MW This investing strategy has beaten the market with exposure to cheap AI stocks
By Philip van Doorn
The Templeton Emerging Markets Fund is diversified and has been an excellent performer, highlighting the advantages of a closed-end structure
These are the three largest holdings of the Templeton Emerging Markets Fund, a closed-end fund that returned 77.7% for one year through June 8.
One way for U.S. investors to diversify their investments is to add exposure to companies based in other countries. At this moment, as the infrastructure build-out to support generative artificial intelligence is in full swing, emerging markets include some very important players, and some of them appear to be well-priced.
The Templeton Emerging Markets Fund EMF has been a solid performer over the past three years. This closed-end fund returned 134% for three years through Monday, compared with a return of 76% for the iShares MSCI Emerging Markets ETF EEM, which tracks the MSCI Emerging Markets Index. That index is the Templeton fund's performance benchmark.
EMF follows pretty much the same strategy as the Templeton Emerging Markets Equity Fund TDADX, an open-ended mutual fund that is rated five stars (the highest rating) within Morningstar's "Diversified Emerging Markets" category. Both funds are managed by Chetan Sehgal and Andrew Ness. But the closed-end fund has been the better performer. This three-year chart, through Monday, includes EEM to represent the funds' performance benchmark, as well as the S&P 500 SPX for reference:
The Templeton Emerging Markets Fund - a closed-end fund - has outperformed the highly rated open-ended Templeton Emerging Markets Equity Fund over the past three years. Both have handily outperformed the iShares MSCI Emerging Markets ETF, which tracks the Templeton funds' performance benchmark index.
Total returns for funds in this article are net of expenses and include reinvestment of dividends and capital-gain distributions and any returns of capital. The investment returns exclude any sales charges, none of which apply to the funds on the chart above. Terms related to closed-end funds are explained below.
During an interview with MarketWatch, Mark Cho, the head of Client Portfolio Management at Templeton Global Investments, discussed the fund managers' value-focused approach, which is combined with local expertise, since the Templeton team has dozens of analysts based in emerging markets. He also explained why the closed-end fund had outperformed the open-ended fund.
Large cloud and AI customers are signing longer-term supply commitments. This gives SK Hynix more visibility for future demand.Mark Cho, head of Client Portfolio Management at Templeton Global Investments
A value proposition with an AI focus
To set the stage, consider that the S&P 500 trades at a forward price/earnings ratio of 21.1, according to LSEG. That ratio is the index's market capitalization divided by the sum of consensus earnings estimates for constituent companies for the next 12 months. The largest stock in the S&P 500 by market capitalization is Nvidia (NVDA). This stock closed at $208.64 on Friday, for a forward P/E of 19.7, based on that price and the consensus 12-month earnings-per-share estimate of $10.58 among analysts polled by LSEG.
So the largest stock in the S&P 500 trades at a less expensive forward P/E than that of the index, even as analysts expect Nvidia to grow its revenue and profit more quickly than the index as a whole.
Based on its holdings as of April 30 and current share prices and consensus estimates, the portfolio of the Templeton Emerging Markets Fund trades at a weighted forward P/E of 10.2, as calculated by LSEG. That is less than half the forward P/E of the S&P 500 and is lower than the forward P/E of 11.6 for the iShares MSCI Emerging Markets ETF.
Now let's look at the largest 10 stockholdings (out of 86) of the Templeton Emerging Markets Fund. The list is as of April 30, but other information is as of the close on Monday:
Company % of EMF Portfolio as of April 30 Forward P/ECountry Industry Taiwan Semiconductor Manufacturing 17.6% 20.5Taiwan Semiconductors SK Hynix 9.1% 5.9South Korea Semiconductors Samsung Electronics 7.5% 6.1South Korea Phones and handheld devices MediaTek 3.3% 45.4Taiwan Semiconductors Prosus 3.1% 9.5South Africa Online services ICICI Bank 2.3% 15.4India Banks Hyundai Motor 2.1% 14.7South Korea Auto and truck manufacturers Alibaba Group Holding 2.1% 16.9China Online services Grupo Financiero Banorte 2.0% 7.4Mexico Banks Itau Unibanco Holding 2.0% 7.8Brazil Banks Source: Franklin Templeton, LSEG
The Templeton Emerging Markets Fund typically holds a company's stock that is listed in its local market. But some of these stocks have American depositary receipts (ADR) that can make it easier to invest in them individually. Companies on the list above with ADRs include Taiwan Semiconductor $(TSM)$, Alibaba (BABA) and ICIC Bank $(IBN)$. There are no ADRs for SK Hynix (KR:000660) or Samsung Electronics (KR:005930). For Itau Unibanco (ITUB), the fund holds the ADR.
You can see that the fund was heavily concentrated in its three largest holdings as of April 30 - Taiwan Semiconductor, SK Hynix and Samsung.
Taiwan Semiconductor has a forward P/E of 20.5, which might be considered rather low, considering that the company reported a 35% increase in first-quarter revenue from the year-earlier quarter and a 58% increase in earnings per share. Looking ahead using consensus calendar-year estimates, Taiwan Semiconductor is expected to increase its sales at a compound annual growth rate (CAGR) of 25.7% from 2026 through 2028, compared with a projected revenue CAGR of 8.1% for the S&P 500. Taiwan Semiconductor's EPS are projected to increase at a CAGR of 25.8% for the same period, while the projection for the S&P 500's EPS growth rate is 16%.
SK Hynix is the fund's second-largest holding, and it has a very low forward P/E of 5.9. This reflects investors' awareness that the market for computer memory components has been cyclical over the long term. So if you believe we are still in an early phase of the AI hardware infrastructure build-out, which has benefited SK Hynix and rivals such as Micron $(MU)$ so much this year and last year that it's one bargain-priced way to play the trend. Micron trades at a forward P/E of 9.6.
SK Hynix's stock had nearly tripled year-to-date through Monday. But its rolling consensus 12-month EPS estimate had increased even more quickly, as that forward P/E was down from 7 at the end of 2025, according to LSEG. Projections based on consensus calendar-year estimates are for the company to increase sales at a 25.6% CAGR from 2026 through 2028, with a projected EPS CAGR of 22.1%. The analysts see at least another two years for Hynix to benefit from the AI build-out.
Samsung is also cheaply priced with a forward P/E of 5.9, even though the stock has soared 146% this year. The P/E is down from 8.6 at the end of 2025. Based on consensus estimates, Samsung is expected to increase its sales at a CAGR of 14.6% from 2026 through 2028, with an EPS CAGR of 16.3%.
When asked about whether or not investors who buy shares of EMF now might be "coming in at a top" for hardware manufacturers catering to data centers, Cho said: "For SK Hynx, we believe it is mispriced, since the market is treating it as a traditional memory-chip company."
"We believe today's AI-driven memory demand looks different," he said. "Large cloud and AI customers are signing longer-term supply commitments. This gives SK Hynix more visibility for future demand."
Cho added that limited production capacity made it difficult for competitors to take market share from SK Hynix.
Meanwhile, the Templeton Emerging Markets Fund's large position in Taiwan Semiconductor can be explained by the closed-end fund's 17.6% weighting being only slightly higher than TSMC's weighting in the MSCI Emerging Markets Index. Cho also noted that the Templeton Emerging Markets Equity Fund (the open-ended mutual fund) had a smaller allocation of about 14%, in keeping with that fund's practice of limiting individual positions to less than 15%. Cho said, "We want to be mindful of our positioning in one stock" within the portfolio of an open-ended fund that is regulated under the Investment Company Act of 1940.
"So with TSMC, we're constantly selling," he said.
Despite the focus on tech companies at the top of the portfolio, Cho emphasized that the approach of both funds is to be "core" portfolios balanced between growth and value stocks.
He added the strategy was differentiated from the index and peers to a significant extent, in part because it includes small-cap stocks.
"We have done a quick review of the 10 largest fundamental EM peers. We can say we have more than 20 stocks in our portfolio that are not in our peer universe," Cho said.
Closed-end funds and EMF's advantage in this AI-dominated stock market
Closed-end funds offer advantages that can work well for investors over the long term since this fund type allows for more flexibility in portfolio management than a traditional open-ended mutual fund. Cho outlined how EMF was able to take more concentrated positions in tech companies than the open-ended Templeton Emerging Markets Equity Fund.
MW This investing strategy has beaten the market with exposure to cheap AI stocks
By Philip van Doorn
The Templeton Emerging Markets Fund is diversified and has been an excellent performer, highlighting the advantages of a closed-end structure
These are the three largest holdings of the Templeton Emerging Markets Fund, a closed-end fund that returned 77.7% for one year through June 8.
One way for U.S. investors to diversify their investments is to add exposure to companies based in other countries. At this moment, as the infrastructure build-out to support generative artificial intelligence is in full swing, emerging markets include some very important players, and some of them appear to be well-priced.
The Templeton Emerging Markets Fund EMF has been a solid performer over the past three years. This closed-end fund returned 134% for three years through Monday, compared with a return of 76% for the iShares MSCI Emerging Markets ETF EEM, which tracks the MSCI Emerging Markets Index. That index is the Templeton fund's performance benchmark.
EMF follows pretty much the same strategy as the Templeton Emerging Markets Equity Fund TDADX, an open-ended mutual fund that is rated five stars (the highest rating) within Morningstar's "Diversified Emerging Markets" category. Both funds are managed by Chetan Sehgal and Andrew Ness. But the closed-end fund has been the better performer. This three-year chart, through Monday, includes EEM to represent the funds' performance benchmark, as well as the S&P 500 SPX for reference:
The Templeton Emerging Markets Fund - a closed-end fund - has outperformed the highly rated open-ended Templeton Emerging Markets Equity Fund over the past three years. Both have handily outperformed the iShares MSCI Emerging Markets ETF, which tracks the Templeton funds' performance benchmark index.
Total returns for funds in this article are net of expenses and include reinvestment of dividends and capital-gain distributions and any returns of capital. The investment returns exclude any sales charges, none of which apply to the funds on the chart above. Terms related to closed-end funds are explained below.
During an interview with MarketWatch, Mark Cho, the head of Client Portfolio Management at Templeton Global Investments, discussed the fund managers' value-focused approach, which is combined with local expertise, since the Templeton team has dozens of analysts based in emerging markets. He also explained why the closed-end fund had outperformed the open-ended fund.
Large cloud and AI customers are signing longer-term supply commitments. This gives SK Hynix more visibility for future demand.Mark Cho, head of Client Portfolio Management at Templeton Global Investments
A value proposition with an AI focus
To set the stage, consider that the S&P 500 trades at a forward price/earnings ratio of 21.1, according to LSEG. That ratio is the index's market capitalization divided by the sum of consensus earnings estimates for constituent companies for the next 12 months. The largest stock in the S&P 500 by market capitalization is Nvidia (NVDA). This stock closed at $208.64 on Friday, for a forward P/E of 19.7, based on that price and the consensus 12-month earnings-per-share estimate of $10.58 among analysts polled by LSEG.
So the largest stock in the S&P 500 trades at a less expensive forward P/E than that of the index, even as analysts expect Nvidia to grow its revenue and profit more quickly than the index as a whole.
Based on its holdings as of April 30 and current share prices and consensus estimates, the portfolio of the Templeton Emerging Markets Fund trades at a weighted forward P/E of 10.2, as calculated by LSEG. That is less than half the forward P/E of the S&P 500 and is lower than the forward P/E of 11.6 for the iShares MSCI Emerging Markets ETF.
Now let's look at the largest 10 stockholdings (out of 86) of the Templeton Emerging Markets Fund. The list is as of April 30, but other information is as of the close on Monday:
Company % of EMF Portfolio as of April 30 Forward P/ECountry Industry Taiwan Semiconductor Manufacturing 17.6% 20.5Taiwan Semiconductors SK Hynix 9.1% 5.9South Korea Semiconductors Samsung Electronics 7.5% 6.1South Korea Phones and handheld devices MediaTek 3.3% 45.4Taiwan Semiconductors Prosus 3.1% 9.5South Africa Online services ICICI Bank 2.3% 15.4India Banks Hyundai Motor 2.1% 14.7South Korea Auto and truck manufacturers Alibaba Group Holding 2.1% 16.9China Online services Grupo Financiero Banorte 2.0% 7.4Mexico Banks Itau Unibanco Holding 2.0% 7.8Brazil Banks Source: Franklin Templeton, LSEG
The Templeton Emerging Markets Fund typically holds a company's stock that is listed in its local market. But some of these stocks have American depositary receipts (ADR) that can make it easier to invest in them individually. Companies on the list above with ADRs include Taiwan Semiconductor (TSM), Alibaba (BABA) and ICIC Bank (IBN). There are no ADRs for SK Hynix (KR:000660) or Samsung Electronics (KR:005930). For Itau Unibanco (ITUB), the fund holds the ADR.
You can see that the fund was heavily concentrated in its three largest holdings as of April 30 - Taiwan Semiconductor, SK Hynix and Samsung.
Taiwan Semiconductor has a forward P/E of 20.5, which might be considered rather low, considering that the company reported a 35% increase in first-quarter revenue from the year-earlier quarter and a 58% increase in earnings per share. Looking ahead using consensus calendar-year estimates, Taiwan Semiconductor is expected to increase its sales at a compound annual growth rate (CAGR) of 25.7% from 2026 through 2028, compared with a projected revenue CAGR of 8.1% for the S&P 500. Taiwan Semiconductor's EPS are projected to increase at a CAGR of 25.8% for the same period, while the projection for the S&P 500's EPS growth rate is 16%.
SK Hynix is the fund's second-largest holding, and it has a very low forward P/E of 5.9. This reflects investors' awareness that the market for computer memory components has been cyclical over the long term. So if you believe we are still in an early phase of the AI hardware infrastructure build-out, which has benefited SK Hynix and rivals such as Micron (MU) so much this year and last year that it's one bargain-priced way to play the trend. Micron trades at a forward P/E of 9.6.
SK Hynix's stock had nearly tripled year-to-date through Monday. But its rolling consensus 12-month EPS estimate had increased even more quickly, as that forward P/E was down from 7 at the end of 2025, according to LSEG. Projections based on consensus calendar-year estimates are for the company to increase sales at a 25.6% CAGR from 2026 through 2028, with a projected EPS CAGR of 22.1%. The analysts see at least another two years for Hynix to benefit from the AI build-out.
Samsung is also cheaply priced with a forward P/E of 5.9, even though the stock has soared 146% this year. The P/E is down from 8.6 at the end of 2025. Based on consensus estimates, Samsung is expected to increase its sales at a CAGR of 14.6% from 2026 through 2028, with an EPS CAGR of 16.3%.
When asked about whether or not investors who buy shares of EMF now might be "coming in at a top" for hardware manufacturers catering to data centers, Cho said: "For SK Hynx, we believe it is mispriced, since the market is treating it as a traditional memory-chip company."
"We believe today's AI-driven memory demand looks different," he said. "Large cloud and AI customers are signing longer-term supply commitments. This gives SK Hynix more visibility for future demand."
Cho added that limited production capacity made it difficult for competitors to take market share from SK Hynix.
Meanwhile, the Templeton Emerging Markets Fund's large position in Taiwan Semiconductor can be explained by the closed-end fund's 17.6% weighting being only slightly higher than TSMC's weighting in the MSCI Emerging Markets Index. Cho also noted that the Templeton Emerging Markets Equity Fund (the open-ended mutual fund) had a smaller allocation of about 14%, in keeping with that fund's practice of limiting individual positions to less than 15%. Cho said, "We want to be mindful of our positioning in one stock" within the portfolio of an open-ended fund that is regulated under the Investment Company Act of 1940.
"So with TSMC, we're constantly selling," he said.
Despite the focus on tech companies at the top of the portfolio, Cho emphasized that the approach of both funds is to be "core" portfolios balanced between growth and value stocks.
He added the strategy was differentiated from the index and peers to a significant extent, in part because it includes small-cap stocks.
"We have done a quick review of the 10 largest fundamental EM peers. We can say we have more than 20 stocks in our portfolio that are not in our peer universe," Cho said.
Closed-end funds and EMF's advantage in this AI-dominated stock market
Closed-end funds offer advantages that can work well for investors over the long term since this fund type allows for more flexibility in portfolio management than a traditional open-ended mutual fund. Cho outlined how EMF was able to take more concentrated positions in tech companies than the open-ended Templeton Emerging Markets Equity Fund.
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Another advantage of the closed-end fund requires a longer explanation, including how different types of funds create and redeem shares and how they are priced.
-- An open-ended mutual fund's share price is called the net asset value $(NAV)$. It is calculated once a day. For U.S. funds, this is at 4 p.m. ET each day stock markets are open. At that time, an open-ended mutual fund's NAV is calculated by dividing the value of all its investments and cash by the number of shares. That is also the only time an investor can buy or sell shares. Both are done at the NAV. If an investor sells shares of the fund, they are redeemed by the fund, and cash is paid to the investor. If an investor buys shares, they are created at that moment. So on a day when redemptions outweigh purchases, the fund could be forced to liquidate some of its investments to raise cash to pay the sellers. This means an open-ended fund will keep some cash on hand to be ready for that action.
-- An exchange-traded fund also calculates its NAV at the market close each day. But it also has a separate share price (known as the market price), since its stock can be traded when the market is open. The market price is typically very close to the NAV. But it is possible for the market price to be higher or lower than the NAV. If, at a certain point, the market price is at a significant premium to the NAV, a market maker will decide that the fund should issue new shares to reduce demand and lower the market price closer to the NAV. If the market price is at a significant discount to the NAV, the market maker will decide that the fund should redeem shares, to increase demand and bring the market price closer to the NAV.
-- A closed-end fund also calculates an NAV and has a market price that might be higher or lower than the NAV. But there is no pressure to ensure the prices are close together. The closed-end fund will not issue or redeem shares at the behest of a market maker. This means the closed-end fund manager's portfolio decisions can be made independently of day-to-day buying and selling action for the fund's shares.
The Templeton Emerging Markets Fund closed at a market price of $22.34 on Monday, which was a 10% discount to its NAV of $24.82. This fund has typically traded at a discount to NAV over recent years. There is not necessarily an advantage or disadvantage to a discount to NAV.
Then again, as we have seen with private-credit funds lately, a heavy discount to NAV can reflect investors' discomfort with certain asset classes, especially ones that lack liquid markets, such as loans to smaller companies. A closed-end fund invested in liquid stocks will not have a problem calculating its NAV. According to Cho, it is typical for about 80% of closed-end funds to trade at discounts to NAV, adding that, as of the end of April, 84% of closed-end funds traded at discounts.
When asked in a follow-up email after the interview why the Templeton Emerging Markets Fund (the closed-end fund) had performed so much better than the open-ended Templeton Emerging Markets Equity Fund over the past three years, Cho wrote: "It is almost entirely due to cash. There are some stocks like TSMC where EMF holds a higher weighting but that's a small part of it. EMF is fully invested, whereas the mutual fund (TDADX) has had a 3% [cash] weighting on average over the last year."
One more element that investors in closed-end funds should learn about is the return of capital. A fund may decide to return some of an investors' own capital to them in place of dividends or for other reasons. These distributions are not taxable. They have the effect of lowering an investor's cost basis, and for closed-end funds for which a dividend stream (or income stream) is an objective, returns of capital can be considered to be advantageous to investors because they have the effect of deferring taxes.
Performance against competing funds
For peer comparisons, LSEG calculates one-year total returns and average annual total returns for longer periods through the most recent month-end. The data provider lists two closed-end funds as peers for the Templeton Emerging Markets Fund EMF, since they are also benchmarked to the MSCI Emerging Markets Index. These are the abrdn Emerging Markets ex-China Fund AEF and the Voya Emerging Markets High Dividend Equity Fund IHD.
Since we have also been looking at the Templeton Emerging Markets Equity Fund TDADX, we have included a peer comparison to that fund as well. LSEG lists dozens of open-ended funds as competitors to TDADX that are benchmarked to the MSCI Emerging Markets Index, so we are showing the five competing funds from the list that were launched at least 10 years ago and have had the highest 10-year average returns.
This comparison begins with the Templeton closed-end fund, then the Templeton open-ended fund, then the MSCI Emerging Markets ETF EEM to represent the benchmark index, and then the seven peers sorted by 10-year average returns through May. See notes below the table about the funds' expenses.
Fund 1-year return 3-year avg. return 5-year avg. return 10-year avg. return
Templeton Emerging Markets Fund 84.4% 34.2% 11.3% 14.2%
Templeton Emerging Markets Equity Fund; Advisor 79.9% 32.8% 10.8% 13.5%
iShares MSCI Emerging Markets ETF 53.9% 24.4% 7.0% 10.0%
Nomura Emerging Markets Fund; Institutional 239.4% 65.8% 25.3% 21.3%
Ashmore Emerging Markets Equity Fund; Institutional 61.6% 27.0% 7.9% 14.2%
Matthews Emerging Markets Sustainable Future Fund; Institutional 68.2% 21.7% 10.0% 13.5%
Fidelity Advisor Focused Emerging Markets Fund; Institutional 65.0% 28.8% 9.1% 13.0%
Baillie Gifford Emerging Markets Equities Fund; Class 2 64.5% 27.8% 6.9% 13.0%
abrdn Emerging Markets ex-China Fund 90.4% 32.7% 9.0% 11.2%
Voya Emerging Markets High Dividend Equity Fund 46.3% 22.9% 8.9% 9.9%
Source: LSEG
The Templeton Emerging Markets Fund has ranked third over the one-year and 10-year periods, with a second-place ranking for the three- and five-year periods.
The Templeton Emerging Markets Equity Fund's adviser share class has ranked fourth for the one- and 10-year periods and third for the three-year and five-year periods.
The Nomura Emerging Markets Fund's DEMIX institutional share class has the top ranking for all periods covered in the table, reflecting its extraordinary one-year return. This fund is heavily concentrated in three stocks - SK Square (KR:402340), TSMC and SK Hynix - which make up 62% of the portfolio as of April 30 - the most recent date for which the fund's portfolio information is available from Morningstar.
The Templeton Emerging Markets Fund's gross expenses come to 1.35% of assets under management annually, but there is a temporary waiver of some expenses so that the current net expense ratio is 1.34%. That makes for annual fees of $134 for a $10,000 investment. The small expense waiver can be discontinued at any time without notice.
The Templeton Emerging Markets Equity Fund's net expense ratio for its Advisor share class is 1.14%. The gross expense ratio is 1.27%. The temporary waiver of some of this fund's expenses will stay in place until at least April 30, 2027.
Five other funds on the list have temporary expense waivers in place:
-- The Nomura Emerging Markets Fund's gross expense ratio for its institutional share class is 1.32%. The net expense ratio will be 1.15% until at least July 28.
-- The Ashmore Emerging Markets Equity Fund EMFIX has a gross expense ratio of 1.40% for its institutional shares. Expenses are being limited to 1.05% until at least Feb. 28, 2027.
-- The Matthews Emerging Markets Sustainable Future Fund's MISFX gross expense ratio for its institutional share class is 1.35%. Expenses will be limited to 1.15% until at least April 30, 2027.
-- The abrdn Emerging Markets ex-China Fund AEF has a gross expense ratio of 2.04%. Expenses are being limited to 1.22% until at least June 30.
-- The Voya Emerging Markets High Dividend Equity Fund's IHD gross expense ratio is 1.44%, but expenses are being limited to 1.41% at least through March 1, 2027.
Keep in mind that all of these funds have different methodologies. You should do your own research to become familiar with any fund's strategy before you invest. This includes a bit of extra work to learn how a fund has distributed dividends and capital gains to consider potential tax consequences.
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