According to the latest portfolio allocation updates from Franklin Templeton, the Templeton Emerging Markets Fund is now 71.3% invested in Asian equities, 10.2% in Europe, 17.7% in Latin America and 0.8% in the Middle East and Africa.
Mark Mobius, Ph.D., executive chairman of Templeton Emerging Markets Group, recently described emerging market stocks as in a “sweet spot” valuation-wise, trading at just 10 times earnings.
Mobius is recognised as an emerging markets guru and has written several books highlighting the opportunities presented by these markets to the investing public. He directs the Templeton research team in 15 global emerging markets offices and manages emerging markets portfolios.
The process of implementing his investment strategies, however, requires the collaboration of the trading team within the organisation. Market impact, for example, is a critical consideration, given the size of Franklin Templeton as an asset manager and the types of markets in which Mobius is investing. Emerging markets accounts for some US$50 billion AUM out of a total of US$720 billion. “Whenever we are doing a trade, we have to consider the impact not only on the market, but on the company we’re investing in, because in many cases, different parts of the organisation will be buying or selling a particular stock,” says Mobius. “That's where, for example, George Molina our Asian head of trading and his team will come in.”
Deeper than data
The trading team is also able to provide a more nuanced view of market conditions that may not be evident from the raw data. “We have a system that tells us how much we hold and how much the entire organisation holds in a particular stock and of course we have information regarding turnover, but turnover numbers leave a lot to be desired,” says Mobius. “George and his team will be able to point out where the numbers announced by a particular stock exchange do not tell the whole story. The trading team is also crucial to getting the best possible price, which they are mandated to do.”
Mobius is renowned for venturing into frontier markets ahead of the pack. “Trading plays an even more critical role in frontier markets, where the difference between what the official statistics are telling you and what is actually happening on the ground can be wide,” he says. Interestingly, the perceived lack of liquidity in these markets can sometimes work in Franklin Templeton’s favour. “We have some positions in frontier markets where people are offering us 50% or 100% above the official market price, because they want shares in bulk, for one reason or another – for example, a proposed acquisition – and we get a very high price,” says Mobius. “Our traders can advise on how best to access those opportunities.”
Front running
While the risk of front running can occur anywhere, he says, it is often heightened in the less developed venues, where only one or two brokers dominate the market. “It's often difficult to detect, because the brokers may be playing multiple roles, including underwriting and trading their own book,” says Mobius. “The trading team will advise us if they’ve seen that. Where we feel a particular market is under-brokered, we will try to develop other brokers to come in.”
Once an order is being worked, says Mobius, “there's a continuous dialogue between us on the trading environment and we will amend our order accordingly.”
Reporting by Richard Schwartz