TEMIT pins 2020 underperformance on banking exposure
Moves from overweight to underweight position
The £2.2bn Templeton Emerging Markets Investment Trust (TEMIT) has blamed its exposure to banking stocks for losses accrued so far in 2020, with the company now reducing exposure to the sector, which has been hard hit by the economic consequences of the coronavirus pandemic.
Speaking to investors in a webinar on Friday (26 June), lead manager Chetan Sehgal explained that "most of the detractors" to performance since the beginning of the year had been financial institutions, to which the trust's overweight position had contributed positively over recent years.
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TEMIT's NAV is up 5.1%, 18.3% and 64.7% over one, three and five years respectively, according to AIC data, surpassing peers in the Global Emerging Markets AIC sector's average of -1.3%, 12% and 49.7% over the same time periods.
However, according to TEMIT's own figures, its NAV is down 5.9% over the six months to 30 May, compared to the MSCI Global Emerging Markets index's loss of 5.4% for the period. The trust is currently trading on a discount to NAV of 12.6%.
Sehgal said: "Most of the detractors really have been financial institutions. The [overweight] trade has done extremely well for us in a in a three-year period until February of this year.
"Since then many of these institutions have declined."
He explained that the impact of the current pandemic-induced crisis on consumer lending as well as small and medium enterprises "has been felt everywhere" as "the banks have actually borne the brunt of the impact".
He singled out Brazilian bank Bradesco, "which is one of the market leading banks" that has had the most significant negative impact on portfolio performance.
He explained: "Brazil has been one of the worst affected markets because of the Covid crisis and these banks have actually declined quite a lot.
"They have declined a little bit in their local currency terms, but significantly more because the currency had also weakened quite a bit in Brazil.
"Similarly, Mexico has also seen a sharp decline in the in the stock price of Banco Santander Mexico.
"It is [also] a function of both the currency as well as the fact that Mexico has been hit by Covid-19."
Bradesco and Banco Santander Mexico detracted roughly 0.7% each to portfolio performance over the year to 31 March, while the Brazilian Itaú Unibanco detracted 0.6% over the period.
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Fellow portfolio manager Andrew Ness confirmed that TEMIT also does not see a positive outlook for emerging market banks going forward and has therefore reduced its exposure to the sector "given the expected economic headwinds from the Coronavirus"
He added that TEMIT was also seeing "lower transparency of loan books given that moratoriums on payment, holidays, and other support mechanisms that have been introduced to support borrowers", in addition to the increasing number of countries imposing limits on banking dividends thereby "reducing the total return available to shareholders in the medium term".
Having been overweight financial services in the past, the firm has now shifted to overall portfolio exposure to an underweight exposure of 19.6% versus the MSCI EM's 21.6%.
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