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 “Get inside the manager’s head”. What can you tell us about it?
A1: On 1 April 2022, FAV’s manager joined Hardman & Co for a wide-ranging Q&A session, which we reviewed in the above report. The session gave investors a detailed insight into Nitin’s investing approach, as well as the current portfolio.
The trust’s key characteristics are buying good businesses (defined as having products that customers want to buy, earning high ROE, with honest and competent people) that are bought at good prices (defined as offering a margin of safety), and these themes ran through the session. These traits mean that ESG is embedded as a good business practice, not a marketing slogan, and regulatory risk should be below-average. Buybacks have also re-commenced.
Q2: One area you asked him about was the key factors driving the great track record, outperforming the benchmark by, on average, 5% a year over the past five years. What did he have to say?
A2: Nitin identified two key factors: first, the investment process and discipline ensure the avoidance of drastic errors by keeping the trust away from bad businesses and bad people, and from severely overpaying for businesses. Avoiding costly mistakes, as well as making the right investments, are, in our opinion, very important factors in achieving outperformance.
Secondly, he highlighted the quality of the people in the broad investment team at Fidelity, as well as the independent board of directors, which meant that he was able to be confident in expressing convictions.
We note below how the long-term outperformance has not always been smooth and having the confidence to hold a long-term winning approach through short-term challenges, to us, sounds invaluable support for a manager.
Q3: You also asked him how he selected stocks from the near 19,000 companies that fall into his mandate. How did he respond to that?
A3: Nitin identified three separate buckets from which ideas are typically generated.
First, roughly half come from the broad pool of Fidelity analysts. FAV has a competitive advantage over many global peers, in having a huge team based in multiple local sites (inter alia China, Singapore, Mumbai), in addition to its global resources. They analyse companies across the entire market cap spectrum.
The second source of ideas is a screen, which filters high ROE businesses at cheap prices.
Finally, there are those that the manager termed, rather quaintly, as being “accidents”, but that we would characterise as being market-aware and alert. Examples of these include being aware who made coffee, using one meeting to establish business contacts and recommendations of good suppliers, etc. The depth of Fidelity’s research materially increases the chance of such “accidents” happening.
Q4: You talked about his position in China. What did you learn from that?
A4: Geopolitical tensions are very dominant in the Western press, but, in China, you get very different headlines. So, as the saying goes, you need to be careful about what you read in the papers.
Having invested in China for nearly a decade, Nitin observed that what you see on the ground, in many cases, differs very sharply from what you read in both local and Western papers. One key consideration, though, is understanding how a business contributes to the society in which it operates. If you know that, you can understand and appreciate the regulatory risk. The Chinese government has a problem if you do something that harms society, but, if you are doing the right thing for society and employees, it leaves you be. When it does interfere, it does not do so agreeably – coming in very hard.
Fundamentally, however, the Chinese government is not anti-capitalist per se. Businesses that make a positive contribution to society and “common prosperity”, and ones that are unlikely to threaten the communist party’s hold on power, are much less likely to face regulatory pressure than large tech, and FAV is investing in the former. We concur with this view, as detailed in our on note on FCSS, published on 18 March 2022, The time to “be greedy when others are fearful”?
Q5: So you called your piece “get inside the manager’s head”. What would be your key takeaways?
A5: The key takeaways were that Fidelity Asian Values is not a complicated story. It invests in good businesses – not stocks, but businesses. It backs people in whose competency and honesty it trusts and buys at prices with a margin of safety. It does this again and again, and it doesn’t get carried away and doesn’t go to extremes – it just repeats the same behaviour, again and again.
It sounds quite boring, but by maintaining this discipline, with the Fidelity analyst team generating great investment ideas, and with the through-cycle support of the board, FAV has delivered long-term outperformance. Its approach may not have been in favour when investors were over-excited, with excessive margin money and easy liquidity, and when there was investing/gambling on loss-making business, but, over the long term, it has delivered.
