Templeton Emerging Markets Investment Trust (LSE:TEM) had returned more than 40% in net asset value terms by the end of September, with Asian semiconductor groups dominating the portfolio.

Templeton Emerging Markets Investment Trust (LSE:TEM), known as TEMIT, has been on a powerful run. At 30 September, the net asset value total return stood at 40.44% for the year to date, against 24.93% for the MSCI Emerging Markets Index. The share price return was higher still at 41.8%.

Over 12 months, the NAV rose 51.53% and the shares 54.19%, compared with a benchmark gain of 30.95%. Over three years the NAV has returned 123.43%, against 75.58% for the index.

At the end of September, the net asset value stood at £3.56 and the shares at £3.30, leaving a discount of 7.32%. Net gearing was modest at 2.7%, while the trust (LSE:TEM) is allowed to borrow up to 20% of net assets.

The third quarter was much quieter than the first half. Over the three months to 30 September, NAV slipped 0.08% and the shares fell 0.75%, broadly in line with a 0.46% decline in the benchmark. September itself was firmer, with the NAV up 2.26%.

About the company

Templeton Emerging Markets Investment Trust is a closed-ended investment company listed on the London Stock Exchange, managed by Franklin Templeton. Its mandate is long-term Capital growth from a diversified portfolio of shares in developing economies, spanning Asia, Latin America, Eastern Europe, the Middle East and Africa. As a trust, it issues a fixed pool of shares that trade on the market, so the share price can sit above or below the underlying net asset value.

The managers follow a bottom-up, value-aware approach, looking for companies whose long-term Earnings power appears under-appreciated, and they are free to hold positions that look quite different from the benchmark. That freedom explains why country and company weightings can diverge sharply from the MSCI Emerging Markets Index, producing both periods of marked outperformance and periods of lag.

The trust earns nothing in the conventional operating sense. Returns come from share price gains and dividends on its holdings, with costs met through a management fee and running expenses, and modest borrowing used to enhance exposure. Shareholders benefit through net asset value growth, a small Dividend and the effect of Buybacks on the discount. The article shows a net asset value total return above 40% so far this year, a three-year return of 123.43% and an unchanged dividend of 5.25p, set against a board that is actively repurchasing shares to keep the discount contained.

Korea and Taiwan at the centre

The portfolio has become heavily concentrated in Asian technology hardware. Taiwan Semiconductor Manufacturing accounted for 18.64% of the trust at the end of September, followed by Samsung Electronics at 10.01% and SK Hynix at 9.39%. Those three holdings together make up about 38% of the total. MediaTek, at 3.84%, and BYD, at 2.38%, completed the top five.

By country, Taiwan represented 28.63% of the portfolio and South Korea 26.52%, while China stood at 20.28%. India's weighting was 7.93% and Brazil's 7.12%.

That shape reflects decisions made over the financial year to 31 March, when annual results published on 2 June showed a NAV total return of 41.3% and a share price total return of 48.6%, compared with 26.8% for the benchmark. SK Hynix alone added 6.2 percentage points of relative return, with TSMC, Hyundai Motor, Samsung Life insurance and Samsung Electronics also helping. ICICI Bank, Prosus and Genpact were the main detractors, and India was the largest relative drag.

How investment trusts work in emerging markets

Closed-ended trusts suit emerging markets because managers are never forced to sell holdings to meet redemptions when sentiment turns, a real advantage in markets where Liquidity can vanish quickly. The structure also permits gearing, which magnifies gains and losses alike.

Emerging markets indices have become far more technology-heavy over the past decade, driven by Taiwanese and Korean manufacturers of chips and memory. A portfolio that leans into those names therefore behaves partly like a bet on the global semiconductor cycle, rather than a broad play on consumer growth in developing economies.

What to watch next

The half-year results to 30 September are the next formal checkpoint, offering detail on portfolio changes, fees and the pace of buybacks. Readers may wish to follow the discount, since a narrower gap supports Shareholder returns independently of the portfolio.

Other variables include movements in memory chip pricing, currency trends in Korea, Taiwan and India, and the extent to which the managers reduce concentration after such a rapid advance. Higher weightings in a handful of names raise the sensitivity of the trust to company-specific news.

Buybacks and the discount

The board described the persistent discount as unsatisfactory when it reported the results. It spent £166.7m on share repurchases during the year at an average discount of 10.2%, and said it intended to buy back up to £300m of shares over the next 12 to 24 months. The discount narrowed from 12.4% to 8.2% over the financial year, and the end-September reading of 7.32% suggests that the gap has remained relatively contained.

Shareholders also received an unchanged total dividend of 5.25p for the year, made up of a 2p interim and a 3.25p final, and a reduction in the fees paid to the investment manager took effect from 1 July.

Chair Angus Macpherson described the performance as unusually solid and cautioned against placing too much weight on any single year. The managers, led by Chetan Sehgal, said in June that they expected a more selective opportunity set rather than a broad-based rally, and that they remained positive on Supply chains linked to artificial intelligence in South Korea and Taiwan, while selective on China and India.

For this FTSE 250 constituent, the concentration that has produced such solid returns also represents the main point of scrutiny, since the portfolio's fortunes are now closely tied to the memory and chip cycle. Half-year results covering the period to 30 September will provide a fuller account when they are published.