Templeton eyes emerging income

This fund invests in markets such as Iraq, Kazakhstan and the Ukraine.

By TheStockAdvisors Jun 3, 2013 10:59AM

Stocks circled in newspaper (© Digital Vision/Getty Images)By Genia Turanova, Leeb Income Performance


A special place among our recommendations belongs to Templeton Emerging Market Income Fund (TEI). First, this is the only closed-end fund we currently recommend. Second, it focuses on a unique area -- emerging market bonds.


We note with satisfaction that the fund, whose performance has always been excellent compared to its peers (TEI is in the top first percentile of its peers for both five-year and 10-year periods), has lately also continued to perform strongly.


Sporting four stars from Morningstar, TEI has continued to overachieve in its fund category, gaining more than 7 percentage points in the latest 12 months in relative terms (and returning more than 20% on a 12-month basis). It is in the top 12th percentile.


The fund has also done well for the three-year period, outperforming three quarters of its peers.


It's important to note that, just like so many of its peers, the fund currently trades at a premium to its net asset value (NAV).


But the premium did, in fact, come down from the levels about which we were concerned, and now stands at some a 3.8%, under the two-year average of 5.3% (although above a five-year discount of -2.2%).


While the fund's distribution yield (which, since it includes return of capital, cannot be directly compared to income generated by other investment classes) is 11%, the more reliable number, its current yield, is 6%.


The fund has its largest holding in Iraq bonds yielding 5.8%. But the fund actually holds more cumulatively in Brazilian Treasury bonds, with 3.4% and 3.2% of the portfolio, respectively, invested in two 6% index-linked Tesouro Nacional notes as top positions.


Other Latin American paper in the fund's top ten include two bonds from Argentina (together totaling 5.2% of the portfolio), and a 9% bond from Mexico's building supply giant Cemex, accounting for 2.9% of holdings.


Evidently, the managers also like Kazakhstan: they hold paper from its JSC Halyk Bank as well as the Kaz Munay national gas company. The top ten holdings also include government bonds of Ukraine and Indonesia.


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