices and technological developments could further support the earnings recovery of these sectors.

 

Portfolio Report (continued)

 

Performance Attribution Analysis %

 

To 31 March 2017

1 year

Total Return (Net)(a)

47.8

Expenses(b)

1.2

Total Return (Gross)(c)

49.0

Benchmark Total Return(d)

35.2

Excess Return(e)

13.8

Stock Selection

13.7

Sector Allocation

0.1

Currency

0.2

Residual(f)

(0.2)

Total Portfolio Manager Contribution

13.8

 

Source: FactSet and Franklin Templeton Investments.

 

(a)     The NAV return inclusive of dividends reinvested.

(b)     Expenses incurred by the Company for the year to 31 March 2017.

(c)     Gross Return is Total Return (Net) plus expenses. This is preferable for attribution analysis and other value-added reporting as it evaluates the contribution of the Investment Manager.

(d)     MSCI Emerging Markets (Total Return) Index, inclusive of dividends reinvested. Indices are comparable to gross returns as they include no expenses.

(e)     Excess return is the difference between the gross return of the portfolio and the return of the benchmark.

(f)      The "Residual" represents the difference between the actual excess return and the excess return explained by the attribution model. This amount results from several factors, most significantly the difference between the actual trade price of securities included in actual performance and the end of day price used to calculate attribution.

 

Contributors and Detractors by Security

 

Top Contributors to relative performance by Security (%)(a)

 

Top Contributors

Share Price
Total Return

Relative Contribution
to Portfolio

Brilliance China Automotive

87.6

2.3

Buenaventura, ADR

88.0

1.5

Itaú Unibanco, ADR

84.6

1.0

NetEase, ADR

130.2

0.8

Samsung Electronics

87.5

0.7

M. Dias Branco

153.3

0.7

Banco Bradesco, ADR

80.2

0.6

Kiatnakin Bank(b)

111.9

0.5

Largan Precision

137.1

0.5

Kumba Iron Ore(b)(c)

59.9

0.5

 

(a)     For the period 31 March 2016 to 31 March 2017.

(b)     Security not included in the MSCI Emerging Markets Index.

(c) Security no longer held by TEMIT as at 31st March 2017.

 

 

Brilliance China Automotive manufactures and sells automobiles for the Chinese domestic market, predominantly through its joint venture with German luxury car manufacturer BMW. We expect luxury car demand to remain resilient and be supported by the continued rise of China's upper middle class. Furthermore, we view the automobile market favourably, as penetration rates remain quite low in comparison with developed markets. We are of the opinion that the stock has an exciting outlook based upon new vehicle launches, increased financing revenues, a supportive macroeconomic environment and attractive valuations.

 

Buenaventura is the largest precious metals company in Peru and a major holder of mining rights in the country. It is engaged in the mining, processing, development and exploration of primarily gold and silver, but also copper, zinc and lead. A rebound in precious and industrial metal prices, and successful cost-cutting efforts resulted in a turnaround in operating performance in 2016 from 2015. The political environment in Peru has also stabilised and improved, somewhat, as a result of the election of a more pro-business government.

 

Itaú Unibanco is one of Brazil's largest financial conglomerates. It operates across a wide range of segments, including asset management, insurance, wholesale banking, full retail operations, credit card and general corporate and personal lending. It announced solid fourth quarter results with an improvement in asset quality and lower provisions, and an increase in the payout ratio, driving the stock price in the latter part of the reporting period. A higher than expected income forecast for 2017 and expectations of continued improvement in credit quality, also benefited sentiment.

 

Top Detractors to relative performance by Security (%)(a)

 

 

Top Detractors

Share Price
Total Return

Relative Contribution
to Portfolio

Hyundai Development

5.6

(0.5)

Vale, ADR(b)

188.8

(0.4)

Daelim Industrial

5.0

(0.3)

Sberbank of Russia, ADR

101.4

(0.3)

China Construction Bank(b)

54.3

(0.3)

Youngone(c)

(17.9)

(0.3)

Uni-President China(c)

2.0

(0.2)

Unilever(c)

29.1

(0.2)

Victory City International(c) (d)

(41.9)

(0.2)

KCB Group(c)

(3.3)

(0.2)

 

(a)     For the period 31 March 2016 to 31 March 2017.

(b)     Security not held by TEMIT.

(c)     Security not included in the MSCI Emerging Markets Index.

(d) Security no longer held by TEMIT as at 31st March 2017.

 

Hyundai Development is one of the leading residential property developers in South Korea. With a strong brand name - "I Park", the company is one of the largest participants in the residential construction business. The company reported below consensus fourth quarter operating profits mainly due to higher expenses. Earnings from the housing division, however, remained strong. Sentiment towards the stock was also influenced by new housing market regulations and measures to curtail household loan growth.

 

Vale is a major mining company based in Brazil with ownership of very large reserves of iron ore and nickel as well as transport and logistics assets. The stock performed well during the reporting period on a rebound in iron ore and ferrous metal prices, supported by stimulus measures in China. TEMIT no longer holds this stock on concerns of uncertain Chinese demand, excessive supply, and a highly leveraged balance sheet given the low iron ore prices at the beginning of 2016. In addition, there is a pending class action lawsuit against the company over the collapse of a tailings dam in Brazil.

 

Daelim Industrial is a leading South Korean construction and petrochemical company. The company reported worse than expected fourth quarter operating profits mainly due to one-offs, including the booking of plant and civil engineering costs in domestic and international projects. Daelim's architecture/housing and petrochemical divisions, however, continued to contribute to earnings. A gradual recovery in Daelim's Middle East operations in recent years, higher oil prices and long-term housing demand in South Korea support our positive view on the firm and led us to increase our holdings in the stock during the reporting period.

 

Top Contributors and Detractors to relative performance by Sector (%)(a)

 

 

 

 

 

 

MSCI



MSCI



Emerging



Emerging



Markets Index

Relative


Markets Index

Relative


Sector Total

Contribution


Sector Total

Contribution

Top Contributors

Return

to Portfolio

Top Detractors

Return

to Portfolio

Consumer Discretionary

27.2

3.1

Industrials

24.5

(0.4)

Information Technology

50.4

3.1




Financials

39.2

2.4




Materials

47.6

2.0




Consumer Staples

17.2

1.8




Telecommunication Services

18.6

0.9




Energy

43.2

0.7




Health Care

12.6

0.6




Utilities

20.1

0.5




Real Estate

22.2

0.5




 

(a)     For the period 31 March 2016 to 31 March 2017.

 

With the exception of industrials, which mildly detracted, all the sectors had a positive impact on relative performance. Selection in consumer discretionary, information technology, financials, materials and consumer staples, where an overweight position also helped, contributed the most. A rebound in commodity prices, improving investor confidence in emerging markets and demand for consumer goods and services supported the performance of these sectors. Positions in the industrials sector were reduced during the year.

 

 

Top Contributors and Detractors to relative performance by Country (%)(a)

 

MSCI



MSCI




Emerging



Emerging




Markets Index

Relative


Markets Index

Relative



Country Total

Contribution


Country Total

Contribution


Top Contributors

Return

to Portfolio

Top Detractors

Return

to Portfolio


China/Hong Kong

37.9

4.0

Kenya(c)

-

(0.3

)

Brazil

64.6

2.0

United Kingdom(c)

-

(0.2

)

Peru

51.6

1.5

Cambodia(c)

-

(0.1

)

South Africa

25.2

1.4

Russia

47.7

(0.0

)

Mexico

12.5

1.1

Nigeria(c)

-

0.0


Malaysia(b)

5.6

0.9

Chile(b)

37.7

0.0


Taiwan

42.6

0.8

Hungary

32.6

0.0


Thailand

35.6

0.8

Jordan(c)

-

0.0


Pakistan(c)

-

0.6

United States(c)

-

0.0


Turkey

(3.8)

0.4

South Korea

39.5

0.0


 

(a)     For the period 31 March 2016 to 31 March 2017.

(b)     No companies held by TEMIT in this country.

(c)     No companies included in the MSCI Emerging Markets Index in this country.

 

 

Geographically, stock selection in China was a significant contributor to relative performance. Selection and allocation in Brazil (overweight relative to the benchmark index), Peru (overweight), South Africa (underweight) and Mexico (underweight) further supported relative returns. In contrast, overweight positions in Kenya and Cambodia, which are not part of the benchmark index, had a negative impact. Reductions were made in Brazil and Peru during the year, while holdings in Russia, Mexico, South Africa, Kenya and Cambodia were increased.

 

As corporations can interpret market rules and regulations differently, we believe our research-based, active approach to investing is critical in helping us to find companies that operate high standards of corporate governance, respect their shareholder base and understand the local intricacies that may determine consumer trends and habits.

 

Currently, we have identified opportunities among some larger-sized companies, but tend generally to favour mid-sized companies which we think have the potential to outperform the market as a whole. We look for companies which we believe have the ability to adapt more efficiently to a fast changing environment, run by flexible and well incentivised management teams.

 

We remain focused on seeking the optimum balance between risk and reward by ensuring the portfolio is not too heavily exposed to any one company, sector or market.

 

Our resulting portfolio is listed by size of holding.

Portfolio changes by Sector

 






Total Return in sterling









31 March 2016



Market

31 March 2017


MSCI Emerging


Market Value

Purchases

Sales

Movement

Market Value

TEMIT

Markets Index

Sector

£m

£m

£m

£m

£m

%

%

Information Technology

409

95

106

228

626

60.9

50.4

Consumer Discretionary

293

106

54

131

476

48.1

27.2

Financials

294

140

135

140

439

55.4

39.2

Energy

133

72

73

54

186

50.6

43.2

Consumer Staples

166

41

86

55

176

36.8

17.2

Materials

62

69

65

63

129

99.1

47.6

Industrials

72

9

17

4

68

7.1

24.5

Health Care

27

18

13

2

34

32.7

12.6

Real Estate

12

1

3

3

13

40.6

22.2

Telecommunication Services

14

-

5

2

11

18.7

18.6

Utilities

-

8

-

-

8

(6.2)

20.1

Other Net Assets

80

-

-

(98)

(18)

-

-

Total

1,562

559

557

584

2,148



 

Sector Asset Allocation

As at 31 March 2017

 

Sector weightings vs benchmark (%)

 

 

 

Portfolio changes by Country

 






Total Return in sterling









31 March 2016



Market

31 March 2017


MSCI Emerging


Market Value

Purchases

Sales

Movement

Market Value

TEMIT

Markets Index

Country

£m

£m

£m

£m

£m

%

%

China/Hong Kong

309

111

122

173

471

63.3

37.9

South Korea

199

50

57

74

266

39.9

39.5

Taiwan

127

22

_

71

220

56.0

42.6

Brazil

170

43

135

95

173

72.4

64.6

Russia

53

93

12

34

168

45.2

47.7

India

140

37

90

45

132

40.8

36.1

Thailand

80

14

7

36

123

51.4

35.6

South Africa

75

36

26

31

116

50.2

25.2

Indonesia

78

8

2

29

113

39.0

30.0

Other

251

145

106

94

384

_

_

Other Net Assets

80

-

-

(98)

(18)

_

_

Total

1,562

559

557

584

2,148



 

Geographic Asset Allocation

As at 31 March 2017

 

Country weightings vs benchmark (%)(a)

 

(a)     Other countries held by the benchmark are Chile, Colombia, Egypt, Greece, Malaysia, Poland, Qatar, Romania, Turkey and United Arab Emirates.

(b)     Countries not included in the MSCI Emerging Markets Index.

 

 

Portfolio Report (continued)

 

Portfolio Investments by Fair Value
As at 31 March 2017

 




Fair Value

% of net

Holding

Country

Sector

Trading(a)

£'000

assets

Brilliance China Automotive

China/Hong Kong

Consumer Discretionary

PS

153,230

7.1

Samsung Electronics

South Korea

Information Technology

IH

147,199

6.9

Taiwan Semiconductor

Manufacturing

Taiwan

Information Technology

IH

95,415

4.4

Naspers

South Africa

Consumer Discretionary

IH

92,260

4.3

Unilever(b)

United Kingdom

Consumer Staples

PS

79,067

3.7

Tencent

China/Hong Kong

Information Technology

NT

73,471

3.4

Astra International

Indonesia

Consumer Discretionary

NT

64,679

3.0

Buenaventura, ADR(c)

Peru

Materials

PS

64,613

3.0

Hon Hai Precision Industry

Taiwan

Information Technology

IH

59,228

2.8

Alibaba, ADR(c)

China/Hong Kong

Information Technology

NH

53,363

2.5

TOP 10 LARGEST INVESTMENTS  



882,525

41.1

MCB Bank

Pakistan

Financials

PS

46,545

2.2

Itaú Unibanco, ADR(c)

Brazil

Financials

PS

45,852

2.1

ICICI Bank

India

Financials

IH

45,041

2.1

LUKOIL, ADR(c)(d)

Russia

Energy

NH

41,963

2.0

Bank Danamon Indonesia

Indonesia

Financials

PS

40,399

1.9

Gazprom, ADR(c)

Russia

Energy

NT

32,147

1.5

Grupo Financiero Santander

Mexico, B, ADR(c)

Mexico

Financials

NH

31,419

1.5

Hyundai Development

South Korea

Industrials

PS

29,705

1.4

China Petroleum and Chemical

China/Hong Kong

Energy

NT

28,983

1.4

Sberbank of Russia, ADR(c)

Russia

Financials

NH

28,969

1.3

TOP 20 LARGEST INVESTMENTS  



1,253,548

58.5

 

(a)     Trading activity during the year: (NH) New Holding, (IH) Increased Holding, (PS) Partial Sale, (IS) Increased Holding and Partial Sale and (NT) No Trading.

(b)     These companies, listed on stock exchanges in developed markets, have significant exposure to operations from emerging markets.

(c)     US listed American Depositary Receipt.

(d)     Security listed on the London and Moscow Stock Exchanges.

 

 




Fair Value

% of net

Holding

Country

Sector

Trading(a)

£'000

assets

Largan Precision

Taiwan

Information Technology

NT

27,450

1.3

Kiatnakin Bank

Thailand

Financials

PS

27,021

1.3

Ping An Insurance Group

China/Hong Kong

Financials

NH

26,612

1.3

Kasikornbank

Thailand

Financials

PS

26,508

1.2

SABIC, Participatory Note

Saudi Arabia

Materials

NH

26,491

1.2

Daelim Industrial

South Korea

Industrials

IH

26,229

1.2

Thai Beverages

Thailand

Consumer Staples

IH

25,291

1.2

Gedeon Richter

Hungary

Health Care

IH

24,612

1.2

Mail.Ru, GDR(e)

Russia

Information Technology

IH

24,321

1.1

NetEase, ADR(c)

China/Hong Kong

Information Technology

IS

24,274

1.1

TOP 30 LARGEST INVESTMENTS



1,512,357

70.6

Banco Bradesco, ADR(c)(f)

Brazil

Financials

PS

23,980

1.1

CIA Hering

Brazil

Consumer Discretionary

PS

23,454

1.1

Lojas Americanas

Brazil

Consumer Discretionary

IH

20,821

1.0

Massmart

South Africa

Consumer Staples

NT

20,242

0.9

Catcher Technology

Taiwan

Information Technology

IH

20,195

0.9

Yandex

Russia

Information Technology

NT

19,970

0.9

CNOOC(c)(g)

China/Hong Kong

Energy

NH

19,404

0.9

IMAX(b)

United States

Consumer Discretionary

NH

19,343

0.9

Infosys Technologies

India

Information Technology

IH

18,478

0.9

Siam Commercial Bank

Thailand

Financials

PS

17,975

0.8

TOP 40 LARGEST INVESTMENTS



1,716,219

80.0

 

(a)     Trading activity during the year: (NH) New Holding, (IH) Increased Holding, (PS) Partial Sale, (IS) Increased Holding and Partial Sale and (NT) No Trading.

(b)     These companies, listed on stock exchanges in developed markets, have significant exposure to operations from emerging markets.

(c)     US listed American Depositary Receipt.

(e)     UK listed Global Depositary Receipt.

(f)      Preferred Shares.

(g)     Security listed on the Hong Kong and New York Stock Exchanges.

 

Portfolio Report (continued)

 




Fair Value

% of net

Holding

Country

Sector

Trading(a)

£'000

assets

Pegatron

Taiwan

Information Technology

NT

17,308

0.8

TOTVS

Brazil

Information Technology

NT

16,723

0.8

Hanon Systems

South Korea

Consumer Discretionary

IH

16,355

0.8

Uni-President China

China/Hong Kong

Consumer Staples

NT

15,722

0.8

Reliance Industries

India

Energy

PS

15,642

0.8

Norilsk Nickel, ADR(c)

Russia

Materials

NH

13,993

0.7

KCB Group

Kenya

Financials

IH

13,482

0.6

Land and Houses

Thailand

Real Estate

IH

13,348

0.6

Tata Chemicals

India

Materials

NT

13,235

0.6

NagaCorp

Cambodia

Consumer Discretionary

IH

13,186

0.6

TOP 50 LARGEST INVESTMENTS  



1,865,213

87.1

Baidu, ADR(c)

China/Hong Kong

Information Technology

PS

12,821

0.6

BM&F Bovespa

Brazil

Financials

IS

12,793

0.6

MGM China

China/Hong Kong

Consumer Discretionary

NT

12,221

0.6

FPC PAR Corretora De Seguros

Brazil

Financials

NH

12,050

0.6

Nemak

Mexico

Consumer Discretionary

IH

11,782

0.5

Coal India

India

Energy

NH

11,496

0.5

M. Dias Branco

Brazil

Consumer Staples

PS

11,361

0.5

Sunny Optical Technology

China/Hong Kong

Information Technology

NH

11,342

0.5

Tata Motors

India

Consumer Discretionary

IH

11,248

0.5

SK Innovation

South Korea

Energy

PS

10,843

0.5

TOP 60 LARGEST INVESTMENTS

1,983,170

92.5

PTT Exploration and Production

Thailand

Energy

NT

10,064

0.5

Equity Group

Kenya

Financials

NH

10,040

0.5

Inner Mongolia Yitai Coal

China/Hong Kong

Energy

NH

8,876

0.4

Dairy Farm

China/Hong Kong

Consumer Staples

PS

8,716

0.4

Moneta Money Bank

Czech Republic

Financials

NH

8,572

0.4

Perusahaan Gas Negara Persero

Indonesia

Utilities

NH

7,711

0.4

América Móvil, ADR(c)

Mexico

Telecommunication

NT

7,243

0.3

Bajaj Holdings & Investments

India

Financials

IH

7,206

0.3

COSCO Pacific

China/Hong Kong

Industrials

NT

7,190

0.3

Glenmark Pharmaceuticals

India

Health Care

IH

7,154

0.3

TOP 70 LARGEST INVESTMENTS  



2,065,942

96.3

 

(a)     Trading activity during the year: (NH) New Holding, (IH) Increased Holding, (PS) Partial Sale, (IS) Increased Holding and Partial Sale and (NT) No Trading.

(c)     US listed American Depositary Receipt.

 

 




Fair Value

% of net

Holding

Country

Sector

Trading(a)

£'000

assets

Hite Jinro

South Korea

Consumer Staples

NH

7,029

0.3

Youngone

South Korea

Consumer Discretionary

NT

6,831

0.3

TMK, GDR(e)

Russia

Energy

NT

6,816

0.3

Bloomage Biotechnology

China/Hong Kong

Materials

NH

6,773

0.3

KT Skylife

South Korea

Consumer Discretionary

NT

6,617

0.3

BDO Unibank

Philippines

Financials

NH

6,474

0.3

Hyundai Wia

South Korea

Consumer Discretionary

NH

6,362

0.3

MAHLE Metal Leve

Brazil

Consumer Discretionary

IH

5,825

0.3

iMarketKorea

South Korea

Industrials

NT

5,161

0.2

Security Bank

Philippines

Financials

NH

4,733

0.2

TOP 80 LARGEST INVESTMENTS



2,128,563

99.1

Guangzhou Automobile Group

China/Hong Kong

Consumer Discretionary

PS

4,718

0.2

MercadoLibre

Argentina

Information Technology

PS

4,236

0.2

Interpark

South Korea

Consumer Discretionary

IH

3,745

0.2

Industrias Peñoles

Mexico

Materials

NH

3,593

0.2

MTN Group

South Africa

Telecommunication

IS

3,568

0.2

United Bank

Pakistan

Financials

IH

3,374

0.2

Weifu High-Technology, B

China/Hong Kong

Consumer Discretionary

NH

3,210

0.1

Univanich Palm Oil

Thailand

Consumer Staples

PS

3,201

0.1

East African Breweries

Kenya

Consumer Staples

NH

2,800

0.1

Biocon

India

Health Care

PS

2,543

0.1

TOP 90 LARGEST INVESTMENTS 



2,163,551

100.7

Savola Group, Participatory Note

Saudi Arabia

Consumer Staples

NH

1,737

0.1

Nigerian Breweries

Nigeria

Consumer Staples

IH

529

0.0

Hankook Tire

South Korea

Consumer Discretionary

PS

133

0.0

TOTAL INVESTMENTS




2,165,950

100.8

OTHER NET ASSETS




(17,853)

(0.8)

TOTAL NET ASSETS



2,148,097

100.0

 

(a)     Trading activity during the year: (NH) New Holding, (IH) Increased Holding, (PS) Partial Sale, (IS) Increased Holding and Partial Sale and (NT) No Trading.

(e)     UK listed Global Depositary Receipt.

 

 

Portfolio Report (continued)

 

Portfolio Summary

 

As at 31 March 2017

All figures are in %

 

Consumer Discretionary

Consumer Staples

Energy

Financials

Health
Care

Industrials

Information Technology

Materials

Real Estate(a)

Telecommunication
Services

Utilities

Total
Equities

Other
Net
Assets

2017
Total

2016
Total

Argentina

-

-

-

-

-

-

0.2

-

-

-

-

0.2

-

0.2

0.3

Brazil

2.4

0.5

-

4.4

-

-

0.8

-

-

-

-

8.1

-

8.1

-

Czech Republic

-

-

-

0.4

-

-

-

-

-

-

-

0.4

-

0.4

10.9

Cambodia

0.6

-

-

-

-

-

-

-

-

-

-

0.6

-

0.6

0.7

China/Hong Kong

8.0

1.2

2.7

1.3

-

0.3

8.1

0.3

-

-

-

21.9

-

21.9

19.8

Hungary

-

-

-

-

1.2

-

-

-

-

-

-

1.2

-

1.2

0.8

India

0.5

-

1.3

2.4

0.4

-

0.9

0.6

-

-

-

6.1

-

6.1

9.0

Indonesia

3.0

-

-

1.9

-

-

-

-

-

-

0.4

5.3

-

5.3

5.0

Kenya

-

0.1

-

1.1

-

-

-

-

-

-

-

1.2

-

1.2

0.4

Mexico

0.5

-

-

1.5

-

-

-

0.2

-

0.3

-

2.5

-

2.5

0.7

Nigeria

-

0.0

-

-

-

-

-

-

-

-

-

0.0

-

0.0

0.0

Pakistan

-

-

-

2.4

-

-

-

-

-

-

-

2.4

-

2.4

4.3

Peru

-

-

-

-

-

-

-

3.0

-

-

-

3.0

-

3.0

2.2

Philippines

-

-

-

0.5

-

-

-

-

-

-

-

0.5

-

0.5

-

Russia

-

-

3.8

1.3

-

-

2.0

0.7

-

-

-

7.8

-

7.8

3.4

Saudi Arabia

-

0.1

-

-

-

-

-

1.2

-

-

-

1.3

-

1.3

-

South Africa

4.3

0.9

-

-

-

-

-

-

-

0.2

-

5.4

-

5.4

4.8

South Korea

1.9

0.3

0.5

-

-

2.8

6.9

-

-

-

-

12.4

-

12.4

12.7

Taiwan

-

-

-

-

-

-

10.2

-

-

-

-

10.2

-

10.2

8.2

Thailand

-

1.3

0.5

3.3

-

-

-

-

0.6

-

-

5.7

-

5.7

5.1

Turkey

-

-

-

-

-

-

-

-

-

-

-

-

-

-

1.6

United Kingdom

-

3.7

-

-

-

-

-

-

-

-

-

3.7

-

3.7

5.0

United States

0.9

-

-

-

-

-

-

-

-

-

-

0.9

-

0.9

-

Other Net Assets

-

-

-

-

-

-

-

-

-

-

-

-

(0.8)

(0.8)

5.1

2017 Total

22.1

8.1

8.8

20.5

1.6

3.1

29.1

6.0

0.6

0.5

0.4

100.8

(0.8)

100.0

-

2016 Total

18.8

10.6

8.4

18.8

1.8

4.6

26.2

4.0

0.8

0.9

-

94.9

5.1

-

100.0

 

(a)   A new sector classification was introduced to the industry on 1 September 2016. Land and Houses and Peninsula Land were previously included within Financials but have been reallocated to Real Estate due to this change.

 

Less than

£1.5bn to

Greater than

Other Net

Market Capitalisation Breakdown(b) (%)

£1.5bn

£5bn

£5bn

Assets

31 March 2017

9.3

18.9

72.6

(0.8)

31 March 2016

12.5

27.6

54.8

5.1

 

(b)     Market Capitalisation - The total market value of a company's shares. For a vehicle like TEMIT, which invests in a number of companies, this is calculated by the share price on a certain date multiplied by the number of shares in issue.

 

Source: FactSet

 

Split Between Markets(c) (%)

31 March 2017

31 March 2016

Emerging Markets

92.4

84.9

Frontier Markets

3.8

5.0

Developed Markets(d)

4.6

5.0

Other Net Assets

(0.8)

5.1

 

(c)     Geographic split between "Emerging Markets", "Frontier Markets" and "Developed Markets" are as per MSCI index classifications.

(d)     Developed markets exposure represented by companies listed in the United Kingdom and United States.

 

Source: FactSet Research System, Inc.

 

Market Outlook

 

We believe the recent improvement in emerging market fundamentals should be helpful for continued strength in emerging market equities, and we also believe valuations in these markets appear attractive relative to developed markets. Nonetheless, we are mindful of potential volatility and remain alert to risks, some of which include the potential of further increases in US interest rates, uncertainty about the new US administration's policies, and potential currency moves.

 

Strengthening macroeconomic data including acceleration in domestic consumption, a revival of private investment, a recovery in export demand and easing concerns about trade friction with the US bode well for Chinese equities. After the tightening of capital outflows by the People's Bank, the Chinese renminbi has also seen some stability against the US dollar. The earnings outlook for corporates also appears positive as many companies could benefit from reflation in the industrials sector and recovery of capital expenditure. However, we remain mindful of the fact that China is still in the process of making adjustments in its policy framework. The growth of shadow banking, the presence of high leverage in the system and regulatory objectives on ensuring stability in the system, mean that we may see strong policy response from China which could impact growth and have implications on various sectors including commodities and real estate.

 

The Company maintains a positive view on technology hardware and semiconductor stocks in South Korea and Taiwan. Although we are cautious of the share price advances in some shares, we continue to see pockets of value in the sector. The information technology sector has been growing in importance in emerging markets, and is becoming more integral and competitive. In addition to internet companies, which stand to benefit from a movement toward more online transactions, we see potential for attractive long-term investment opportunities in the following areas: shopping, gaming and other services, hardware companies providing application processors and memory chips for smartphones, graphic processing units for data centres and artificial intelligence applications, as well as connectivity and processor integrated circuits for autonomous cars and devices related to the "Internet of Things."

 

We also think opportunities still exist across the energy sector. Overall, we believe oil companies with upstream operations are best positioned to benefit from higher oil prices, and we remain positive on a number of companies in China, Russia, Thailand, Pakistan and India. Over the longer-term, higher oil prices could result in a potential increase in supply from a number of areas such as more shale producers, increased drilling activity around the world, and/or a production increase by low-cost producers to support fiscal revenues.

 

In Brazil, strong momentum on reform in both macroeconomic issues (government debt, pension deficits, labour reform) and across economic sectors focused on improving the business environment provides reasons for optimism. Additionally, the economy is recovering from two years of GDP contraction. Therefore the base of growth is very low, allowing strong operational advantage with even a small upturn. Taking that into consideration, we believe Brazil is likely to continue to cut interest rates this year, allowing strong financial leverage to consumers and companies.

 

Emerging markets are generally in a recovery mode. Low borrowing, improved current accounts, robust exports, progress in corporate earnings, and stabilising industrial production and exchange rates are reasons to be confident. Overall, we believe that emerging markets are on course to continue their recovery based on robust and improved economic fundamentals. Valuations have not been this low, relative to developed markets, in many years and we are seeing attractive opportunities for investors.

 

Carlos Hardenberg

7 June 2017

 

 

Financial Statements

 

Income Statement

For the Year Ended 31 March 2017

 




Year ended




Year ended








31 March 2017




31 March 2016








Revenue


Capital


Total


Revenue


Capital


Total




Note


£'000


£'000


£'000


£'000


£'000


£'000


Gains/(losses) on investments and foreign exchange















Gains/(losses) on investments at fair value


6


-


682,120


682,120


-


(388,315

)

(388,315

)

(Losses)/gains on foreign exchange




-


(1,357

)

(1,357

)

-


1,710


1,710


Revenue















Dividends


1


46,071


-


46,071


44,702


-


44,702


Bank and deposit interest


1


49


-


49


319


-


319






46,120


680,763


726,883


45,021


(386,605

)

(341,584

)

Expenses















AIFM fee


2


(20,735

)

-


(20,735

)

(17,535

)

-


(17,535

)

Other expenses


2


(1,857

)

-


(1,857

)

(1,910

)

-


(1,910

)





(22,592

)

-


(22,592

)

(19,445

)

-


(19,445

)

Profit/(loss) before finance costs and taxation




23,528


680,763


704,291


25,576


(386,605

)

(361,029

)

Finance costs


3


(418

) 

-


(418

)

-


-


-


Profit/(loss) before taxation




23,110


680,763


703,873


25,576


(386,605

)

(361,029

)

Tax expense


4


(4,084

) 

(377

)

(4,461

)

(3,772

)

1,661


(2,111

)

Profit/(loss) for the year




19,026


680,386


699,412


21,804


(384,944

)

(363,140

)

Profit/(loss) attributable to equity holders of the Company




19,026


680,386


699,412


21,804


(384,944

)

(363,140

)

Earnings per share


5


6.59

p

235.71

p

242.30

p

7.05

p

(124.47

)p

(117.42

)p

Ongoing charge ratio








1.20%






1.22%


 

Under the Company's Articles of Association the capital element of return is not distributable.

 

The total column of this statement represents the profit and loss account of the Company.

 

All revenue and capital items in the above statement derive from continuing operations.

 

The accompanying notes are an integral part of the Financial Statements.

 

 

 

Balance Sheet

As at 31 March 2017

 






As at



As at








31 March 2017



31 March 2016





Note



£'000



£'000


Non-current assets











Investments at fair value through profit or loss



6



2,165,950



1,482,238


Current assets











Trade and other receivables



7



6,390



6,884


Cash and cash equivalents






65,265



77,359


Total assets






71,655



84,243


Current liabilities











Bank loans



8



(83,732

)


-


Trade and other payables



9



(5,286

)


(3,890

)

Capital gains tax provision



4



(490

)


(326

)

Total liabilities






(89,508

)


(4,216

)

Net current (liabilities)/assets






(17,853

)


80,027


Total assets less current liabilities






2,148,097



1,562,265


Share capital and reserves











Equity Share Capital



10



70,406



74,505


Capital Redemption Reserve






12,263



8,164


Special Distributable Reserve






433,546



433,546


Capital Reserve






1,535,899



944,961


Revenue Reserve






95,983



101,089


Equity Shareholders' Funds






2,148,097



1,562,265


Net Asset Value pence per share



11



762.8



524.2


 

These Financial Statements of Templeton Emerging Markets Investment Trust PLC were approved for issue by the Board and signed on 7 June 2017.

 

Paul Manduca                                                                                            Peter Harrison

Chairman                                                                                                     Director

 

 

Statement of Changes in Equity

For the Year Ended 31 March 2017

 






Capital



Special














Equity Share



Redemption



Distributable



Capital



Revenue








Capital



Reserve



Reserve



Reserve



Reserve



Total





£'000



£'000



£'000



£'000



£'000



£'000


Balance at 31 March 2015



79,736



2,933



433,546



1,423,461



105,355



2,045,031


Profit/(loss) for the year



-



-



-



(384,944

)


21,804



(363,140

)

Equity dividends



-



-



-



-



(26,070

)


(26,070

)

Purchase and cancellation of own shares



(5,231

)


5,231



-



(93,556

)


-



(93,556

)

Balance at 31 March 2016



74,505



8,164



433,546



944,961



101,089



1,562,265


Profit for the year



-



-



-



680,386



19,026



699,412


Equity dividends



-



-



-



-



(24,132

)


(24,132

)

Purchase and cancellation of own shares



(4,099

)


4,099



-



(89,448

)


-



(89,448

)

Balance at 31 March 2017



70,406



12,263



433,546



1,535,899



95,983



2,148,097


 

 

 

Cash Flow Statement

For the Year Ended 31 March 2017

 



Year ended



For the year to





31 March 2017



31 March 2016





£000



£000


Cash flows from operating activities
















Profit/(loss) before finance costs and taxation



704,291



(361,029

)

Adjustments for:








(Gains)/losses on investments at fair value



(682,120

)


388,315


Realised (gains)/losses on foreign exchange



1,357



(1,710

)

Stock dividends received in year



(1,108

)


(749

)

(Decrease)/Increase in debtors



(785

)


236


Increase/(decrease) in creditors



528



(327

)

Cash generated from operations



22,163



24,736


Tax paid



(4,296

)


(4,047

)

Net cash inflow from operating activities



17,867



20,689


Cash flows from investing activities
















Purchases of non-current financial assets



(556,380

)


(708,533

)

Sales of non-current financial assets



556,971



772,668


Net cash inflow from investing activities



591



64,135


Cash flows from financing activities
















Purchase and cancellation of own shares



(89,734

)


(93,407

)

Movement in bank loans outstanding



83,390



-


Equity dividends paid



(24,132

)


(26,070

)

Bank loan interest paid



(76

)


-


Net cash outflow from financing activities



(30,552

)


(119,477

)

Net decrease in cash



(12,094

)


(34,653

)

Cash at the start of the year



77,359



112,012


Cash at the end of the year



65,265



77,359


 

 

 

Notes to the Financial Statements

For the Year Ended 31 March 2017

 

1 Revenue

 



2017



2016





£'000



£'000


Revenue from investments
















Non EU dividends



42,819



41,764


UK dividends



1,928



2,188


Stock dividends



1,108



750


Other EU dividends



216



-





46,071



44,702


Other revenue
















Bank and deposit interest



49



319


Total revenue



46,120



45,021


 

2 Expenses

 



2017



2016





£'000



£'000


Manager's expenses
















AIFM fee



20,735



17,535


Other expenses
















Custody fees



716



698


Directors' emoluments



290



283


Depositary fees



159



163


Registrar fees



118



142


Shareholder communications and marketing



114



103


Membership fees



98



120


Printing and postage costs



57



126


Auditors' remuneration








Audit of the annual financial statements



31



29


Half-yearly financial report



5



5


Legal fees



22



21


Other expenses



247



220


Total other expenses



1,857



1,910


 

The Company has a contract with Franklin Templeton International Services S.à r.l. ("FTIS") as Alternative Investment Fund Manager.

 

The contract between the Company and FTIS, its Alternative Investment Fund Manager and provider of Secretarial and Administration Services, may be terminated at any date by either party giving one year's notice of termination.

 

FTIS receives an ad valorem fee of 1.10%, which is paid monthly and based on monthly trading total net assets of the Company. As at 31 March 2017, £2.0 million in fees were payable and outstanding to FTIS. These were paid in full in April 2017.

 

Fees in respect of services as Directors are paid by the Company only to those Directors who are independent of Franklin Templeton Investments. Included within these costs are Employer National Insurance contributions.

 

 

 

3 Finance costs

 



2017



2016





Revenue



Capital



Total



Revenue


Capital


Total





£'000



£'000



£'000



£'000


£'000


£'000


Interest and fees on bank loans



418



-



418



-


-


-


 

4 Tax on ordinary activities

 



2017



2016





Revenue



Capital



Total



Revenue



Capital



Total





£'000



£'000



£'000



£'000



£'000



£'000


Overseas withholding tax



4,084



-



4,084



3,772



-



3,772


Overseas capital tax



-



213



213



-



275



275


Prior period adjustments



-



-



-



-



-



-


Total current tax



4,084



213



4,297



3,772



275



4,047


Deferred tax



-



164



164



-



(1,936

)


(1,936

)

Total tax



4,084



377



4,461



3,772



(1,661

)


2,111


 



2017



2016


Taxation



£'000



£'000


Profit/(loss) before taxation



703,873



(361,029

)

Theoretical tax at UK corporation tax rate of 20% (2016: 20%)



140,775



(72,206

)

Effects of:








- Capital element of profit



(136,152

)


77,321


- Irrecoverable overseas tax



4,084



3,772


- Excess management expenses



2,817



2,386


- Overseas Capital Gains Tax



213



275


- Income taxable in different periods



98



104


- Dividends not subject to corporation tax



(6,787

)


(6,941

)

- Movement in overseas capital gains tax liability



164



(1,936

)

- UK dividends



(512

)


(438

)

- Overseas tax expensed



(239

)


(226

)

Actual tax charge



4,461



2,111


 

As at 31 March 2017, the Company had unutilised management expenses of £97.0 million carried forward (2016: £82.9 million). These balances have been generated because a large part of the Company's income is derived from dividends which are not taxed. Based on current UK tax law, the Company is not expected to generate taxable income in a future period in excess of deductible expenses for that period and, accordingly, is unlikely to be able to reduce future tax liabilities by offsetting these excess management expenses. These excess management expenses are therefore not recognised as a deferred tax asset.

 

Movement in provision for deferred tax



2017



2016





£'000



£'000


Balance brought forward



326



2,262


Charge for the year



164



(1,936

)

Balance carried forward



490



326


Provision consists of:








- Overseas capital gains tax liability



490



326





490



326


 

A provision for deferred capital gains tax has been recognised in relation to short-term unrealised gains on Indian holdings.

 

 

 

 

 

 

 

 

 

 

 

 

 

5 Earnings per share

 



2017



2016





Revenue



Capital



Total



Revenue



Capital



Total





£'000



£'000



£'000



£'000



£'000



£'000


Earnings



19,026



680,386



699,412



21,804



(384,944

)


(363,140

)

 



2017



2016





Revenue



Capital



Total



Revenue



Capital



Total





pence



pence



pence



pence



pence



pence


Earnings per share



6.59



235.71



242.30



7.05



(124.47

)


(117.42

)

 

The Earnings per Share is based on the profit/(loss) on ordinary activities after tax and on the weighted average number of shares in issue during the year of 288,656,880 (year to 31 March 2016: 309,256,759).

 

6 Financial assets - investments

 



2017



2016





£'000



£'000


Opening investments



1,482,238



1,941,161


Movements in year:








Purchases



558,641



699,086


Sales



(557,049

)


(769,694

)

Realised profits



171,094



297,735


Net appreciation/(depreciation)



511,026



(686,050

)

Closing investments



2,165,950



1,482,238


 

All investments have been recognised at fair value through the Income Statement.

 

Transaction costs for the year on purchases were £1,438,000 (2016: £2,190,000) and transaction costs for the year on sales were £1,318,000 (2016: £1,683,000). The aggregate transaction costs for the year were £2,756,000 (2016: £3,873,000).

 



2017



2016





£'000



£'000


Realised and unrealised gains on investments comprise:








Realised gain based on carrying value at 31 March



171,094



297,735


Net movement in unrealised appreciation/(depreciation)



511,026



(686,050

)

Realised and unrealised gains/(losses) on investments



682,120



(388,315

)

 

7 Trade and other receivables

 



2017



2016





£'000



£'000


Dividends receivable



5,328



5,130


Overseas tax recoverable



699



96


Sales awaiting settlement



352



1,631


Other debtors



11



27





6,390



6,884


 

8 Bank loan payables

 



2017



2016





£'000



£'000


Bank loan



83,390



-


Bank loan interest and fees



342








83,732



-


 

 

 

 

 

 

 

 

9 Trade and other payables

 



2017



2016





£'000



£'000


Purchase of investments for future settlement



2,490



1,336


Accrued expenses



2,350



1,822


Amounts owed for share buy backs



446



732





5,286



3,890


 

10 Called-up share capital

 



2017



2016





Allotted, issued & fully paid



Allotted, issued & fully paid





£'000



Number



£'000



Number


Shares of 25p each



























Opening balance



74,505



298,019,690



79,736



318,944,992


Shares repurchased during the year



(4,099

)


(16,395,704

)


(5,231

)


(20,925,302

)

Closing balance



70,406



281,623,986



74,505



298,019,690


 

The Company's shares have unrestricted voting rights at all general meetings, are entitled to all of the profits available for distribution by way of dividend, and are entitled to repayment of all of the Company's capital on winding up.

 

During the year, 16,395,704 shares were bought back for cancellation at a cost of £89,448,000 (2016: 20,925,302 shares were bought back for cancellation at a cost of £93,556,000).

 

11 Net asset value per share

 



Net asset value per share


Net asset value attributable





2017


2016


2017


2016





pence


pence


£'000


£'000


Shares



762.8


524.2


2,148,097


1,562,265


 

12 Dividend

 


2017


2016




Rate (pence

)


£'000


Rate (pence

)


£'000


Declared and paid in the year












Dividend on shares:












Final dividend for year


8.25



24,132


8.25



26,070














Proposed for approval at the Company's AGM












Dividend on shares:












Final dividend for the year ended 31 March 2017 (31 March 2016: 8.25p)


8.25



23,173




















 

Dividends are recognised when the shareholders' right to receive the payment is established. In the case of the final dividend, this means that it is not recognised until approval is received by shareholders at the Annual General Meeting.

 

13 Related party transactions

The Directors consider under the classification of related parties under the Association of Investment Companies SORP, issued November 2014, that Franklin Templeton entities are not classified as related parties under IAS 24 (as adopted by the EU) .

 

Accordingly there were no transactions with related parties, other than the fees paid to the Directors during the year ended 31 March 2017, which have a material effect on the results or the financial position of the Company.

 

14 Risk management

In pursuing the investment objectives, set out in the Annual Report, the Company holds a number of financial instruments which are exposed to a variety of risks that could result in either a reduction in the Company's net assets or a reduction of the profits available for dividends.

 

The main risks arising from the Company's financial instruments are market risk (which comprises market price risk, foreign currency risk and interest rate risk), other price risk, liquidity risk and credit risk.

 

The objectives, policies and processes for managing these risks, and the methods used to measure the risk, are set out below. These policies have remained unchanged since the beginning of the year to which these financial statements relate.

 

Investment and concentration risk

 

The Company may invest a greater portion of its assets than the benchmark in the securities of one issuer, securities domiciled in a particular country, or securities within one industry group than other types of fund investments. As a result, there is the potential for increased concentration of exposure to economic, business, political or other changes affecting similar issues or securities, which may result in greater fluctuation in the value of the portfolio.

 

Market price risk

 

Market risk arises mainly from uncertainties about future prices of financial instruments held. It represents the potential loss the Company might suffer through holding market positions in the face of price movements.

 

The Directors meet quarterly to consider the asset allocation of the portfolio in order to minimise the risk associated with particular countries or industry sectors whilst continuing to follow the investment objectives. The Investment Manager has responsibility for monitoring the existing portfolio selected in accordance with the overall asset allocation parameters described above, and seeks to ensure that individual stocks also meet the risk/ reward profile on an ongoing basis.

 

The Investment Manager does not use derivative instruments to hedge the investment portfolio against market price risk, as in its opinion, the cost of such a process could result in an unacceptable reduction in the potential for capital growth.

 

100% (2016: 100%) of the Company's investment portfolio is listed on stock exchanges. If share prices had decreased by 10% with all other variables remaining constant, the income statement capital return and the net assets attributable to equity shareholders would have decreased by £216,595,020 (2016: £148,223,833). The analysis for last year assumes a share price decrease of 10%.

 

A 10% increase (10% increase) in share prices would have resulted in a proportionate equal and opposite effect on the above amounts, on the basis that all other variables remain constant.

 

Foreign currency risk

 

Currency translation movements can significantly affect the income and capital value of the Company's investments, as the majority of the Company's assets and income are denominated in currencies other than sterling, which is the Company's functional currency.

 

The Investment Manager has identified three principal areas where foreign currency risk could affect the Company:

 

•     Movements in rates affect the value of investments;

 

•     Movements in rates affect short-term timing differences; and

 

•     Movements in rates affect the income received.

 

The Company does not hedge the sterling value of investments that are priced in other currencies. The Company may be subject to short-term exposure to exchange rate movements, for instance where there is a difference between the date an investment purchase or sale is entered into and the date on which it is settled.

 

The Company receives income in currencies other than sterling and the sterling values of this income can be affected by movements in exchange rates. The Company converts all receipts of income into sterling on or near the date of receipt; it, however, does not hedge or otherwise seek to avoid rate movement risk on income accrued but not received.

 

The fair value of the Company's monetary items that have foreign currency exposure at 31 March are shown below:

 

2017










Investments at



Trade and




Trade and


Total net


fair value



other


Cash


other


foreign currency


through



receivables


at bank


payables


exposure


profit or loss

Currency


£'000


£'000


£'000


£'000


£'000

US dollar


178


58,525


(58,595

)

108


507,618

Hong Kong dollar


-


-


-


-


342,975

Korean won


3,515


(31

)

-


3,484


266,209

Taiwan dollar


693


96


-


789


219,596

Indian rupee


45


331


(490

)

(114

)

132,043

South African rand


-


-


-


-


116,070

Other


1,948


805


(27,561

)

(24,808

)

502,372

 

 

2016










Investments at



Trade and




Trade and


Total net


fair value



other


Cash


other


foreign currency


through



receivables


at bank


payables


exposure


profit or loss

Currency


£'000


£'000


£'000


£'000


£'000

US dollar


789


-


-


789


274,091

Hong Kong dollar


-


-


-


-


245,609

Korean won


1,807


275


(840

)

1,242


199,080

Indian rupee


-


-


(326

)

(326

)

140,040

Taiwan dollar


18


-


-


18


126,860

Indonesian rupiah


-


-


-


-


78,094

Other


4,243


(1,547

)

(496

)

2,200


340,515

 

Sensitivity

 

The following table illustrates the sensitivity of the profit after taxation for the year and the equity in regard to the Company's monetary financial assets and liabilities and its equity if sterling had strengthened by 10% relative to all currencies on the reporting date, with all other variables held constant.

 




2017






2016









Capital






Capital



Revenue




Return


Revenue




Return

Financial Assets and Liabilities


£'000




£'000


£'000




£'000

US dollar


1,034




50,762


1,014




27,409

Hong Kong dollar


481




34,298


1,018




24,561

Korean won


421




26,621


206




19,908

Taiwan dollar


616




21,960


16




12,686

Indian rupee


303




13,204


170




14,004

South African rand


81




11,607


659




7,995

Other


2,936




158,452


3,083




106,563

 

A 10% weakening of sterling against the above currencies would have resulted in an equal and opposite effect on the above amounts.

 

Interest rate risk

 

The Company is permitted to invest in fixed rate securities. Any change to the interest rates relevant to particular securities may result in income either increasing or decreasing, or the Investment Manager being unable to secure similar returns on the expiry of contracts or the sale of securities. In addition, changes to prevailing rates or changes in expectations of future rates may result in an increase or decrease in the value of the securities held and the interest payable on bank loans when interest rates are reset.

 

Interest rate risk profile

 

The exposure of the financial assets and liabilities to interest rate risks at 31 March is shown below:

 


Within


Within



one year


one year



2017


2016



£'000


£'000

Bank loans


(83,732

)

-

Cash


65,265


77,359

Net exposure at year end


(18,467

)

77,359

 

Exposures vary throughout the year as a consequence of changes in the make up of the net assets of the Company. Cash balances are held on call deposit and earn interest at the bank's daily rate. The Company's net assets are sensitive to changes in interest rates on borrowings. There was no exposure to fixed interest investment securities during the year or at the year end.

 

Liquidity risk

 

The Company's assets comprise mainly of securities listed on the stock exchanges of emerging economies. Liquidity can vary from market to market and some securities may take longer to sell. As a closed ended investment trust, liquidity risks attributable to the Company are less significant than for an open ended fund.

 

The risk of the Company not having sufficient liquidity at any time is not considered by the Board to be significant, given the large number of quoted investments held in the portfolio and the liquid nature of the portfolio of investments.

 

The Investment Manager reviews liquidity at the time of making each investment decision and monitors the evolving liquidity profile of the portfolio regularly.

 

Investments held by the Company are valued in accordance with the accounting policies at bid price. Other financial assets and liabilities of the Company are included in the Balance Sheet at fair value.

 

Credit risk

 

Certain transactions in securities that the Company enters into expose it to the risk that the counter-party will not deliver the investment (purchase) or cash (in relation to sale or declared dividend) after the Company has fulfilled its responsibilities. The Company only buys and sells through brokers which have been approved by the Investment Manager as an acceptable counter-party. In addition, limits are set as to the maximum exposure to any individual broker that may exist at any time. These limits are reviewed regularly.

 

The amount of credit risk that the Company is exposed to is disclosed under the interest rate risk profile and represents the maximum credit risk at the Balance Sheet date.

 

The Company has an ongoing contract with its custodian (JPMorgan Chase Bank) for the provision of custody services.

 

As part of the annual risk and custody review, the Company reviewed the custody services provided by JPMorgan Chase Bank and concluded that while there are inherent custody risks in investing in emerging markets, the custody network employed by TEMIT has appropriate controls in place to mitigate those risks, and that these controls are consistent with recommended industry practices and standards.

 

Securities held in custody are held in the Company's name or to its accounts. Details of holdings are received and reconciled monthly. Cash is actively managed by Franklin Templeton Investment's Trading Desk in Edinburgh and is typically invested in overnight time deposits in the name of TEMIT with an approved list of counterparties. Any excess cash not invested by the Trading Desk will remain in a JPMorgan Chase interest bearing account. There is no significant risk on debtors and accrued income or tax at the year end.

 

Fair Value

 

Fair values are derived as follows:

 

•     Where assets are denominated in a foreign currency, they are converted into the sterling amount using year-end rates of exchange;

 

•     Non-current financial assets - on the basis set out in the accounting policies; and

 

•     Cash - at the face value of the account.

 

The tables below analyse financial instruments carried at fair value by valuation method. The different levels have been defined as follows:

 

Level 1


Quoted prices (unadjusted) in active markets for identical assets and liabilities.




Level 2


Inputs other than quoted prices included with level 1 that are observable for the asset or liability, either directly (prices) or indirectly (derived from prices).




Level 3


Inputs for the asset or liability that are not based on observable market data (unobservable inputs).

 

Valuation hierarchy fair value through profit and loss

 


31 March 2017


31 March 2016



Level 1


Level 2


Level 3


Total


Level 1


Level 2


Level 3


Total



£000


£000


£000


£000


£000


£000


£000


£000

Listed investments


2,165,950


-


-


2,165,950


1,482,238


-


-


1,482,238

 

 

 

15 Significant holdings in investee undertakings

 

As at 31 March 2017 and 2016, the Company held 3% or more in the issued share capital of the following companies:

 


31 March 2017


31 March 2016



Issued share




Issued share





capital held


Fair


capital held


Fair



by TEMIT(a)


Value


by TEMIT(a)


Value

Name


%


£'000


%


£'000

CIA Hering


3.2


23,454


4.3


20,086

MCB Bank


2.4


46,545


3.4


51,900

Univanich Palm Oil


2.1


3,201


5.0


6,683

Peninsula Land


-


-


5.1


2,543

Victory City International


-


-


6.0


6,694

 

(a)This is the percentage of the class of security held by TEMIT.

 

16 Contingent liabilities

No contingent liabilities existed as at 31 March 2017 or 31 March 2016.

 

17 Financial commitments

There were no financial commitments as at 31 March 2017 or 31 March 2016.

 

18 Post balance sheet events

With effect from 1 April 2017, 70% of the AIFM fee and 70% of the costs of borrowing will be allocated to the capital account.

 

The only other material post balance sheet event is in respect of the proposed dividend, which has been disclosed in Note 12.

 

This preliminary statement was approved by the Board on 7 June 2017. The financial information set out above does not constitute the Company's Audited statutory accounts. While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRSs), this announcement does not itself contain sufficient information to comply with IFRSs. The Company will publish full financial statements that comply with IFRSs on its website.

 

The statutory accounts for the financial period ended 31st March 2016 have been delivered to the Registrar of Companies, received an audit report which was unqualified, did not include a reference to any matters to which the Auditors drew attention by way of emphasis without qualifying the report, and did not contain statements under section 498(2) and (3) of the Companies Act 2006.   

 

The statutory accounts for the period ended 31 March 2017 received an audit report which was unqualified, did not include a reference to any matters to which the Auditors drew attention by way of emphasis without qualifying the report, and did not contain statements under section 498(2) and (3) of the Companies Act 2006, and will be delivered to the Registrar of Companies.

 

The Annual Report and Accounts will be sent to Shareholders shortly.  Copies will be uploaded and available for viewing on the National Storage Mechanism, copies will also be posted to the website www.temit.co.uk and may also be requested during normal business hours from Client Dealer Services at Franklin Templeton Investment Management Limited on freephone 0800 305 306.

 

Stephen Westwood (Investor Relations) +44 (0) 7533 178 381 or Joe Winkley at Winterflood (Corporate Broker) on + 44 (0) 20 3100 0301.  


This information is provided by RNS
The company news service from the London Stock Exchange
 
END
 
 
FR UGUUAQUPMGPM

Companies

Templeton Emerging Markets Inv Trust (TEM)
UK 100
FTSE quotes by TradingView

Latest directors dealings

All directors dealings today