EMF - EMF Vs. WAINX: Why I Sold The First; Bought The Second Fund

2023-03-17 08:00:00 ET

Summary

• The Templeton Emerging Markets Fund is a CEF managed by Templeton Asset Management. It actively invests in any/all Emerging Market countries.
• The Wasatch Emerging India Fund is a Mutual Fund managed by Wasatch Advisors Inc. The fund invests in public equity markets of India.
• EMF’s CAGR was over 13% until 2008; only about 3.7% since. From 2011, when WAINX started, it is slightly negative versus 10+% CAGR for WAINX over its life.
• Compared to WAINX, EMF is Strong Sell; compared to other EM funds, a Hold at Best. I give WAINX a Buy rating for those evaluating for 5+-yr results, Hold for others.

(This article was co-produced with Hoya Capital Real Estate )

Introduction

My investment management goal for 2023 is cleaning house. For the first time in too long of a time, I am looking at each fund we own and asking several questions:

• Why did we buy this to begin with and is that still a valid reason to hold it? This usually focuses on the market exposure within our total portfolio. If not, it should be sold.
• Assuming the answer above is "keep it", then how it has performed compared to similar, though not necessarily exact funds, is reviewed. If there is a better performing fund, make the switch.

In this case, while the second question said the Templeton Emerging Markets Fund ( EMF ) should be replaced, re-evaluating our commitment to Emerging Market stocks indicated that percentage should be reduced, as those stocks have not lived up to expectations.

House cleaning the EM sector

Realizing we had some EM exposure via the Causeway Emerging Markets Fund ( CEMIX ), which I sold part of, and the Wasatch Emerging Markets Small Cap Fund ( WAEMX ), plus three international equity ETFs, I chose to sell off the Fidelity Emerging Markets Discovery Fund ( FEDDX ) a year ago, the VanEck Africa Index ETF ( AKF ) last month ( article link ), and the Templeton Emerging Markets Fund recently. Instead of a shotgun approach, I picked the best fund in what should be the fastest growing EM country, India, that being the Wasatch Emerging India Fund ( WAINX ). With this trade, I did reduce my Emerging Markets allocation.

Some of the reasons I think India is a good investment were covered in my two articles on other India funds:

• IFN Vs. INDY: Similar Strategy For India Stocks; Results Depend On Reinvestment
• Investing In India: Earnings Vs. Small-Cap ETFs

Here is one of the charts I looked at in deciding to invest in WAINX; using only funds that existed when WAINX start in 2011.

Templeton Emerging Markets Fund review

As the above chart shows, EMF has had period of great returns, followed by equally large downdrafts.

Seeking Alpha describes this CEF as:

The Templeton Emerging Markets Fund is a closed-ended equity mutual fund launched by Franklin Resources Inc. The fund is managed by Templeton Asset Management Ltd. It invests in the public equity markets of emerging market countries across the globe. The fund employs fundamental analysis with a focus on such factors as long-term earnings, asset value, and cash flow potential to create its portfolio. It benchmarks the performance of its portfolio against the MSCI Emerging Markets Index. EMF started in 1987.

Source: seekingalpha.com EMF

EMF has $204m in AUM; very small for a fund started in 1987 by John Templeton; considered the dean of international investing. Fees are 149bps; about as expected for an actively managed EM CEF. While the current yield is listed as 9.96%, payments have been erratic. EMF's webpage quotes a much lower yield; 3.5%.

The managers of EMF provided this strategy statement:

We believe in the dynamic growth potential of emerging market regions. With analysts around the globe, we identify emerging market stocks that may be some of the best "bargains" the world has to offer.

Source: franklintempleton.com

EMF holdings review

The benchmark shown is the MSCI EM Index. Breaking regions into countries shows the following.

Notice that India, the focus of the other fund, is under 12% of the allocation in EMF; which is heavily invested in other parts of Asia, especially China. Next, I looked at sectors.

No surprise in the top sectors. Large banks are common in many EM countries and two top holdings account for all of the Semiconductor sector. The Top 4 sectors are all overweighted compared to the MSCI EM index.

Above, EMF is compared to the full EM market universe.

Total holdings

Both EMF and WAINX hold a very limited number of stocks. The "Share Change %" entry indicates the change in the number of shares of each stock from the previously reported portfolio, which appears to be monthly for EMF.

EMF distributions review

While more stable recently, payouts have ranged from near $0 to almost $6, which are paid annually in December. For the last few years, payouts were sourced almost equally from income and capital gains.

Price Vs. NAV review

The next chart shows the relationship clearer.

So, while the current 12% discount sounds attractive, EMF has a long history of selling at such a discount; much shrinkage from the current level should not be expected.

Wasatch Emerging India Fund review

Seeking Alpha describes this MF as:

Wasatch Emerging India Fund is an open-end equity mutual fund launched and managed by Wasatch Advisors Inc. The fund invests in public equity markets of India. It invests in stocks of companies operating across diversified sectors. It invests in growth stocks of companies across diversified market capitalization. The fund employs fundamental and quantitative analysis with bottom-up stock picking approach to create its portfolio. It seeks to benchmark the performance of its portfolio against the MSCI India IMI. WAINX started in 2011.

Source: seekingalpha.com WAINX

WAINX has $459m in AUM and investors see 151bps in fees. Payouts are annual and vary greatly each year.

WAINX holdings review

WAINX, compared to other EM funds, is overweight in Financials, Health Care and Technology; underweight in Materials and Consumer Cyclical; with no exposure to Energy stocks. Since this fund only invests in the country of India, both region (Asia) and country would be 100% allocation.

Above, WAINX data is compared to only other stocks in India, not the full EM universe. The fund's focus is clearly in the larger stocks.

Total holdings (12/31/22)

Here the "Share Change %" appears to be reset quarterly. The smallest three positions were all bought on 12/31/22. There were three other positions that were initiated for the first time on 2022 too.

WAINX distribution review

Investors can see that the payouts are very dependent on long-term capital gains, which the managers have some control over in generating. The low rates and inconsistent nature mean income-seeking investors need to avoid this MF.

Comparing funds

The obvious big difference is the country allocations. Investors believing India is the best EM country to own, or those just wanting to increase their EM exposure to India, should prefer owning WAINX. That said, it is still worth doing some deeper data compares. I start with sectors, as they are important regardless of country.

Some key data metrics from Morningstar are:

I marked in Green the fund with the better value: earnings favor EMF, growth metrics, WAINX. The Price ratios were split.

Performance numbers

I included the iShares MSCI Emerging Markets ETF ( EEM ) to represent what EM-index investing, versus active management, did.

It is clear that from 2013, India has done better than either EMF's active strategy or EEM's index approach to EM investing. Next are some standard measures of risk.

These favor WAINX, with EMF not having the best value in any measure.

Portfolio strategy

One cannot consider an India fund without reviewing what's happening with the Adani Group "scandal". The Adani Group includes transport logistics, an energy utility portfolio, and businesses focusing on large scale infrastructure development in India. I suggest this article on that subject: India Remains A Compelling Investment Case Amid The Current Storm .

A total of 172 funds have exposure to any of the Adani Group companies; 64 active funds and 108 index or Exchange Traded Funds, though the percents are low. Looking deeper, fund's investing based on the Nifty Fifty dominated the list. While neither fund reviewed here has exposure, the "Adani Group" affect is hurting the whole Indian stock market, which I looked at as a buying opportunity.

Assuming India is now on the reader's radar, other India funds should be included in their due diligence search. Here are some I found: unfortunately, HCIB does not include mutual funds, so no data for WAINX.

With CAGRs of just over 6.7% at both 3- and 5-years; WAINX top the list at 5 years but is near the bottom at 1 and 3 years. Which raises the question: "Which time period (s) should be used in ranking fund results?".

Compared to WAINX, EMF is Strong Sell; compared to other EM funds, a Hold at Best. I give WAINX a Buy rating for those evaluating for 5+-yr results, Hold for others.

Final thought

To be fair to EMF, being an unrestricted Emerging Markets fund, here is how it has done against both other CEFs and ETFs with/without factor strategies.

Against this set, at 5-years, only the WisdomTree Emerging Markets High Dividend Fund ( DEM ) performed better, but all are way behind the India funds.

For further details see:

EMF Vs. WAINX: Why I Sold The First; Bought The Second Fund