AEF - EMF: Don't Ignore The Risks Of This Fund's Chinese Exposure

2025-02-18 15:34:22 ET

Summary

• The Templeton Emerging Markets Fund offers high yield and exposure to fast-growing emerging markets but has underperformed compared to the S&P 500 in recent decades.
• Emerging markets have higher economic growth rates but are more sensitive to global shocks, resulting in slower recovery and higher risk compared to U.S. equities.
• The fund's 3.95% yield is lower than peers, and its high allocation to China poses risks due to potential economic stagnation and unreliable growth figures.
• The fund is easily covering its distribution and share buybacks solely out of realized gains and net investment income.
• Despite its lower yield, the Templeton Emerging Markets Fund has outperformed other emerging market equity funds in total return over the past ten years.

The Templeton Emerging Markets Fund ( EMF ) is one of the few closed-end funds around that provides investors with a way to both get a very high yield and exposure to the potentially high growth that can be obtained by investing in emerging market countries. There could be a good argument for having emerging market exposure, given that many emerging markets have substantially higher economic growth rates than what can be found in developed market nations. For example, Visual Capitalist provides the following gross domestic growth rates for several emerging market nations for 2024:

The global average for the entire globe was 2.9% over the same projection period, so we can clearly see that all of these countries beat that figure handily. The figures shown for the emerging market nations above are also all considerably above the 2.3% year-over-year growth rate that the United States achieved in the fourth quarter of 2024:

Thus, by investing some of our assets in emerging market nations, we can get exposure to financial opportunities in countries that are growing considerably faster than the United States or other developed market nations. It should not be difficult to see how this could result in fairly attractive potential returns over the long term....

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