Shrewd stock selection has made up for the debacle at Templeton Emerging Markets (TEM ) last year, when its five-year performance, over which it will be judged at a continuation vote next year, slipped below the benchmark.

Annual results published earlier this month showed the £1.8bn portfolio delivered a net asset value (NAV) total return of 0.8% in the year to 31 March versus an index fall of 4.5%. This brings the underlying NAV up 16% over five years, almost doubling the index’s 8.4%. The shares climbed 17.7% to trade at a 12.6% discount.

This puts managers Chetan Sehgal and Andrew Ness in a much more confident position 12 months ahead of the trust’s continuation vote and, if passed, a 25% tender offer, given activist investor City of London is its largest shareholder with a 24.2% stake.

Last year the portfolio of 80 Asia-weighted stocks was knocked 17.3% by China’s tech crackdown, the war in Ukraine and the write-down of Russian holdings. This year, China’s zero-Covid policy U-turn, its measures to spur the economy, such as support for the property sector, and strong performance from stocks not listed on the index yielded outperformance.

Five-year returns

Earnings per share soared from 3.44p last year to 5.72p, one penny short of 2021 levels, affording a proposed 5p dividend per share without dipping into reserves.

Sehgal, who has been at the helm since July 2018, said there was a prospect of a recovery in earnings growth in the second half of this year following the re-emergence of China, the ‘last major country to emerge from the pandemic’.

He cautioned that earnings would remain weak in the very short term, with subdued consumption and inventory digestion. ‘A pickup in earnings revisions in [emerging markets] would signify better times ahead for equity markets,’ he said.

He added that although the current global outlook remains weak, economies with a greater focus on domestic demand are better placed to weather this. China, India, Indonesia and Brazil are well positioned to remain resilient from external demand shortfalls.

Some policymakers are providing incentives to manufacturing companies to expand operations to remain self-sufficient and competitive. These include India’s Production Linked Incentive programme and South Korea’s tax break plans for semiconductor and other technology companies.

For the second year in a row, Indian bank ICICI was the trust’s top-performing holding, contributing 1.3% relative to the benchmark index.

Chinese global investment company Prosus, the largest shareholder in Chinese tech company Tencent, was the second-highest contributor as shares in Tencent soared. The company is not listed on the index.

Brilliance China Automotive, the Chinese car maker noted for its association with German luxury car maker BMW, shot up when its shares resumed trading after an 18-month suspension. Mexican bank Banco Santander Mexico was another strong performer. Both of them are not on the index. Other outperformers included Unilever (ULVR) and New York-listed technology company Genpact.

Top detractors included South Korean communication services company Naver, Brazilian consumer discretionary company Americanas, which has since been sold, and Brazilian bank Banco Bradesco.

Taiwanese semiconductor company TSMC, Samsung Electronics and ICICI Bank now constitute the largest positions in the fund at 12.3%, 6.1% and 5.9%, respectively, according to the May factsheet. The portfolio’s 27.4% weighting to technology and 23.5% to financials are both larger than the index’s.

In April, Numis removed the trust as a ‘trading buy’, ‘reflecting the lacklustre performance in recent years, which means the discount may remain stubbornly wide. We acknowledge there may be scope for some narrowing due to a performance-triggered tender on the horizon’.