Fidelity Asian Values plc (LON:FAS) is the topic of conversation when Hardman and Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1: You called your recent report on Fidelity Asian Values “Grabbing hold of the tiger’s tail”. What can you tell us about it?
A1: FAV gives investors liquid access to the attractive small-cap Asian market (ex-Japan). Its long-term returns have beaten UK markets, Asian benchmarks, listed peers and open-ended fund comparators.
This performance is driven by i) superior GDP growth, demographics, cherry-picking from 18,000 potential investments and markets with pricing anomalies, and ii) the value added by the company, with its rigorous investment process, flexible mandate, and active management.
Risks include geopolitical and economic tensions, volatility, and the market’s appetite for small-cap value stocks. FAV trades at a modest discount to NAV.
Q2: So, can you tell us a bit more about the market opportunity in Asia?
A2: Asia is attractive because it has the following wind of superior GDP growth driven by a young, growing and increasingly wealthy population, so really positive demographics. Rising domestic demand is a key feature.
Second, across the region, we are seeing more business-friendly government policies, inter alia, fostering global trade growth. But the governments are doing much more than trade agreements with a slew of other policies encouraging business and investment in the region.
Third, the number of potential opportunities is huge – 18,000 in all – from which creates massive upside from cherry-picking the best ones.
Fourth, several of the local stock markets have pricing anomalies with, for example, trading in China driven by retail investor who may follow a herd-like mentality.
Fifth, there is, like elsewhere in the world, a value vs. growth valuation gap, and, rather surprisingly to some, earnings growth among “value” companies is actually ahead of “growth” ones in the long term.
Finally, global funds are under-weight the region.
Q3: Sounds good. So, what is FAV’s position within that market?
A3: The companyadds value through rigorous, structured investment process, using detailed analysis to identify mis-priced investments and avoid high-risk ones. It also adds value through, first, a flexible mandate to take the best opportunity at any time.
Secondly, FAV adopts active position and portfolio management with the average turnover over FY’16-FY’20 of 59%, as the manager is “selling what has gone up and recycling into new ideas”. With such an approach, investors should focus on value-added process, rather than portfolio, on any given date.
Thirdly, it has all the benefits of a closed-ended structure. This structure we believe outperforms open-ended ones, as they have less cash drag, can invest long term, offer more favourable trading options, have a board of directors to supervise, and allow gearing.
We estimate FAV’s performance at 1% p.a. above the average of the closest open-ended funds over five years. The bottom line is FAV’s approach has delivered returns beating its benchmarks over the long term, so it is doing something right.
Q4: And what about the risks?
A4: Again, the risks can be split between the macro affecting all Asia and company-specific ones.
There are geopolitical risks across Asia with well-documented US/China trade tensions and multiple border issues and domestic instability. There is economic uncertainty from COVID-19 and while, for example, the Indian human cost has been tragic, the stock markets have, like elsewhere in the world, been relatively stable, Asia is going through major structural changes, which can also create uncertainty.
In our note, we go into detail as to why it is fundamentally different from before the Asian crisis of 1997 and why that scenario is extremely unlikely to recur. Finally, Asia has seen a relatively slow development of ESG, but this is improving.
Turning to company-specific risks, the market appetite for Fidelity’s investment style (i.e. value not growth/ momentum) can create a headwind, which it has normally overcome but not all the time. FY’20, for example, was an “annus horribilis” and that can impact on sentiment notwithstanding the funds long-term outperformance. The markets can be volatile and FASV’s investment approach increases this further.
Q5: And a few words on Fidelity Asian Values valuation?
A5: Going into COVID-19, FAV was trading at a 4% discount to NAV and, following a strong share price performance in April 2021, it is back to this level. This rating is above that of most peers, and FAV has delivered superior long-term performance. The primary goal is capital growth, but there is a 2% dividend yield.
