This stock-market strategy has cheap exposure -2-

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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06-09-26 1917ET