Fidelity Emerging Markets Limited (LON:FEML) is the topic of conversation when Edison Group’s Investment Director Victoria Chernykh caught up with DirectorsTalk for an exclusive interview.
Q1: How does Fidelity Emerging Markets differentiate from other emerging market funds?
A1: This fund has been taken over by Fidelity only last year. However, this is not the first year the strategy has been run, that is applied to this fund. The manager who took it over, Nick Price, is the lead manager. He now has a co-manager which he appointed when Fidelity got the fund, Chris Tennant. Nick has been managing the strategy since 2011 and he was actually the portfolio manager who launched it and grew it and the strategy outperformed the emerging markets index since launch, very nicely.
So what’s different about it is that it is a long strategy, but in addition to the long being 100% long, it uses derivatives. Again, the word derivatives scares many people. Here we deal with Fidelity and Fidelity is the house that has been making investments for investors for decades, and they have really well developed and stringent risk methodologies that they apply to any fund, including this one. So, these derivatives/strategies are risk controlled and monitored by the team.
So what do they use? What do the managers use? They use contracts for differences to enhance income in the fund; they use options whole and puts on stocks, they hold, and they short stocks, but shorting again is a term that puzzles many investors. When we talk about shorting in this fund, the risks are very small that the managers take. Every short position – and there are about 130/150 positions in the fund and half of them will be longs, half of them will be shorts. Moreover, every short position is very small, it’s less than one third of a percent typically.
So, if you combine all these positions, you have just about 25% of the gross exposure will be a short exposure so the gross exposure is, if you imagine 100%, gross exposure with the shorts will be 125 and the net exposure is 100% still. So what you have is an extension of the monetary base that feeds into profitability and earns income for this fund so income enhancing techniques.
This strategy has been proven by time so this is, in a few points, what is special. So, I think you do need to trust a fund manager but we cannot predict the future but what we usually look at is a track record and usually skilled managers do outperform.
Q2: So, what does Fidelity as a company bring to the table?
A2: I mentioned two managers, the lead manager and the co-manager, but these are not just the two of them. I think actually it’s very good that they have two names of the people who are responsible for the strategy and for the fund, for investors that investors can ask questions to, rather than the team. Previously, the fund has been managed by Genesis and they have a different approach, they have a team approach so I think it’s good because you have two people accountable for it. It’s not just two of them – Fidelity has 45 research analysts who sit all over the world in all these emerging markets that help and feed ideas to the managers.
So, the resources they use are pulled from using the local expertise. I think that is strong, and another point of what Fidelity bring, which is different, which is discussed, it’s a strategy which is different to all other closed end and emerging markets peers that are currently on the London market.
Q3: What stocks in the Fidelity Emerging Markets fund would you highlight for us?
A3: As I mentioned, those are about 60 to 80 long positions. If we look at the top 10 right now, there’s 5 technology companies which speaks for itself and two Taiwanese, two Korean and one Indian. Within the top 10 there are other sectors as well, in the financials consumer. I’ve been speaking to the managers recently with all the turbulence particularly with emerging market equities caused by firstly the pandemic and then by the war in Ukraine. The managers mentioned that they did have a Russian exposure which they’ve adjusted now. There is now no Russian exposure and emerging markets is a big universe.
So, what we have is a range of countries, we have a range of companies, the ones that they’re excited about. For example, they’ve been adding to the Chinese internet names that sold off very, very sharply at the beginning of the first quarter of this year, and they sold off last year as well.
Along with the usual suspects of Alibaba and Tencent that the fund is exposed to, they have, for example, TravelSky Technology, which is a technology company that enables people in China to travel and it’s about 1% of the fund. It’s a significant material position still and it’s something that they believe is going to take off once the pandemic subsides.
There are some real estate also in China. Real estate names that the managers are excited about. Because of their strategy and the option to short, FEML is short (and has benefitted from) several other property shorts in China so they can use both sides but they have now entered a few long positions.
Latin America has suddenly been booming and its equity markets have been performing really strongly over the past few months due to the commodity exposure and basically that is one of the substantial markets that has been taken out of the equation for the moment. So, Latin American commodity firms, Latin American consumer stories, such as Localiza Rent A Car, it’s a Brazilian company which locals rent cars and go and travel with, are doing well.
I don’t think there are many positions in the fund yet. There are a few areas that the managers are looking at. I think, again, to emphasise this is a global emerging markets fund. One area is Middle Eastern exposure. It is not just commodities – there’s a football world cup coming up this year and the country’s invested a lot in the region. So, the managers are looking out there.