Winterflood cuts Temit after manager departure

Winterflood Investment Trusts has removed the Templeton Emerging Markets Investment Trust (Temit) from its recommend list of funds until the future direction of Franklin Templeton’s emerging markets team becomes clearer.

Templeton Emerging IT lead manager resigns

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Last week it was announced that Carlos Hardenberg, manager of Temit, was resigning and handing over the reigns to Chetan Sehgal.

Despite the fact few changes to the trusts are expected after his departure at the end of March, the move was described by Winterflood as a “blow”, while Morningstar labelled the move “disappointing”.

Hardenberg (pictured) was appointed lead manager on the £2.1bn trust in October 2015 and Simon Elliott, head of research at Winterflood Investment Trust, admits the firm initially underestimated the manager’s impact on the fund.

“In our opinion the imminent departure of Carlos Hardenberg is undoubtedly a blow for Templeton Emerging Markets,” said Elliott. “We initially underestimated the extent of the change to the investment approach under his stewardship, which allowed investment in more highly valued companies such as technology stocks.”

This, said Elliott, has resulted in a marked turnaround in the fund’s performance over the last two years.

Disappointing

According to FE, the trust is ranked second out of 10 trusts in the Global Emerging Market Equities sector over one year, returning 28.7% versus the sector average rise of 17.9%.

“In our view the departure of Hardenberg is disappointing,” said David Holder, a senior manager research analyst at Morningstar. “Under his tenure he had successfully restructured the portfolio by broadening out the number of holdings and by making good use of the closed-ended nature of the structure by increasing exposure to the less liquid smaller companies.

“He appeared to be utilising the vast analytical resource within the group to good effect and was applying a greater focus on risk within the portfolio. This resulted in improved performance on a relative and risk adjusted basis.”

However despite his departure, both Winterflood and Morningstar, have confidence in the new manager that will takeover, Chetan Sehgal.

“It would be wrong to assume Carlos was acting on his own,” said Elliott. “Both Carlos and Chetan were part of the senior management team that considered the ideas generated by the firm’s analysts, which led to the investment decisions.

“The similarity of investment approach is best demonstrated by the high commonality between the US-listed closed ended fund and the investment trust, with the former managed by Chetan. Consequently we would not expect any significant changes in the short-term.”

Experience taking over

Holder added that it is clear Sehgal is an experienced emerging markets investor, with it assigning bronze ratings to the Templeton Emerging Markets Smaller Companies and Templeton Asian Smaller Companies strategies that he runs.

“So we believe shareholders remain in safe hands here, but are maintaining our current neutral Morningstar analyst rating and will look to meet with Sehgal at the earliest opportunity,” Holder said.

Where Winterflood does have concerns however, is in regards to the future direction of Franklin Templeton’s emerging markets business.

Formed by Mark Mobius in 1987, Elliott said the Templeton Emerging Markets Group has always appeared to have some of the characteristics of a “personal fiefdom” within the wider group, retaining a high degree of autonomy.

“This started to change in 2016 with the appointment of Stephen Dover as CIO following a difficult period of performance,” said Elliott. “While the last two years have seen greater collaboration across the wider Franklin Templeton group, it appears that this is now being taken to a new level with the retirement of Mark Mobius and the recruitment and appointment of Manraj Sekhon as CIO of emerging markets equity.

“We suspect that the decision by Carlos and a number of his colleagues to leave is not unrelated to these developments. While we have no reason to suspect that Chetan is not entirely committed to Franklin Templeton and the management of Templeton Emerging Markets, we believe that it is difficult at this moment to gauge how great the impact of the potential changes to the wider team and process will be.

“Consequently, although we do not expect any significant changes to the fund’s portfolio or investment process in the short term, we have decided to remove the fund from our recommendation list until it becomes clearer as to the future direction of Franklin Templeton with regard to its emerging markets equities team.”

Redeeming features

Elliott added that Temit still has much to commend it, particularly its size, liquidity, strong long-term performance track record and the board’s commitment to an active share buyback policy.

“Its profile means it is undoubtedly the flagship fund within the emerging markets sector and Franklin Templeton continues to have considerable resource in the area, with over 80 investment professionals,” he said. “In addition, we think that the prospects for emerging markets equities are as strong as they have been for several years as a result of improving fundamentals.”

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