This stock-market strategy has cheap exposure to AI and points to an advantage for closed-end funds

By Philip van Doorn

The Templeton Emerging Markets Fund is diversified and has been an excellent grower with a value focus

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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06-09-26 1917ET