TDF Has Delivered Outperformance, But Geopolitical Risks Remain

Nov. 30, 2020 12:55 PM ETTempleton Dragon Fund (TDF)15 Comments

Summary

  • TDF is a closed end fund with a relatively concentrated portfolio of high growth Chinese companies.
  • It has outperformed comparable China indexes on both a market price and NAV basis over just about every time frame, both long term and short term.
  • However, China presents a lot of geopolitical risks not reflected in current valuations.

China is home to many of the fastest growing companies in the world. The Templeton Dragon Fund (NYSE:TDF) is a pure play China closed end fund trading at a slight discount to its NAV. Its differentiated investment strategy has delivered solid returns for long term returns for investors. Although China’s geopolitical risks are a concern, TDF looks like a potential long opportunity.

Portfolio

TDF’s concentrated portfolio, and high allocation to technology differentiate it from China focused index funds. TDF’s portfolio has just 40 holdings, and the top ten holdings account for 43% of the total portfolio. In contrast, the iShares MSCI China ETF (MCHI), has over 600 holdings. However, MCHI’s top ten holdings actually account for a higher percentage of total assets (52%). This phenomenon is caused by the ETFs market cap weighting. TDF and MCHI both hold large positions in Tencent(OTCPK:TCEHY) and Ali Baba(BABA), which dominate the available Chinese stock universe. However, TDF has more flexibility with position sizing, and can be selective in making smaller company investments.

The following table shows TDF’s top ten holdings.

Collected - Top Holdings

Weight(%)

TENCENT ORD

11.47

ALIBABA GROUP HOLDING ADR REP 8 ORD

9.41

INSTITUTIONAL MONEY MARKET PORTFOLIO

3.72

JD.COM ADR REP 2 CL A ORD

3.44

ANTA SPORTS ORD

2.96

NEW ORIENTL EDUCTN GRP ADR REP 1 ORD

2.78

WUXI BIOLOGICS CAYMAN INC 144A

2.63

MEITUAN-W ORD

2.52

CM BANK ORD H

2.18

INNOVENT BIOLOGICS INC 144A

2.14

The following chart shows TDF’s portfolio weighting by sector.

Source: Thomson Reuters Eikon, Author’s calculations

So far in 2020, TDF’s allocations to Tencent was a major contributor to its overall performance. Tencent, one of the largest internet companies in China, provides online gaming social network, and fintech services. Over the past year it has improved its monetization of WeChat, and delivered above consensus earnings. TDF also

This article was written by

Much more than closed end funds, look for hidden value, especially in investment companies and macroeconomic or industry dislocations.Areas of focus include: -NAV discounts-Liquidations-Fund restructurings-Income strategies-Shareholder activism-Macro opportunitiesI previously submitted individual stock research on Seeking alpha under the (no longer active) Afanti Arbitrage account.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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