Templeton Emerging Markets Investment Trust plc

Annual Report and Accounts to 31 March 2023

Company Overview

Launched in June 1989, Templeton Emerging Markets Investment Trust plc ("TEMIT" or the "Company") is an investment trust that invests principally in emerging markets companies with the aim of delivering capital growth to shareholders over the long term. While the majority of the Company's shareholders are based in the UK, shares are traded on both the London and New Zealand stock exchanges.

TEMIT has a diversified portfolio of around 80 high quality companies, actively selected for their long-term growth potential and sustainable earnings, and with due regard to Environmental, Social and Governance ("ESG") attributes. TEMIT's research-driven investment approach and strong long-term performance has helped it to grow to be the largest emerging markets investment trust in the UK, with assets of £2.0 billion as at 31 March 2023. From its launch to 31 March 2023, TEMIT's net asset value ("NAV") total return was +3,845.7% compared to the benchmark total return of +1,707.2%.

The Company is governed by a Board of Directors who are committed to ensuring that shareholders' best interests, considering the wider community of stakeholders, are at the forefront of all decisions. Under the guidance of the Chairman, the Board of Directors is responsible for the overall strategy of the Company and monitoring its performance.

TEMIT at a glance

For the year to 31 March 2023

^(a)    A glossary of alternative performance measures is included in the full Annual Report.

^(b)    Source: MSCI. The Company's benchmark is the MSCI Emerging Markets Index, with net dividends reinvested.

^(c)    An annual ordinary dividend of 5.00 pence per share for the year ended 31 March 2023 has been proposed. This comprises the interim dividend of 2.00 pence per share paid by the Company on 27 January 2023 and the proposed final dividend of 3.00 pence per share.

Strategic Report

The Directors present the Strategic Report for the year ended 31 March 2023, which incorporates the Chairman's Statement, and has been prepared in accordance with the Companies Act 2006.

The aim of the Strategic Report is to provide shareholders with the ability to assess how the Directors have performed in their duty to promote the success of the Company for shareholders' collective benefit, and having regard for the interests of all stakeholders, by bringing together in one place key information about the Company's strategy, the risks it faces, how it is performing and the outlook.

Financial Summary

2022-2023

Source: Franklin Templeton and FactSet.

^(a)    A glossary of alternative performance measures is included in the full Annual Report.

^(b)    An annual ordinary dividend of 5.00 pence per share for the year ended 31 March 2023 has been proposed. This comprises the interim dividend of 2.00 pence per share (2022: 1.00 pence per share) paid by the Company on 27 January 2023 and a proposed final dividend of 3.00 pence per share (2022: 2.80 pence per share).

^(c)    The revenue, capital and total earnings per share figures are shown in the Statement of Comprehensive Income in the full Annual Report and Note 7 of the Notes to the Financial Statements.

^(d)    A net gearing figure of 0% means that the cash held in the Company is equal to or higher than the total bank loans.

Ten Year Record

2013-2023

Ten year growth record^(e)

2013-2023

Source: Franklin Templeton and FactSet.

^(a)    Comparative figures for financial years 2013 to 2021 have been retrospectively adjusted following the sub-division of each existing ordinary share of 25 pence into five ordinary shares of 5 pence each on 26 July 2021.

^(b)    A glossary of alternative performance measures is included in the full Annual Report.

^(c)    Excludes the special dividend of 0.52 pence per share for the year ended 31 March 2020 and the special dividend of 2.00 pence per share for the year ended 31 March 2021.

^(d)    An annual ordinary dividend of 5.00 pence per share for the year ended 31 March 2023 has been proposed. This comprises the interim dividend of 2.00 pence per share paid by the Company on 27 January 2023 and a proposed final dividend of 3.00 pence per share.

^(e)    Rebased to 100 at 31 March 2013.

Chairman's Statement

Market overview and investment performance

Our financial year started shortly after the Russian invasion of Ukraine and I would like to repeat the sympathy of the Board and of all of those involved with the management of TEMIT for all victims of the Russian invasion of Ukraine. Market conditions were challenging throughout the year. The war caused a surge in commodity prices. Rapid increases in prices generally result in pressure from individuals to increase their pay, with a risk that inflation then becomes entrenched. Governments and central banks around the world have sought to contain inflation by raising interest rates but need simultaneously to avoid choking economic growth. This is a difficult balance to achieve and only time will tell whether their actions have been successful.

In recent years China has become an important engine for world economic growth as well as a key element of the emerging markets investment universe. For a large part of our financial year there were concerns over the Chinese economy due to the government's continued pursuit of lockdowns to control the spread of COVID-19 as well as its interventions in private companies and political tension with the rest of the world, particularly the United States. The approach to COVID-19 was suddenly and unexpectedly reversed and this, along with more positive regulatory developments, helped to spur the recovery in the country and in other emerging markets. In other countries the higher level of inflation has caused a variety of issues, although some companies have benefited from higher commodity prices, most notably in the energy sector.

The year under review was a volatile period for TEMIT's shares. The second half of our financial year was better than the first; at the half year stage we reported a decline of -8.3% whereas in the second half returns turned around and we ended the financial year with a small positive return over 12 months of +0.8%^(a), outperforming the benchmark index which produced a total return of -4.5%^(a).

^(a) See Glossary of Alternative Performance Measures included in the full Annual Report.

Revenue and dividend

Net revenue earnings increased markedly to 5.72 pence per share. At the half year stage we announced an increase in the interim dividend from 1.00 pence to 2.00 pence per share. The Board is proposing a final dividend of 3.00 pence per share which, if approved by shareholders at the Annual General Meeting ("AGM") will result in a total dividend for the year of 5.00 pence per share. This will be an increase in the total dividend of 32% compared with the previous financial year. I have regularly emphasised that the primary focus of our Investment Manager is on capital growth. Nevertheless, it is encouraging to see such a strong increase in revenues.

Borrowing

TEMIT has fixed borrowing of £100 million, and a revolving credit facility under which up to £120 million in flexible debt may be drawn down. The revolving facility matured on 31 January 2023 and was extended for a further year. The Investment Manager continues to take a cautious view on borrowing in difficult markets. As at the financial year end, net of cash in the portfolio, TEMIT was not geared.

Share rating

Our managers remain very active in promoting TEMIT's shares to existing and potential investors via a variety of traditional and online channels. As I mentioned in the half yearly report, the Board was delighted that TEMIT won the award in the "Emerging Markets Equity - Active" category in the prestigious AJ Bell Fund and Investment Trust Awards in September 2022 for the third consecutive year. The award is made on the basis of voting by private investors from a shortlist of open-ended funds, ETFs and investment trusts drawn up by investment experts.

The challenging market conditions naturally led to pressure on the discount. The Board remains consistent in its view that share buybacks are a key tool in managing the balance between supply and demand for the shares. In total over the year, £29.2 million was spent on share buybacks and, as all buybacks were at a discount to the prevailing NAV, this resulted in an increase in the NAV of 0.23% to the benefit of remaining shareholders.

31 March 2023 marked the end of the fourth year of the assessment period for the Conditional Tender Offer, under which the Board undertook to arrange a tender for up to 25% of the Company's shares if the NAV total return underperforms that of the benchmark index over the five years to 31 March 2024. After four years, the return was ahead of the benchmark index over the measurement period by approximately 4 percentage points, but we are aware that returns, both absolute and relative to the benchmark, can be volatile. The Conditional Tender Offer is described in detail in the full Annual Report.

Environmental, Social and Governance

Throughout TEMIT's history, governance of investee companies has been a key part of the investment process and in recent years there has been a growing focus on sustainability. A description of the Investment Manager's process is included in the full Annual Report, along with a summary of the approach to Environmental, Social and Governance matters. Last year the Investment Manager published the first dedicated Stewardship Report for TEMIT and this received favourable comments from shareholders and industry experts. The second report was published simultaneously with this Annual Report and is available to download at www.temit.co.uk.

The Board

As previously announced, Beatrice Hollond retired from the Board at last year's AGM in July 2022 and Simon Jeffreys assumed the position of Senior Independent Director.

Abigail Rotheroe was appointed as a Director with effect from 1 November 2022. Abigail has over 20 years of investment experience, most recently as the Investment Director at Snowball Impact Management, a sustainable and impact-focused asset manager. Previously Abigail managed retail and institutional Asia Pacific portfolios in Hong Kong and London for Schroders, HSBC Asset Management and Columbia Threadneedle Investments. She is a CFA Charterholder and has experience in manager selection, sustainability, and impact measurement.

I will complete nine years as a director on 1 August 2024, shortly after next year's AGM. My colleagues have started the process of identifying the next Chairman of the Company and expect to make an announcement later this year.

Annual General Meeting

I am pleased to be able to invite all shareholders to attend our AGM on 14 July 2023 at Barber-Surgeons' Hall in London. We look forward to welcoming shareholders at the meeting.

Whether you intend to attend the meeting in person or not, you are strongly encouraged to submit your votes on the AGM resolutions in advance of the meeting. Submitting votes by proxy does not preclude you attending the meeting or changing your vote if you attend the AGM.

If you have any questions, please send these by email to temitcosec@franklintempleton.com or via www.temit.co.uk./investor/contact-us in advance of the meeting. You can also use these contact details should you have a question at any other time. Any questions that we receive will be considered and responses will be provided on our website www.temit.co.uk.

Outlook

Recent evidence suggests that the problems stemming from the pandemic and then the Russian invasion of Ukraine have started to abate and attention has returned to the prospects for growth. Nevertheless, difficulties remain particularly in the developed world which is challenged by high levels of inflation and debt. The re-opening of the Chinese economy is a positive development but equally important are efforts to stimulate growth in several parts of the emerging world.

Our Investment Manager expects a recovery in earnings in the second half of 2023 and this is likely to be helped by efforts by governments to stimulate demand. The long-term case for investing in emerging markets is founded on a higher level of economic growth supported by young populations, increasing domestic consumption as the middle-class population expands rapidly and some world-leading companies. Key to investment performance will be identifying the companies best able to capitalise on these factors. Our Investment Manager points to a wide variety of opportunities around the world and, despite the obvious challenges, we continue to look to the long term with some optimism.

Paul Manduca

Chairman

9 June 2023

The Investment Manager's Report

Review of performance

Emerging markets ("EMs") as measured by our benchmark index declined over the 12 months under review. For a large part of the year, rising inflationary pressures and resultant rate hikes, the ongoing Russian invasion of Ukraine and supply chain challenges depressed consumer and investor sentiment. However, several bright spots emerged towards the end of the year under review-signs of receding inflation, policy support to spur domestic consumption and China's pivot away from zero-COVID restored investor confidence and helped to cap losses. The MSCI Emerging Markets Index returned -4.5% in the 12-month period under review, whilst TEMIT delivered a net asset value total return of +0.8% (all figures are total return in sterling). Full details of TEMIT's performance can be found in the full Annual Report.

By region, EMs in Asia fared relatively better than their peers in Latin America and Europe, Middle East and Africa. However, all three regions witnessed declines in some of their underlying markets. Stocks in China contributed to regional gains after the dismantling of the country's zero-COVID policy and measures to spur the economy, such as support for the property sector. Weakening global demand for consumer electronics weighed on technology-heavy markets in South Korea and Taiwan, and the Indian market corrected from its strong performance previously. China's gains at the end of 2022, together with tourism-reliant Thailand (which benefited from optimism from a rebound in tourism), helped to support the emerging Asia region. Latin America was dragged down by the emergence of political concerns which weighed on equity prices. Emerging Europe lost ground due to the fallout from Russia's invasion of Ukraine and the dislocations in regional energy markets. Towards the end of the year, share prices in the Middle East-which had been through a boom-declined as oil prices moderated and liquidity conditions tightened in some of the markets. As at 31 March 2023 TEMIT held three Russian securities which remained fair-valued at zero in view of restrictions around trading these shares and a lack of any price discovery mechanism to provide indications of residual value. We continue to monitor the developments and will look to realise value in the best interests of shareholders, whenever possible.

China was TEMIT's largest market exposure, although the portfolio remained underweight relative to the benchmark. China gained almost 2% in sterling terms over the 12-month period. Regional lockdowns related to the country's zero-COVID policy, prolonged regulatory uncertainty and a reeling real estate market dominated headlines for a large part of the year and capped gains. However, Chinese equities rebounded sharply near the end of the period as the country reopened, and the government reiterated its growth priorities. The Chinese government has clearly defined its agenda in terms of support of common prosperity and the curtailment of monopolies. With this, we see the internet sector now adjusting to the new normal. China's pursuit of higher quality growth with a focus on technology advancement and self-sufficiency will likely shift investment and growth to newer emerging technologies. We expect the opening up of the Chinese economy to spur local and overseas demand as there has been a significant increase in household savings accumulated during the pandemic.

TEMIT's second-largest market position was in South Korea, where the portfolio was overweight versus the benchmark. South Korean equities declined by more than 8% during the reporting period, as the technology-heavy market continued to struggle throughout the year on weakening demand for technology products, including consumer electronics which had seen excess demand during the pandemic. Although a downtrend in the global technology sector weighed heavily, expectations of a trough and hopes of a visible end in the destocking cycle started to manifest in March 2023. South Korea has some of the most competitive and innovative companies which span several sectors including semiconductors, electric battery, automobile and renewable energy industries which augur well for future growth.

The Taiwanese market ended the reporting period with a loss of more than 7%. The technology-heavy and export-oriented market experienced a lower demand for its technology exports and a fallout from the demand shortfall in many consumer electronic industries. TEMIT's slight overweight allocation to Taiwan was largely attributable to exposure to the island's semiconductor industry and TEMIT's largest portfolio holding, which is in Taiwan Semiconductor Manufacturing ("TSMC"), the world's leading manufacturer of advanced chips.

India was TEMIT's fourth-largest exposure at the end of March 2023. Indian equities fell by 6% over the 12-month period as global volatility, rising inflation and soaring energy prices diminished investor sentiment for most of 2022. India also had a weak start to 2023 over concerns of a consumption slowdown and the impact of the decline in the share prices of different companies in the Adani Group following a negative research report; none of these were held in TEMIT. However, India has the ability to rely on domestic consumption and its massive increase in infrastructure capital expenditure bodes well for further development of the economy. It has also benefited from the diversification of global supply chains away from China alongside a pick-up in manufacturing investments. In the long-term, the diversification of India's power sources into renewables should eventually ease pressure from imported energy and inflation.

Equities in Brazil fell 13% over the reporting period. Brazilian equities were volatile due to political and economic uncertainty after its presidential elections in October 2022. Former president Luiz Inacio Lula da Silva won the election by a narrow margin, beating the incumbent president Jair Bolsonaro. In the immediate aftermath of the election, widespread protests that lasted for more than two months plagued the country. A delay in announcing the composition of the new cabinet also caused uncertainty. This backdrop of domestic unrest and post-election uncertainty on future government policy hung over positive developments such as an improvement in economic growth and softening inflation.

Investment strategy, portfolio changes and performance attribution

The following sections show how different investment factors (stocks, sectors and geographies) accounted for TEMIT's performance over the period. We continue to emphasise our investment process that selects companies based on their individual attributes and ability to generate risk-adjusted returns for investors, rather than taking a high-level view of sectors, countries or geographic regions to determine our investment allocations.

Our investment style is centred on finding companies with sustainable earnings power and whose shares trade at a discount relative to their intrinsic worth and to other investment opportunities in the market. We also pay close attention to risks.

We continue to utilise our research-based and active approach to help us to find companies which have high standards of corporate governance, respect their shareholders and also allow us to understand the local intricacies that may determine consumer trends and habits. Utilising our large team of analysts, we aim to maintain close contact with the board and senior management of existing and potential investments and believe in engaging constructively with our investee companies.

All of these factors require us to conduct detailed analyses of potential returns versus risks with a time horizon of typically five years or more.

Our well-resourced, locally-based teams remain a key competitive advantage and it has certainly been helpful having teams on the ground particularly in the benchmark heavyweight countries of Brazil, China and India. This local presence allows us to understand business models, competitive dynamics and supply chain issues. We also obtain insights into regulatory conversations and management capabilities, which are factored into our analysis. We view our locally-based teams, which are armed with vast knowledge of the respective countries' macroeconomic issues and views on the ground as vital sources of input into the investment process.

In the portfolio, we remain positioned in long-term themes including consumption premiumisation, digitalisation, health care and technology. We focus on companies reflecting our philosophy of owning good quality businesses, with long-term sustainable earnings power and share prices at a discount to intrinsic worth. We see high levels of leverage as a risk and continue to avoid companies with weak balance sheets.

Performance attribution analysis %

Source: FactSet and Franklin Templeton.

^(a)    A glossary of alternative performance measures is included in the full Annual Report.

Top 10 contributors to relative performance by security (%)^(a)

^(a)    For the period 31 March 2022 to 31 March 2023.

^(b)    Security not included in the MSCI Emerging Markets Index as at 31 March 2023.

^(c)    This security, listed on a stock exchange in a developed market, has significant exposure to operations from emerging markets.

ICICI Bank, India's second largest private sector bank, gained during the period following several consistently strong quarters of loan growth, net interest margins and non-interest income. The bank remains well positioned with its healthy capital adequacy ratios and strong franchise.

Prosus is a leading global investment company and the largest shareholder of Tencent, a Chinese technology company. Its share price tracked Tencent's, which ended the period higher on hopes of China's reopening, better-than-expected third quarter results for 2022 and easing of restrictions for the Chinese internet industry.

Shares of Brilliance China Automotive, a Chinese car maker noted for its association with German luxury car maker BMW, moved higher after trading resumed in October 2022 following a suspension of one-and-a-half years. It also paid out a special dividend of the proceeds from a stake sale in its affiliate BMW Brilliance Automotive, but uncertainties over further dividends weighed on the stock price in the later part of the period.

Top 10 detractors to relative performance by security (%)^(a)

^(a)    For the period 31 March 2022 to 31 March 2023.

^(b)    Security not held by TEMIT as at 31 March 2023.

^(c)    Security not included in the MSCI Emerging Markets Index as at 31 March 2023.

^(d)    This security, listed on a stock exchange in a developed market, has significant exposure to operations from emerging markets.

NAVER is the leading internet search and advertising company in South Korea. The share price was negatively impacted by slower growth in a post-COVID environment. Concerns over expansion into unprofitable new businesses in uncertain macroeconomic conditions and weak earnings (which fell short of consensus estimates) pressured the share price. However, we believe that NAVER is in a good position to build a thriving ecosystem integrating search, e-commerce, payments and digital content based on its solid foundation in search and advertising.

Americanas is a Brazilian e-commerce company and operator of convenience stores. Disappointing results for the third quarter of 2022, news of accounting inconsistencies and the departure of its new leadership team pressured its share price. High inflation and elevated interest rates also made for a difficult environment. We divested our position in the stock in January 2023.

Banco Bradesco is Brazil's leading private sector bank. Weak fourth quarter results and exposure to Americanas weighed on stock prices.

Top contributors and detractors to relative performance by sector (%)^(a)

^(a)    For the period 31 March 2022 to 31 March 2023.

Favourable stock selection in the financials sector added to TEMIT's performance relative to the benchmark index in the period of review. ICICI Bank (described above) and Banco Santander Mexico were both examples of financial companies which aided relative returns. In addition, Banco Santander Mexico is an off-benchmark holding, which is testament to the investment team's knowledge of local companies stemming from our experience and on-the-ground presence. Stock selection in the materials sector also aided relative performance. Contribution within this sector was led by South Korea-based steel product manufacturer POSCO. Stock selection in the consumer discretionary sector was also another contributor to relative returns.

In contrast, only one sector, information technology detracted (marginally) primarily due to an overweight allocation. Semiconductor firms TSMC and Samsung Electronics were key detractors, as they suffered from a cyclical downturn in demand for semiconductors.

Largest holdings

The largest portfolio holding is in computer chip maker TSMC. After rising in 2021 on the basis of a positive outlook for the semiconductor industry, TSMC suffered with a weakness in demand at some of its end customers. Although its profits for 2022 were ahead of initial estimates, the slowdown in demand meant that estimates for 2023 profit growth are much more muted. However, we are confident on the resilience of the business model of TSMC as it continues to lead on its business model of being "everyone's foundry".

The second largest portfolio holding is in Alibaba, a Chinese e-commerce company. Most recently, Alibaba announced an organisational revamp, resulting in a split into six units. Alibaba has seen a slowdown in growth in the past couple of years due to increased regulations, competition and prolonged COVID-19 lockdowns. With China's economic reopening and the industry's adjustment to the new regulatory environment, we expect growth to resume, albeit at a slower pace. Whilst the e-commerce businesses of Alibaba should deliver steady growth, its other businesses such as cloud, fintech, local commerce and content have significant potential. This could either offer growth opportunities or the possibility of an improvement in profitability. We remain positive on the strength of the e-commerce ecosystem of Alibaba and its ability to generate strong cash flows. In addition, Alibaba's strong buyback policy is another driver of earnings growth.

Global semiconductor manufacturer Samsung Electronics was the third-largest holding in the portfolio. Although TEMIT has reduced its holdings in the company due to a cyclical fall in earnings, we continue to believe that Samsung Electronics will be at the forefront of the industry and will benefit from any subsequent revival in demand.

Portfolio changes by sector

Portfolio changes by country

Portfolio investments by fair value

As at 31 March 2023

^(a)    Trading activity during the year: (NH) New Holdings, (IH) Increased Holdings, (PS) Partial Sale and (NT) No Trading.

^(b)    TEMIT holds in this company shares listed on the Hong Kong stock exchange and American Depository Receipts listed on the New York stock exchange.

^(c)    This company is listed in the Netherlands. The classification of China/Hong Kong is due to most of its revenue coming from its holding in Tencent.

^(d)    Preferred shareholders are entitled to dividends before ordinary shareholders.

^(e)    US listed American Depository Receipt.

^(f)    This company, listed on a stock exchange in a developed market, has significant exposure to operations from emerging markets.

^(g)    This company is fair valued at zero as a result of its trading being suspended on international stock exchanges.

Portfolio summary

As at 31 March 2023

All figures are a % of the net assets

^(a)    The Company's net assets/(liabilities) are the total of net current assets plus non-current liabilities per the Statement of Financial Position in the full Annual Report.

^(b)    All companies held by TEMIT in this country are valued at zero.

Source: FactSet Research System, Inc.

^(a)    The Company's net assets/(liabilities) are the total of net current assets plus non-current liabilities per the Statement of Financial Position in the full Annual Report.

^(b)    Geographic split between "Emerging markets", "Frontier markets", "Developed markets" are as per MSCI index classifications.

^(c)    Developed market exposure represented by companies listed in United Kingdom and United States which have significant exposure to operations in emerging markets.

Outlook for emerging markets

Heading into 2023, while we remain watchful for developments that could change our overall outlook, including China's relationship with Taiwan and the United States, we find many reasons to be positive about EMs. Many countries are towards the end of the rate tightening cycle. Most markets in Latin America have traditionally had a significant real interest rate and their economic potential has been curtailed because of the need for macroeconomic stability.

We expect any policy pivot in EMs to revive consumption and spur economic growth as inflation slows. In addition, after a slowdown in earnings in 2022, there is the prospect of a recovery in earnings growth in 2023, with China being the last major country to emerge from the pandemic. However, in the short-term, earnings are likely to remain weak with subdued consumption and inventory digestion and a recovery is expected more towards the second half of 2023. A pickup in earnings revisions in EMs would signify better times ahead for equity markets.

Although the current global outlook remains weak, economies with a greater focus on domestic demand are better placed to weather this in the near term. Many emerging markets such as China, India, Indonesia and Brazil have huge domestic consumption bases and are well-positioned to remain resilient from external demand shortfalls. In addition, policy makers in several markets are providing incentives to manufacturing companies to expand operations in order to remain self-sufficient and competitive. For example, India is driving investments through its Production Linked Incentive program. South Korea plans to offer tax breaks to semiconductor and other technology companies investing within the country whilst reforming stock market regulations. Thailand has also approved a budget to boost tourism in the country, one of its biggest growth drivers.

The long-term structural tailwind of consumption growth in EMs via expansion of the middle class and premiumisation of buying patterns is now more significant than ever. Some US$2.6 trillion in Chinese bank deposits were amassed in 2022^(a) and middle-class households are looking to spend on experiences, products and services. In our view, China's reopening could benefit many markets as the country has strong trade links with many EMs. Chinese tourism has also been a vital source of revenue for many countries.

^(a) Source: People's Bank of China

After the removal of most COVID-related constraints, we have seen economic activity in China starting to recover in the first quarter of 2023, where retail sales, industrial production and investment in fixed assets increased. More importantly, companies are now able to operate their businesses without COVID protocols which removes the pressure of unplanned outages and improves overall efficiency.

Markets in Eastern Europe will benefit from the normalisation of energy dislocations, although the conflict in Ukraine will continue to be an overhang. Markets in the Middle East continue to see a boom in initial public offering activity which bodes well for future capital market developments in the region.

These uncorrelated drivers of returns in EM economies present an investment opportunity which our team's deep experience, local expertise and a bottom-up investment approach can uncover.

EMs also continue to make strides towards climate goals and with the cost of renewable energy expected to fall in 2023, we might well see EMs make further climate commitments.

It is an interesting time to be looking at the emerging world today. We believe that the breadth of opportunity, growth, innovation, sustainability of business models and the much stronger institutional resilience compared to decades past when considered together create an attractive future for EMs.

Chetan Sehgal

Lead Portfolio Manager

9 June 2023

The Investment Manager's Process

Investment philosophy and approach

FTEME's long-term approach is driven by the 3 S's, seeking Structural growth opportunities in emerging markets, investing in businesses with Sustainable earnings power at a discount to intrinsic worth, and believing in responsible Stewardship of client capital. FTEME seeks to capture the growth potential of emerging market companies and believes that this is best achieved by employing a bottom-up and fundamental security selection process. FTEME conducts in-depth proprietary company research with a long-term and independent perspective. FTEME believes in the responsible stewardship of clients' capital and that governance and sustainability factors create risks and opportunities for companies. ESG analysis is therefore integrated alongside fundamental bottom-up analysis.

TEMIT's performance in different market environments

FTEME's approach aims for outperformance over the long term. The investment strategy tends to produce stronger performance when company fundamentals are the primary driver for stock returns, where a focus on stock selection should produce superior results. Performance may be less strong in highly sentiment-driven market environments, when investors focus more on the overall economic picture rather than company fundamentals. This can also be the case when the market is overly short-term oriented, and rewards companies driven by what FTEME views as unsustainable factors such as short-term demand/supply imbalances or inorganic growth.

Investment process

The three broad stages of FTEME's investment process comprise: idea generation, stock research, and portfolio construction and management; with governance and sustainability considerations and risk management fully integrated at all stages.

1. Idea generation

The key source of idea generation is FTEME's team of over 70 analysts and portfolio managers located around the globe. Their experience and expertise allow them to identify trends which they may want to explore further through company research. In addition, FTEME's local presence, network and understanding of local dynamics may help to identify trends and opportunities that other market participants may filter out through standard quantitative screens. FTEME analysts speak the local language and are part of the local culture and fabric of the countries where they conduct research.

2. Stock research

FTEME analysts conduct rigorous analysis to assess whether a company has sustainable earnings power, and to establish a proprietary estimate of its intrinsic worth. By integrating ESG analysis with traditional business and financial analysis, FTEME seeks to gain insights into the quality and risks of companies. FTEME's research platform currently has coverage of over 700 companies across emerging markets using a proprietary and rigorous bottom-up research approach, along with extensive knowledge of the wider investment universe.

FTEME's research analysts form detailed views of companies by collecting and analysing a variety of information. The team conducts detailed quantitative financial analysis by building in-depth company models to evaluate financial strength and profitability, and to project future earnings and cash flow. Industry demand and supply models are incorporated in the analysis, as well as country and currency macro considerations. FTEME has a strong emphasis on qualitative assessment.

The assessment of ability to sustain stable or growing economic profits over time is typically driven by a combination of factors, including (i) sound business models; (ii) sustainable competitive advantages; (iii) management foresight; and (iv) low debt levels. Earnings power is the demonstrable ability to generate sustainable economic profit into the future in areas which could be beyond the current scope of operations. The analysts look for real earnings growth by focusing on economic earnings and cash flows rather than reported earnings, and differentiating between operational earnings and financial earnings. They evaluate internal versus external drivers to earnings and prefer companies with earnings which can be affected through management action. A key element of earnings power is therefore quality, as signified by (i) products and services with low regulatory and macro risk; (ii) financial strength; and (iii) management strength.

Each research recommendation may incorporate several valuation methods extending typically over a three to five-year horizon. FTEME aims to clarify the risk/reward balance of a company by conducting sensitivity analysis, stress-testing, and scenario analysis. It seeks to identify what the market consensus expectations are for a stock and how the team's fundamental views may differ.

3. Portfolio construction

FTEME seeks to build a high-conviction stock-centric portfolio that is primarily driven by company-specific factors and focused on the long term. A bottom-up approach to stock selection is used, with country and sector allocations a residual of this process.

Portfolio Style and Characteristics

The strategy typically displays the following characteristics:

•     Core style: The strategy aims to deliver outperformance irrespective of market direction. The portfolio construction process leads to the majority of active risk being focused.

•     Quality and growth but not at excessive valuation levels: The philosophy typically leads to a portfolio with higher quality and growth than the aggregate of the benchmark index.

•     High conviction portfolio: The top-10 holdings typically account for over 40% of the portfolio which overall is well-diversified across the market cap spectrum.

•     Low turnover: FTEME's high conviction and long-term approach means that the typical annual portfolio turnover is less than 20%.

Buy and Sell Discipline

FTEME's buy discipline is primarily designed to ensure that the portfolio managers buy when they have both conviction in a business and it is trading below its intrinsic value; FTEME's sell discipline is designed to capture the opposite. All holdings are regularly reviewed to ensure that analyst recommendations are up to date and accurately reflect any changes in company fundamentals. In this way, ongoing fundamental research drives all buy and sell decisions.

Investment risk management

Investment in emerging markets equities inevitably involves risk in a volatile asset class. Franklin Templeton uses a comprehensive approach to managing risks within its managed portfolios and this approach is inherent in all aspects of the investment process. Investment risks are to be identified and intentional, not minimised. Risk management is embedded through all stages of the investment process, in collaboration with dedicated resources from Franklin Templeton's Investment Risk Management Group of over 80 risk management professionals, which is independent from the portfolio management team. Various risk management tools are used to predict and decompose the portfolio's active risk in order to understand and manage the portfolio's active risk profile.

For additional information with respect to the AIFM risk management framework, please read the Investor Disclosure Document on our website (www.temit.co.uk).

FTEME's approach to stewardship

FTEME's focus is on a total sustainability approach including business, economic, environmental and social sustainability. How FTEME monitors and manages client assets is not just about focusing on governance and sustainability factors. It demands a holistic approach incorporating proactive long-term engagement with the managers of the companies which FTEME invests in, on behalf of TEMIT and its other clients.

Part of being a responsible steward of clients' assets is acknowledging that governance and sustainability factors create risks and opportunities for companies. It therefore makes sense to integrate these factors alongside fundamental bottom-up analysis and engage with companies as active owners on behalf of clients. Responsible stewardship is not a single act but a continuous process that includes engagement and voting. Being responsible stewards of our clients' capital is reflected in:

Integrating ESG factors

Analyses of governance and sustainability factors are embedded components of our rigorous fundamental bottom-up research. The driving factors of the decision to purchase or sell a stock centre on the following:

•     Its sustainable earnings power and whether its price is at a discount to intrinsic worth; and

•     The sustainability of its business model, which is critical to maintaining its competitive positioning.

Climate change

Within emerging markets, the landscape varies considerably, ranging from countries that have announced meaningful carbon targets to those that have yet to declare any significant policies. FTEME's objective is to understand the climate commitments of investee companies incorporating both local and global perspectives, recognising that the pace of decarbonisation and the associated strategies will differ across countries and cultures.

Where material, FTEME integrates climate change/carbon analysis into its bottom-up research process, focusing on assessing the impact on long-term business values. This is part of the holistic approach of integrating ESG analysis with traditional financial analysis so that FTEME can gain valuable insights into the quality and risks of businesses which FTEME invests in.

FTEME's analysts and portfolio managers look at climate risks and opportunities closely for relevant sectors and geographies where climate change plays an important role. FTEME closely tracks climate related factors into estimates, models and valuations for those businesses materially exposed to the issue.

Our portfolio managers also seek to understand the carbon risk profile at a portfolio level to understand its carbon risk exposures. The data helps with the engagement agenda.

TEMIT's portfolio carbon risk is concentrated amongst a small number of companies, with the top 5 companies in terms of carbon intensity representing 7.2% of the portfolio and accounting for 69.0% of the portfolio WACI. From a sector perspective, 48.2% of the portfolio WACI contributions come from the materials sector. On a relative basis, portfolio selection in materials contributes positively, whilst the utilities sector also contributes positively to WACI, as TEMIT is underweight in this sector. China Resources Cement and LG, exhibit the largest carbon intensities in TEMIT's portfolio, representing 3.2% of the portfolio and accounting for 48.8% of the portfolio WACI. TSMC's carbon intensity is low, however due to it representing 11.6% of the portfolio, it is third in terms of contribution to the portfolio WACI.

We emphasise that the data does not always fully represent the actual carbon risk of the portfolio.

We remain willing to invest in companies in carbon-intensive sectors, such as cement, steel and extractive industries. This is because we are pragmatic investors who understand that not every company can have a perfect sustainability profile today.

In the full Stewardship Report, available on our website (www.temit.co.uk), we spotlight and focus this year on the steel industry. The transition to a low-carbon economy will require a change in the way we manufacture steel. Accounting for nearly 8% of global emissions from the energy sector, the steel industry will play an important role in mitigating climate change by reducing the CO2 emissions in the production process.

As investors in the steel industry in TEMIT, we profile our observations with POSCO, one of the largest steel producers in the world, headquartered in South Korea.

Active ownership

As investors with a significant presence in emerging markets, FTEME's active ownership efforts are a key part of the overall approach to stewardship. FTEME analysts conduct almost 2,000 company meetings a year across the investment platform using its industry-leading research footprint across emerging markets, where FTEME seek to gain a number of fundamental and sustainability insights. We believe that our engagement efforts are key to developing a detailed understanding of companies and improving outcomes for shareholders as well as stakeholders more broadly.

Engagement statistics

FTEME's analysts are in a continual dialogue with companies on a range of topics including sustainability and governance. There are also companies that FTEME identify where dedicated discussion on ESG topics are necessary. Active engagements with companies in the TEMIT portfolio for the year ended 31 March 2023 are summarised below:

Below is an ESG engagement example with an investee company headquartered in South Korea.

Proxy voting

In the year ended 31 March 2023, FTEME voted on over 900 management proposals at annual and special general meetings for TEMIT.

Most of the proposals which FTEME voted on related to companies' director appointments, routine business proposals and capital structures. Of the voteable management proposals, FTEME voted "For" proposals 84% of the time.

FTEME voted "Against" management proposals in 13% of cases. By proposal category, as a percentage of votes within each category, votes against were largely concentrated on capital structure, non-salary compensation and management-related proposals.

FTEME views votes against proposals as a formal way to communicate our views to management, and FTEME undertakes them based on the investment team's assessment of each motion in line with clients' best interests.

"Other" votes were cast in 3% of cases. These were mainly related to director votes in Brazil, where FTEME abstained from voting when they did not support the candidates put forward for election, or where the company bundled several proposals into one, preventing voting on individual items.

The number of resolutions proposed by shareholders is increasing around the world, particularly on environmental and social issues, although they remain relatively uncommon in emerging markets. FTEME will continue to closely examine the merits of views raised by fellow shareholders.

We encourage you to download the full TEMIT Stewardship Report from www.temit.co.uk for further, detailed information.

Business Review

Strategy and Business Model

Company purpose and objective

TEMIT's purpose is to provide both private and institutional investors with the opportunity for capital appreciation via a professionally managed vehicle focused on listed equity investments in emerging markets.

The objective of TEMIT is to provide long-term capital appreciation via exposure to global emerging markets, supported by a culture of both strong customer service and corporate governance.

Investment policy

The Company seeks long-term capital appreciation through investment in companies listed in emerging markets or companies which earn a significant amount of their revenues in emerging markets but are domiciled in, or listed on, stock exchanges in developed countries ("Emerging Markets Companies").

It is expected that the majority of investments will be in listed equities. However, up to 10% of the Company's assets may be invested in unlisted securities. In addition, while it is intended that the Company will normally invest in equity instruments, the Investment Manager may invest in equity-related investments (such as convertibles or derivatives) where it believes that it is advantageous to do so.

The portfolio may frequently be overweight or underweight in certain investments compared with the MSCI Emerging Markets Index (the "Benchmark") and may be concentrated in a more limited number of sectors or geographical areas than the Benchmark. Investments may be made in Emerging Markets Companies outside the Benchmark that meet the investment criteria.

Whilst there are no specific restrictions on investment in any one sector or geographic area, the portfolio will be managed in a way which aims to spread investment risk. The portfolio will typically contain between 50 and 100 individual stocks but may, at times, contain fewer or more than this range. No more than 12% of the Company's assets will be invested in the securities of any one issuer at the time of investment, save that any investment in unlisted securities of any one issuer will be limited to no more than 2% of the Company's assets, measured at the time of investment.

The maximum borrowing will be limited to 20% of the Company's net assets, measured at the time of borrowing.

No more than 10%, in aggregate, of the value of the Company's assets will be invested in other listed closed-ended investment funds.

In accordance with the Listing Rules, the Company will not make any material change to its published investment policy without the prior approval of the UK's Financial Conduct Authority ("FCA") and the approval of its shareholders by ordinary resolution.

Distribution policy

The Company will ensure that its total annual dividends will be paid out of the profits available for distribution under the provisions of the relevant laws and regulations and will be at least sufficient to enable it to qualify as an investment trust under the UK Income and Corporation Taxes Act. If the Company has received an exceptional level of income in any accounting year, the Board may elect to pay a special dividend. The primary focus of the investment policy is on generating capital returns, the Company does not target a particular level of income and there is no guarantee that dividend levels will be maintained from one year to the next.

The Company will normally pay two dividends per year, an interim dividend declared at the time when the half yearly results are announced, and a final dividend declared at the time when the annual results are announced. The final dividend will be subject to shareholder approval at the AGM each year.

The Company may also distribute capital by means of share buybacks when the Board believes that it is in the best interests of shareholders to do so. The share buyback programme will be subject to shareholder approval at each AGM.

Business model

The Company has no employees and all of its Directors are non-executive. The Company delegates its day-to-day activities to third parties.

Since 1 October 2021, Franklin Templeton Investment Trust Management Limited ("FTITML", "AIFM" or the "Manager") has been the Company's AIFM and Company Secretary.

The Board is responsible for all aspects of the Company's affairs, including the setting of parameters for the monitoring of the investment strategy and the review of investment performance and policy. It also has responsibility for overseeing all strategic policy issues, namely dividend, gearing, share issuance and buybacks, share price and discount/premium monitoring, corporate governance matters and engagement with all the Company's stakeholders.

Strategy

The Company seeks to achieve its objective by following a strategy focused on the following:

Performance

At the heart of the strategy is the appointment and retention of capable investment management professionals, whose aim is to identify value and achieve superior long-term growth for shareholders. The Investment Manager, under the leadership of Chetan Sehgal, continues to apply the same core investment philosophy that has driven TEMIT's performance since the Company's launch. The investment team aims to achieve long-term capital appreciation for shareholders seeking exposure to global emerging markets by investing in companies that they believe offer long-term sustainable growth and good value, combined with strong management and sound governance.

Environmental, Social and Governance ("ESG") matters

As TEMIT is an investment trust, the key ESG consideration is the stewardship of its portfolio of investments. The Board has reviewed and fully supports the Investment Manager's approach to stewardship, which is described under "FTEME's approach to stewardship" in the full Annual Report. It receives regular reports on Franklin Templeton's policies and controls.

TEMIT has no greenhouse gas emissions to report from the operations of the Company, as all of its activities are outsourced to third parties. While as an investment trust TEMIT is exempt from disclosures recommended by the Task Force on Climate-related Financial Disclosures ("TCFD"), Franklin Templeton continues to develop metrics for our carbon footprint. Further information on our approach to climate change can be found under "FTEME's approach to stewardship" above and in more detail in the full Stewardship Report, available on our website (www.temit.co.uk).

TEMIT has no employees and is not an organisation that provides goods or services as defined in the Modern Slavery Act 2015 and thus the Company considers that the Act does not apply. The Company's own supply chain consists predominantly of professional services advisers.

Culture and values

The Board believes in a culture of openness and constructive challenge in its interactions with the Manager and other service providers. The Board aims to maintain open and regular communication with shareholders, as set out under Communication in the full Annual Report.

The Company is committed to acting professionally, fairly and with integrity in all of its business dealings and relationships. The Board has a zero-tolerance policy towards bribery and looks to ensure that its service providers and associated persons have effective policies and procedures designed to actively prevent bribery which are proportionate, and risk based. In relation to the corporate offence of failing to prevent tax evasion, it is the Company's policy to conduct all business in an honest and ethical manner. The Company takes a zero-tolerance approach to any facilitation of tax evasion whether under UK law or under the law of any foreign country. The Board notes that the Manager has a robust whistleblowing policy in place.

Information on the Company's approach to Diversity is set out in the Directors' Report in the full Annual Report.

Liquidity

The shares issued by the Company are traded on the London and New Zealand stock exchanges. The Company has engaged Winterflood Securities as financial adviser and stockbroker, and to act as a market maker in the shares of the Company.

Gearing

Fixed term loan

On 31 January 2020, the Company entered into a five-year £100 million loan at a fixed rate of 2.089% with Scotiabank Europe plc. The fixed term loan is denominated in pounds sterling and will remain in place until 31 January 2025. Full details of the loan are set out in Note 11 of the Notes to the Financial Statements.

Revolving credit facility

On 31 January 2020, the Company entered into a three-year £120 million unsecured multi-currency revolving loan facility with The Bank of Nova Scotia, London Branch. Drawings may be in sterling, US dollars or Chinese renminbi ("CNH"). The total amount which may be drawn down in CNH is 45% of the combined limit of the fixed rate loan and of the revolving loan facility. On 31 January 2023 the agreement was amended to extend the maturity date to 30 January 2024. Further details of the facility are set out in Note 10 of the Notes to the Financial Statements.

The Investment Manager has been granted discretion by the Board to draw down the revolving loan facility as investment opportunities arise, subject to overall supervision by the Board, and subject to the overall gearing limit in TEMIT's investment policy.

The Company has no other debt. The net gearing position was 0.0% (net of cash in the portfolio) at the year-end (2022: 1.1%) which means that the cash held by the Company is equal to or higher than the total bank loans.

The Board continues to monitor the level of gearing and currently considers gearing of up to 20% to be appropriate, measured at the time of borrowing.

Affirmation of shareholder mandate

In accordance with the Company's Articles of Association, the Board must seek shareholders' approval every five years for TEMIT to continue as an investment trust. This allows shareholders the opportunity to decide on the long-term future of the Company. The last continuation vote took place at the 2019 AGM, when 99.95% of the votes cast were registered as votes in favour. The next continuation vote will take place at the 2024 AGM.

Stability - Share buybacks and Conditional Tender Offer