My Top Pick for conservative investors for 2018 is Templeton Emerging Markets Income Fund (TEI), a c...
Top Picks 2018: Templeton Emerging Markets Income Fund (TEI)
01/11/2018 5:00 am EST
My Top Pick for conservative investors for 2018 is Templeton Emerging Markets Income Fund (TEI), a closed-end yield fund that pays monthly distributions and has $630 million under management, explains Vivian Lewis, international expert and editor of Global Investing.
The fund is actively managed by a team of experienced bond hands. If you buy a fund or ETF invested in US Treasury inflation bonds, you don't need active managers. This is not the case for emerging market bonds, where skilled management is needed.
Its top 10 holdings include 9.4% in two Zambian government bonds yielding 8.97% and 5.37% respectively; 5.1% in Kenyan government bonds yielding 6.875%; 4.8% in Senegalese ones yielding 6.25%.
Its largest non-African position accounts for 4.1% of its assets, in Iraqi 5.8% bonds, followed by 3.5% in Argentinian bonds yielding 15.5%. Its top 10 positions account for 36.44% of its portfolio.
The fund is also heavily invested in private sector although its top holding is a government bond, the Philippine Republic 4.2% of 2024 which accounts for 2.9% of the total holdings. Its second and third largest holdings, both at 2.1%, are private sector debts from Malaysia and India.
Other top 10 holdings include 4 more private companies (half Latin American) and more government bonds from Panama, the 4% of 2024 at 2.1%; the Republic of Chile 23.125% of 2026; and the Indian Ex-Im Bank floaters of 2023 at 1.8%.
TEI trades at a 12.35% discount from net asset value. As such, investors can buy $100 of bonds for only $87.50 It cannot issue new shares without a complicated process. Its Morningstar rating is 5 stars for 5-year and 10-year performance.
To make sure that a reversal in earnings will not hurt the fund, it retains part of the earnings of its bonds until the end of the year when they are distributed to shareholders. This makes its yield look bad until the end of the year, 2.31% vs. a real yield of 3.06%, all of it from capital gains or interest.
Year to date, Templeton Emerging Markets Income Fund has paid out 10.3% in dividends based on its market price, and 13.4% based on its net asset value. I recently added this closed-end fund to my portfolio, paying $11.65 per share.
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