TEMIT is down by 17.5% over the past two years, which is more than double the losses suffered by the MSCI Emerging Markets Index over that period. Hardenberg attributes the severe underperformance to previous strong overweights to financials and especially energy, and to hard-hit currencies such as the Brazilian real.
“We didn’t exit these positions at the right time as we were in fact hit by a perfect storm,” says Hardenberg, who has learnt a few lessons from the turbulence of the previous to years. “We want to manage the portfolio risk in a different way,” he told a press briefing. This intention is reflected in some radical changes the new lead manager, who has been with Franklin Templeton since 2002, has made in the seven months since taking over management of TEMIT.
Hardenberg has shifted the focus of the fund from blue chips towards smaller companies, and has drastically reduced its exposure to financials and especially energy, instead betting on information technology to be the next major growth driver in emerging markets. The fund’s allocation to this sector has more than doubled to 26.1%. Exposure to energy companies went the other way: it was halved to 8.7% (versus a benchmark weight of 7.5%).
“We have shifted our focus to companies that work on technological innovation,” Hardenberg said. “It’s more difficult to find these companies than it is to find energy or blue chip companies, but we have a lot of resources available and we are digging hard.”
Hardenberg’s recent investment in the Korean technology company Hanon, which has a market cap of only slightly more than $5bn, exemplifies his strategic shift. “This company is well-positioned to profit from the rise of electric cars, as it has developed a product to cool their motors,” he explained. Hardenberg is not the only investor who has discovered the potential of this company, which is witnessed by its share price having risen by some 53% over the past year.
The only sector that seems to please Mobius and Hardenberg equally is consumer discretionary. The German has left the allocation to this sector stable at just under 20%. Here, however, he has also made a move towards mid caps. “We bought the Cambodian casino operator NagaCorp (market cap $1.55bn, listed in Hong Kong), which profits from an influx of Chinese gamblers,” he said. Since the Chinese government started a crackdown on casinos in Macau, the only place in China where casinos are legal, Chinese gamblers have increasingly gone abroad to gamble. This has benefited the likes of NagaCorp.
“And because 80% of NagaCorp’s clients are low-end clients with less than $1000 to spend, the company is not very much affected by China’s wider campaign against corruption,” Hardenberg said.