Fund in focus: Fidelity Institutional Emerging Markets

Posted by Liz Rees in Fund and industry updates category on 12 Dec 19


The proposition

This fund aims to produce long-term capital growth. At least 70% is invested in countries with high rates of economic growth. The fund offers exposure to Latin America, South East Asia, Africa, Eastern Europe and the Middle East and will adjust weightings as appropriate. Up to 10% of assets can be held directly in Chinese shares. The manager may use derivatives to reduce risk and costs as well as to generate additional returns.

The team

Nick Price joined Fidelity as a research analyst in January 1998. After developing the EMEA (Europe Middle East and Africa) strategy he was appointed to head up Emerging Markets in July 2009. He is supported by a large and growing resource of analysts and portfolio managers some of whom are based around the region.

Philosophy and process

Price looks for companies that can deliver sustainable returns. He believes those with leading market positions and competitive advantages are best placed to deliver reliable earnings through an economic cycle. The fund invests in large liquid stocks with a tilt towards quality growth over value.

The experienced analysts produce a short-list of their best ideas and Price will then construct his portfolio from these, taking into account current valuations. He insists on the potential for high returns on assets that convert into cash flows to finance future growth.

The team travels widely to research the themes and drivers of demand. For example, the China specialist stayed with a family in Chengdu to understand their lifestyle and  consumption patterns and ascertain which companies could benefit.

Positioning

China, at 28% of the fund, is the largest country exposure although this is slightly underweight relative to the MCSI Emerging Markets index. Along with Russia and India, these three markets account for around 50% of the portfolio**.

Around 14% is invested in India with a focus on banking and insurance. Financial inclusion has expanded rapidly and over 80% of adults now have a bank account. Price has a positive stance on Russia, which he considers to have some of the cheapest valuations in his universe as well as a stable outlook, attractive dividends and the ability to withstand a lower oil price.

The fund has under-weight exposure to South Korea and Taiwan due to low growth prospects while trade tariffs affect demand for some products. Companies held here are those that can gain market share and innovate. He also avoids Saudi Arabia because it has a large budget deficit.

An important theme is ‘premiumisation’ as consumers trade up and brand awareness increases. In a number of industries, notably beer, local Chinese firms are becoming the leading brand due to their understanding of the local culture.

The top five holdings are Sberbank Russia, Taiwan Semiconductor, Alibaba, Naspers and AIA. Sberbank is a banking and financial services group with a dominant position in the retail savings market. Its German Chief Executive has introduced western management techniques.

Taiwan Semiconductor is the world’s biggest independent semiconductor manufacturer, dominating supply for communications and consumer electronics. Alibaba continues to benefit from the structural shift to online retail as well as growing segments such as cloud and financial services.

Naspers is a South African internet business that invested in other tech companies, such as Tencent, at an early stage and offers a cheaper route to gain exposure to them. Insurer AIA Group is a play on the structural growth in the Asian life insurance market.

Performance

Over the tenure of Nick Price (from 13/5/2013) to the fund has returned 58.5% compared with 37.0% for the IA Global Emerging markets sector*. In the last 3 years the fund has gained 33.3% versus 24.7% for the sector peer group*.

Outlook

Although some central banks in emerging market countries cut interest rates in 2019, real rates still average over 4% so there is scope for further stimulus. Attractive dividend yields across the asset class demonstrate appreciation of shareholder requirements.

It is impossible to ignore the potential negatives of the US-Chinese trade war as together the super-powers account for 50% of global manufacturing. However, any resolution should be well received.

The rising middle classes and urbanisation are the two main factors driving consumption in emerging markets. Urbanisation is rising fast from a low base and there has been a big rise in disposable income, particularly in China. By 2030, Fidelity estimate China’s affluent citizens should equal the size of the entire US population.

China is taking a significant role in the next generation of technology with 35% of payments now made via mobiles, followed by 30% in India and 16% in Indonesia. The planned increase of China A shares, from 3% to 10% of the MSCI Emerging Markets index, is expected to generate demand for these shares and present new investment opportunities.

Whilst GPD growth has moderated, India still has one of the fastest growth rates in the world buoyed by a young population and an entrepreneurial culture. Brazil’s prospects have improved following pension reforms but Price feels this is factored in and valuations look expensive. Russia’s economy remains buoyant with cheap valuations and high dividends.

Our view

Although emerging markets are not immune from global slowdown, we believe the themes mentioned above, along with improved corporate governance, make the asset class worth considering.

However, with such economic and cultural diversity it makes sense to use an experienced investor like Nick Price who can uncover the hidden gems. Morningstar award his fund a silver rating.

* Source: FE Analytics, total return in Pounds Sterling.
** All data relating to fund construction and holdings taken from provider factsheet 31/10/2019.

Important information: Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Nothing in this article is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment.