Temit introduces performance-related discount control mechanism

Trust is still rebuilding its brand after Mark Mobius and Carlos Hardenberg exits

Templeton Emerging Market investment trust (Temit) has announced it is introducing a five-year performance-related conditional tender offer, driven by its largest shareholder, City of London (14%).

The tender offer will see Temit put forward proposals to shareholders to undertake a tender offer for up to 25% of the issued share capital of the company, if its net asset value total return fails to exceed the benchmark total return over the five-year period to 31 March 2024. The offer is subject to the passing of a continuation vote at the company’s annual general meeting in July.

There will be no tender offer if net asset value total return continues to exceed the Templeton’s benchmark total return, MSCI Emerging Markets Index TR.

Charles Cade, director at Numis Securities, said there is no real impact on shareholders in the near term. “It helps to reassure investors that there will be action to tackle the discount in future if the fund underperforms. However, if that happens, we would expect the board to take action anyway.”

Cade said he liked that the board has commited to buybacks to limit downside from the current discount of 10%.

“Ultimately, the jury is still out on the management team following the departure of Carlos Hardenberg and Mark Mobius, but this should get the fund through its continuation vote and give the managers time to try to deliver.”

In a trading update, the trust also said any offer will be at a price equal to the then prevailing net asset value less 2%. It will also be conditional on shareholders approving a continuation vote in 2024 before taking place following the annual general meeting that year.

Jupiter leads the way on discount mechanism

However, said the proposed tender offer is conditional on a number of factors, not only passing the Continuation Resolution in 2019 but also passing the same vote at the 2024 AGM.

The offer is conditional on the trust’s net asset value total return underperforming the MSCI Emerging Markets Index TR over the five year to end March 2024, which, over the last five years to end April 2019, has underperformed the index by 5%, said Anthony Leatham, analyst at Peel Hunt.

Leatham said: “I am in favour of board’s proactively addressing discount control and I can see the motivation behind these proposals, particularly as today’s announcement also confirms that the trust’s largest shareholder – City of London Investment Management’s – intends to vote in favour of continuation,” he said.

“However, I am not sure that these measures go far enough and it is not obvious that they will have any more impact on the trust’s discount than the existing process of buying back shares in the market?”

Leatham said in the last three months to 4th April 2019 Templeton Emerging Markets has bought back £24m of shares on 46 occasions at an average discount of 10%.  Over the past 5 years, the trusts average discount has been 12% and has ranged from 15% to 8%, the sector average has been 9%.

The trust has outperformed the average global emerging markets trust in the year since renowned manager Carlos Hardenberg jumped ship to join emerging markets veteran Mark Mobius at his eponymous new firm.

According to Leatham, one of the most robust discount control mechanisms in the sector belongs to Jupiter Emerging & Frontier Income Trust (JEFI) which launched in 2017 and operates an annual redemption facility at or close to NAV.

Mobius Investment Trust (MMIT) launched last year has adopted a similar approach, offering the first redemption point in 2022.

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