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Carlos Hardenberg, the manager who took over the Templeton Emerging Markets (TEM) investment trust last October, discusses the changes he has made to the £1.3 billion portfolio.
TEM is the country's biggest and oldest emerging markets fund. Hardenberg replaced Mark Mobius who had run the trust for 26 years since its launch.
In this video interview, Hardenberg talks about his career and comments on the under performance that has dogged the trust during the downturn in emerging markets.
Hardenberg also explains why he has increased the fund's holdings in technology companies, medium-sized 'mid-cap' stocks and Brazil.
Gavin Lumsden: Hello, I’m very pleased to have with me today Carlos Hardenberg, the recently appointed manager of Templeton Emerging Markets investment trust. Carlos, thanks very much for coming in.
Now you took over from Mark Mobius, who pioneered emerging markets investing when he launched the trust in 1989, and he’s been running it ever since until last October. Could you tell us a bit about yourself and why you were chosen to succeed him?
Carlos Hardenberg: I started with Mark when I was 26 years old, which is kind of half of my life ago. I was based in south-east Asia, I analysed stocks out of Singapore. I was then sent off to Poland where I was running our European efforts. I always had a deep passion for emerging market investments. I always saw in Mark a great teacher, a great mentor of my life. I spent a lot of time with him – my wife says more with him than with her but that’s not quite true! I was then sent to Turkey, spent almost 11 years in Turkey, I directed our investments there, ran funds, I developed our global frontier efforts.
So that’s a bit of my background. I really look forward to the challenge of this great trust and I hope I will be able to continue with the success going forward.
GL: Performance of the trust has been poor of late. Longer-term returns are still good but over five years shareholder returns are down around 28%. More importantly it’s been lagging the benchmark. You and Mark can’t be blamed for the downturn in emerging markets but why was the trust behind the MSCI Emerging Markets index?
CH: So I think you have to clearly differentiate between short-term developments and the long-term performance of the trust. Our process is designed in a way to benefit from very long-term investment developments. And when sentiment takes over markets and you have very strong reactions in markets, as we’ve seen in the last five years: markets that saw the oil price go down by 80%; iron ore price go down more than 60%; worries about a hard landing in China; a collapse in the economy of South Africa; a dramatic slowdown in Brazil; developments in the Middle East which are certainly not conducive. That led to a huge and very dramatic sentimental move in the market and we were kind of caught in that storm.
As bottom-up stock pickers we remain confident in our ability to choose better stocks, better-managed companies with better corporate governance that will do well over the long term and we will not change that process. Obviously the performance has suffered over that period but we want to emphasise that over the last ten, 12 years, out of those, in at least eight of those calendar years the fund actually outperformed. It was really one, maybe one-and-a-half years where we got caught short.
GL: So no changes to the fundamental process but you have been making some changes to the portfolio: increasing the number of stocks that you hold. Is that right?
CH: So what we’ve done, we looked at diversification, we went into some new sectors that we’d not paid a lot of attention to in the past. We’re moving quite dramatically into technology within emerging markets and now that markets and companies are really on the operating table and are bleeding and cheap. It is a great time to select some of those stocks which traditionally have been very expensive.
GH: Technology stocks are not what we’d associate with Templeton Emerging Markets of the past. Is that you showing that you’re the new man, making yourself different from Mark?
CH: In a way, in a way. We always had some interest but Mark is an extreme value investor and that segment of the market has never really been a good fit for value investors. However, now the situation kind of coincides with me taking over, some of those stocks have been punished for the wrong reason.
GL: Another big change you’ve made is you’ve increased the weighting to Brazil, which I can imagine is kind of the classic Templeton thing to do, buying a market at the bottom. The recent impeachment of President Dilma Rousseff, is that just noise to you obscuring the fundamental strengths of that country?
CH: So the reason Brazil was sold down so dramatically is partially related to the sell-off in commodity prices, especially iron ore which is down from somewhere around 200 to 60 [dollars a tonne]. It’s also related to the political noise as you mentioned and that led to quite a sharp slowdown in economic activity. This is the perfect time for value investors to move in because the long-term future of Brazil is still fantastic and we find very well-run companies there.
So just to add a point: we not only increased the number of stocks and we not only went into the technology sector a little bit more, we also tried to move away to some degree from the very large-cap segment to more the mid-cap segment. We think our ability to pick winning stocks in the mid-cap segment is very good. We also think the value proposition, the current valuations of these stocks is more attractive. At the same time there is another argument here. We have seen that over time some of the companies which have government affiliation or government influence will not do as well as others over the long term and we have actually said goodbye to some of those investments that we had in the portfolio and went to the more entrepreneurial segment within the universe.