Jul 06, 2012
Finding emerging markets' sweet spot
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