The US Market has dominated Equity Market headlines and returns for a decade. In particular, the big techs, which we have flagged for a while now, dominate market indices. Therefore, we’ll analyse why we should look East and to the emerging markets.
Taken from FundCalibre’s Chris Salih, ‘Why more investors should consider Asia’, 60% of the world’s population resides in Asia including China, Korea, Singapore, India, Australia, Thailand, and the Philippines. According to spokesperson, Tahsin Saadi Sedik in the International Monetary Fund’s Asia and Pacific Department;
“Its (Asia’s) companies are exploiting recent advances in artificial intelligence (AI), robotics, cryptography and Big Data that promise to reshape the global economy and fundamentally alter the way we live and work, in the same way that the steam engine and electricity did in centuries past.”
Vontobel Asset Management, managers of an Emerging Market Corporate debt strategy we invest in also see optimism for emerging market and Asian equities:
- “Emerging Market (EM) stocks are trading at a steep discount to developed markets.
- After a narrowing of the differential in GDP growth between EM and developed economies, the gap is expected to widen again from next year.
- A potential resurgence in China could spur a strong comeback in EM equities.
- Asian economies seem well-positioned while Latin America and Eastern Europe appear vulnerable to growth/US recession shocks.”
Even though all market participants might not share this point of view with potential continued macroeconomic headwinds, it is a view we largely agree with and a significant reason we always aim to keep a geographically diversified portfolio.
Although performance is not so strong now, we think there are plenty of forward-looking opportunities. The chart below highlights Vontobel’s comments on discounted share prices.
It shows that while most companies’ shares have become cheaper in the last 6 months, for US companies, which dominate World indices, this was from a high valuation starting point with price-earnings ratios over 25X.
Emerging Markets companies’ shares have fallen as well but were less highly valued at the start of 2022. Relatively speaking, Emerging market companies now look significantly cheaper than the world index, whereas in 2010 they were significantly more expensive.
FundCalibre go on to highlight how unpopular Asian funds have become. Comparing the £170bn invested by UK investors in IA Global funds and £160bn in IA UK All Companies funds to just £36bn in IA Asia Pacific ex Japan.
Most UK investors are significantly underweighting Asian markets now, which could create strong buying if these funds start to out-perform Global indices.
It’s been a rough ride in 2022 so far for our Emerging Market fund managed by Blackrock but our Asian funds have fared better. Nick talks below about the Fidelity Asian Special Opportunities fund we have invested in, which as can be seen below has kept in touch with world indices over the longer term but has the propensity to outperform when Asian equities are in favour.
In our diversified approach we have approximately 20% of our blended growth and income equity portfolio in Asian and Emerging Market funds.
With the disparity in valuations, we don’t see these funds as significantly more risky right now than a US or MSCI index or index hugging funds. We do see genuine diversification and opportunity in keep these allocations.
Fund in Focus: Fidelity Asia Pacific Opportunities
In keeping with this week’s theme of Asian and Emerging Market Equities we have provided below a short recap of Fidelity’s Asia Pacific Opportunities strategy, a core component in Tideway’s Asia and Emerging Markets Equity exposure.
We recently saw lead manager Anthony Srom present at Fidelity’s latest Investment summit at the end of the last month.
We retain high conviction in the fund despite some relative underperformance versus its benchmark in 2022. The fund continues to score well when assessed versus the wider criteria on which we judge our fund managers. As you will have heard us say before, judging fund managers solely by performance can lead to some very poor outcomes.
Team: Skilled and experienced manager with extensive resources at his disposal.
- Anthony Srom, lead manager on the strategy since September 2014.
- 25 years of Investment experience and has been at Fidelity since 2006
- Previous stops included Deutsche Bank, Goldman Sachs and ABN Amro in Australia.
- Anthony graduated from Bond University in Australia and is a CFA Charterholder.
- Over 50 analysts focusing on Asia Pacific ex Japan region alone allowing great coverage and a constant source of Investment ideas for the manager.
- Should Anthony depart unexpectedly, there are a number of other portfolio managers, running other Asian strategies who would be able to take the reins at short notice.
- This would lead Tideway to review as we think Anthony is an extremely skilled portfolio manager, who adds significant value to the strategy.
Strategy: Bottom-up fundamentals driven approach, high conviction and concentrated portfolio
Fundamentals, Sentiment, Valuation (FSV):
- Fundamentals are analysed in-depth with particular focus on factors such as financial strength, accounting quality, industry structure and the quality of the management team.
- Sentiment is an important consideration with the manager favouring companies which have been overlooked by other investors and where downside risks remain quantifiable. The manager likes to initiate positions in companies where the team has a different view to consensus.
- Valuation is the most crucial aspect of the process according to the manager who uses a range of metrics to evaluate a stock depending on the industry it operates in and where it is in terms of its earnings cycle.
- Necessary for an expected return which exceeds 10% annualised with the manager responsible for all portfolio management decisions.
Construction:
- Unlike many managers, the portfolio manager will only construct a portfolio with 25-35 names with the upper limit reached when markets are good and an excess of ideas. When there are more market risks the number will typically be at the lower end of this range. The manager wants to be rewarded for a correct thesis and does not want the returns diluted by having lower conviction names in the portfolio.
- A small number of names has not translated to additional risk, as the manager focuses on having low intra stock correlation and tries to avoid doubling up on risk. Total risk of the fund has traditionally lower than the index despite the index having many more stocks
Portfolio: Differentiated from the index. Stock selection rather than wider markets drive performance
Rewards for High Conviction
- Scatter plot 3: Year Annualised Information Ratio Vs. Alpha: UT Asia Pacific Excluding Japan (GBP Share Classes). The Blue Square is Fidelity Asia Pacific Opportunities.
- Information Ratio: Asseses the degree to which a manager uses skill and knowledge to enhance returns, holding Alpha a higher information ratio indicates the manager achieved the same level of return for relatively less risk.
- Alpha: Meassure of a fund’s over-or under- performance
Portafolio Performance: Strong long-term performance though has struggled. YTD
Tideway Portfolio Fit:
- Slight crossover with Jupiter Asian Income and Blackrock Emerging Markets which roundup Tideway’s EM/Asia Exposure.
- Style agnostic strategy not relyinhg on any particular market conditions to make returns. Morningstar style analysis has showed fund has changed many times over the years. Makes Tideway’s overall portfolio more dynamic.
- Concentrated strategy works well in a fund-of-funds strategy such as Tideway’s where overlap between strategies is commonplace.
