~ by Snehasish Chaudhuri, MBA (Finance)
Templeton Emerging Markets Income Fund (TEI) is a closed-end, fixed-income mutual fund that invests primarily in bonds issued by sovereign or sovereign-related entities in emerging markets (EM). Most of these titles generate yield than US bonds. However, these bonds are also riskier and there are risks of default. If an emerging market bond fund is able to invest in sovereign bonds with an investment grade rating, only then can it benefit from both high yield and low yield. risk. The fund has generated a year-over-year return (TTM) of 13.5% and pays out monthly. However, the total yield is quite low. Currently, TEI is available at a good price. I will analyze this fund using my “7 Factor Model for Evaluating Emerging Markets Funds” to understand its investability.
Templeton Emerging Markets Income Fund is geographically diversified
Templeton Emerging Markets Income Fund is launched by Franklin Resources, Inc. and is managed by Franklin Advisers, Inc. TEI invests primarily in a portfolio of sovereign or sovereign-related entities and aims to generate high dividends while market appreciation capital becomes secondary. 46% of bonds are investment grade and 73% of bonds are rated BB and above. With an average credit rating of BB+, the overall risk of this portfolio can be qualified as moderate. The weighted average maturity of the entire portfolio is 7.5 years. The fund compares the performance of its portfolio to the JP Morgan Emerging Markets Bond Index.
I prefer emerging market funds that invest in the 15 most credible and largest economies among all emerging markets spread across the world. These 15 emerging markets are expected to have a nominal GDP above $400 billion by 2025, a credit rating of at least BBB- by S&P or Baa3 by Moody’s, and a relatively lower ranking in the “fragile states index”. 2022”. My list includes China, India, Taiwan, South Korea, Indonesia, Malaysia, Philippines, Thailand, Singapore, Hong Kong, Saudi Arabia, United Arab Emirates, Israel, Poland and Mexico. I find that Templeton Emerging Markets Income Fund has invested 55% of its assets in credible economies, including investments in the United States, Peru and Oman.
The United States is a developed market, while Peru and Oman are equally credible economies with relatively weaker gross domestic product (GDP). I won’t rate the quality of the investments as top rated, but I’m not discouraged by this diversification. At least I don’t find this fund investing heavily in my list of avoidable and less credible emerging markets.
Templeton Emerging Markets Income Fund has exposure to hard currencies
Although Templeton Emerging Markets Income Fund’s investments are spread across emerging markets around the world, over 80% of its exposure is in hard currencies, primarily emerging markets – Chinese renminbi (RMB), Indian rupee (INR), Brazilian Real (BRL), Indonesian Rupiah (IDR), Thai Baht (THB), Malaysian Ringgit (MYR), Peruvian Nuevo Sol (PEN), Uzbek Som (UZS) and Canadian Dollar (CAD). In the 12 months ending October 2022, the US dollar (USD) appreciated 3.9% against the UZS, 8.7% against the IDR, 9.6% against the INR, 10.2% against the CAD, 12% against the RMB, 12.7% against the MYR and 13% against the THB. . On the other hand, the dollar depreciated by almost 1% against the PEN and by 5% against the BRL. One can obviously think, how do these currencies become hard currencies, instead of the currencies of Angola, Armenia, Syria and Russia, against which the dollar depreciated from 13 to 25 % during the same period?
In my opinion, an appreciation does not necessarily mean that the economy is growing or that the currency is risk free. The Russian ruble (RUB) appreciated 13.3% not because its economy is booming. High oil and gas prices, a drop in Russian imports, and credit controls that prevented Russians from buying foreign currency made this appreciation possible. The country also trades directly in the national currencies of other countries instead of dollars. Economic sanctions against Russia have so far appreciated the RUB. However, all this is not sustainable, because the lack of exports, the fall in prices and demand for Russian gas and oil will lead to a recession or a financial crisis in the long term. This will ultimately reduce the value of their currency in the long run. The appreciation of the ruble also led to a 27% loss in oil revenues, apart from the loss due to discounts offered to Chinese and Indian buyers.
The dollar depreciated by 24.5% against the Angolan kwanza (AOA) due to the surge in oil prices, which accounts for 90% of Angola’s export earnings. As oil prices fall, the AOA is losing strength and the dollar has appreciated almost 5% between August and October 2022. Syria’s economy, crippled by a decade-long war, has highly dollarized, as Syrians try to protect themselves. against inflation and currency depreciation. The collapse of the Syrian Pound (SYP) has led to high inflation and hardship as Syrians struggle to support themselves. The Armenian dram (AMD’) was boosted by rising oil prices, trade with Russia and the shifting of bases of IT companies from Russia to Armenia.
On the other hand, the USD strengthened against most currencies of the G20 economies, as well as highly traded currencies. It appreciated by 18% against the euro (EUR), by 21% against the pound sterling (BP’), by 24% against the New Zealand dollar (NZL), by 26% against against the South Korean WON (WON’) and 30% against the Japanese yen (YEN). . In this sense, the currencies to which the Templeton Emerging Markets Income Fund is exposed have managed to maintain their strength. A reasonable depreciation against the US dollar also means that the investable amount of US investors increases, even if they spend the same dollar amount. Thus, the fund will be able to make more investments with the existing assets. This obviously makes this fund attractive.
TEI’s total return was quite poor, despite a high return
The Templeton Emerging Markets Income Fund was established on September 23, 1993 and used to pay quarterly dividends. Since June 2018, TEI pays monthly dividends. The return over the past five years has varied between 8% and 13%, and has generated a 12-month return (TTM’) of 13.5%. The average annual return was 9.35%. However, despite such a high yield, the total yield is quite low. It generated an average annual total return of 2.88% from 2016 to 2020, and since 2012 the average annual return has been negative 0.7%. The fund has an expense ratio of 1.22% and the weighted average coupon is 5.27%. Given all of this, I think it will be difficult to generate a solid total return in the near future, and a return of between 8% and 13% does not seem sustainable either.
Investment thesis
I analyze the investment capacity of emerging funds by evaluating the seven most critical factors for these funds: share price performance, assets under management, average annual return, level of portfolio diversification, rating average credit rating, current discount to net asset value and future sustainability of its performance. Templeton Emerging Markets Income Fund has a yield of over 5% and a market price of over $5, but assets under management are just under $240 million. The stock is currently trading at a healthy discount of 6.9%. However, over the long term, its price performance was quite poor and resulted in a negative total return despite a strong return. Due to a high spend rate and a much lower coupon than the current yield level, the yield does not appear to be sustainable. But, even a lower level of return will be enough for TEI investors. Backed by a weighted average coupon of 5.27%, expecting a decent return over the long term doesn’t seem unrealistic.
Templeton Emerging Markets Income Fund’s currency exposure is impressive. Most currencies resisted while the dollar appreciated against the most credible and most traded currencies around the world. The fund is well diversified globally and its selection of emerging markets cannot be considered bad. 46% of its assets are invested in the most credible emerging markets, and an additional 45% is invested in 8 other large and medium-sized emerging markets with lower credit ratings, but not fragile economies, such as Brazil, Colombia , Costa Rica, Dominican Republic, Ecuador, Egypt, South Africa and Uzbekistan. Thus, overall, the portfolio presents a moderate risk, which is also characterized by its weighted average credit rating of BB+. So I don’t think that liquidating the stakes in TEI is a good idea. In addition, the appreciation of the dollar enabled this fund to invest more in bonds in the target currencies. I would call TEI a Hold.
~ by Snehasish Chaudhuri, MBA (Finance)
Templeton Emerging Markets Income Fund (TEI) is a closed-end, fixed-income mutual fund that invests primarily in bonds issued by sovereign or sovereign-related entities in emerging markets (EM). Most of these titles generate yield than US bonds. However, these bonds are also riskier and there are risks of default. If an emerging market bond fund is able to invest in sovereign bonds with an investment grade rating, only then can it benefit from both high yield and low yield. risk. The fund has generated a year-over-year return (TTM) of 13.5% and pays out monthly. However, the total yield is quite low. Currently, TEI is available at a good price. I will analyze this fund using my “7 Factor Model for Evaluating Emerging Markets Funds” to understand its investability.
Templeton Emerging Markets Income Fund is geographically diversified
Templeton Emerging Markets Income Fund is launched by Franklin Resources, Inc. and is managed by Franklin Advisers, Inc. TEI invests primarily in a portfolio of sovereign or sovereign-related entities and aims to generate high dividends while market appreciation capital becomes secondary. 46% of bonds are investment grade and 73% of bonds are rated BB and above. With an average credit rating of BB+, the overall risk of this portfolio can be qualified as moderate. The weighted average maturity of the entire portfolio is 7.5 years. The fund compares the performance of its portfolio to the JP Morgan Emerging Markets Bond Index.
I prefer emerging market funds that invest in the 15 most credible and largest economies among all emerging markets spread across the world. These 15 emerging markets are expected to have a nominal GDP above $400 billion by 2025, a credit rating of at least BBB- by S&P or Baa3 by Moody’s, and a relatively lower ranking in the “fragile states index”. 2022”. My list includes China, India, Taiwan, South Korea, Indonesia, Malaysia, Philippines, Thailand, Singapore, Hong Kong, Saudi Arabia, United Arab Emirates, Israel, Poland and Mexico. I find that Templeton Emerging Markets Income Fund has invested 55% of its assets in credible economies, including investments in the United States, Peru and Oman.
The United States is a developed market, while Peru and Oman are equally credible economies with relatively weaker gross domestic product (GDP). I won’t rate the quality of the investments as top rated, but I’m not discouraged by this diversification. At least I don’t find this fund investing heavily in my list of avoidable and less credible emerging markets.
Templeton Emerging Markets Income Fund has exposure to hard currencies
Although Templeton Emerging Markets Income Fund’s investments are spread across emerging markets around the world, over 80% of its exposure is in hard currencies, primarily emerging markets – Chinese renminbi (RMB), Indian rupee (INR), Brazilian Real (BRL), Indonesian Rupiah (IDR), Thai Baht (THB), Malaysian Ringgit (MYR), Peruvian Nuevo Sol (PEN), Uzbek Som (UZS) and Canadian Dollar (CAD). In the 12 months ending October 2022, the US dollar (USD) appreciated 3.9% against the UZS, 8.7% against the IDR, 9.6% against the INR, 10.2% against the CAD, 12% against the RMB, 12.7% against the MYR and 13% against the THB. . On the other hand, the dollar depreciated by almost 1% against the PEN and by 5% against the BRL. One can obviously think, how do these currencies become hard currencies, instead of the currencies of Angola, Armenia, Syria and Russia, against which the dollar depreciated from 13 to 25 % during the same period?
In my opinion, an appreciation does not necessarily mean that the economy is growing or that the currency is risk free. The Russian ruble (RUB) appreciated 13.3% not because its economy is booming. High oil and gas prices, a drop in Russian imports, and credit controls that prevented Russians from buying foreign currency made this appreciation possible. The country also trades directly in the national currencies of other countries instead of dollars. Economic sanctions against Russia have so far appreciated the RUB. However, all this is not sustainable, because the lack of exports, the fall in prices and demand for Russian gas and oil will lead to a recession or a financial crisis in the long term. This will ultimately reduce the value of their currency in the long run. The appreciation of the ruble also led to a 27% loss in oil revenues, apart from the loss due to discounts offered to Chinese and Indian buyers.
The dollar depreciated by 24.5% against the Angolan kwanza (AOA) due to the surge in oil prices, which accounts for 90% of Angola’s export earnings. As oil prices fall, the AOA is losing strength and the dollar has appreciated almost 5% between August and October 2022. Syria’s economy, crippled by a decade-long war, has highly dollarized, as Syrians try to protect themselves. against inflation and currency depreciation. The collapse of the Syrian Pound (SYP) has led to high inflation and hardship as Syrians struggle to support themselves. The Armenian dram (AMD’) was boosted by rising oil prices, trade with Russia and the shifting of bases of IT companies from Russia to Armenia.
On the other hand, the USD strengthened against most currencies of the G20 economies, as well as highly traded currencies. It appreciated by 18% against the euro (EUR), by 21% against the pound sterling (BP’), by 24% against the New Zealand dollar (NZL), by 26% against against the South Korean WON (WON’) and 30% against the Japanese yen (YEN). . In this sense, the currencies to which the Templeton Emerging Markets Income Fund is exposed have managed to maintain their strength. A reasonable depreciation against the US dollar also means that the investable amount of US investors increases, even if they spend the same dollar amount. Thus, the fund will be able to make more investments with the existing assets. This obviously makes this fund attractive.
TEI’s total return was quite poor, despite a high return
The Templeton Emerging Markets Income Fund was established on September 23, 1993 and used to pay quarterly dividends. Since June 2018, TEI pays monthly dividends. The return over the past five years has varied between 8% and 13%, and has generated a 12-month return (TTM’) of 13.5%. The average annual return was 9.35%. However, despite such a high yield, the total yield is quite low. It generated an average annual total return of 2.88% from 2016 to 2020, and since 2012 the average annual return has been negative 0.7%. The fund has an expense ratio of 1.22% and the weighted average coupon is 5.27%. Given all of this, I think it will be difficult to generate a solid total return in the near future, and a return of between 8% and 13% does not seem sustainable either.
Investment thesis
I analyze the investment capacity of emerging funds by evaluating the seven most critical factors for these funds: share price performance, assets under management, average annual return, level of portfolio diversification, rating average credit rating, current discount to net asset value and future sustainability of its performance. Templeton Emerging Markets Income Fund has a yield of over 5% and a market price of over $5, but assets under management are just under $240 million. The stock is currently trading at a healthy discount of 6.9%. However, over the long term, its price performance was quite poor and resulted in a negative total return despite a strong return. Due to a high spend rate and a much lower coupon than the current yield level, the yield does not appear to be sustainable. But, even a lower level of return will be enough for TEI investors. Backed by a weighted average coupon of 5.27%, expecting a decent return over the long term doesn’t seem unrealistic.
Templeton Emerging Markets Income Fund’s currency exposure is impressive. Most currencies resisted while the dollar appreciated against the most credible and most traded currencies around the world. The fund is well diversified globally and its selection of emerging markets cannot be considered bad. 46% of its assets are invested in the most credible emerging markets, and an additional 45% is invested in 8 other large and medium-sized emerging markets with lower credit ratings, but not fragile economies, such as Brazil, Colombia , Costa Rica, Dominican Republic, Ecuador, Egypt, South Africa and Uzbekistan. Thus, overall, the portfolio presents a moderate risk, which is also characterized by its weighted average credit rating of BB+. So I don’t think that liquidating the stakes in TEI is a good idea. In addition, the appreciation of the dollar enabled this fund to invest more in bonds in the target currencies. I would call TEI a Hold.