Fidelity Asian Values Trust – opportunity amid volatility?

Markets sometimes unfairly punish stocks in the eye of a storm. This can bring opportunities that reward the patient investor explains Fidelity’s Nitin Bajaj.

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  1. Rob Morgan

Political risks have intensified for Asian equity investors, the dominant theme being the escalation of trade tensions between the US and China. However, Nitin Bajaj, manager of Fidelity Asian Values investment trust, warns against making assumptions about the impact.  He explains that the world economy is a complex system and it is almost impossible to assess all the consequences any single policy action.

By way of an example, he explains, a tax on soya exports from the US to China will impact the price of soya beans. This will have a knock-on impact on palm oil, as soya bean oil competes with palm oil. It will also impact animal feed, which uses soya beans as a raw material. As a result, meat and poultry prices will be high, which will also impact inflation. Knock-on consequences are many-fold and not always obvious.

His approach in this environment is to avoid businesses where either the risk of policy impact is very high or where the stock market has failed to understand the unintended consequences of such a policy change. He also remains vigilant for new opportunities. Markets sometimes punish stocks which are in the eye of the storm of a policy decision, he explains, and these scenarios can sometimes throw up opportunities to invest in excellent businesses going through challenging circumstances which are likely to improve with time. These opportunities can reward the patient investor.

Mr Bajaj takes inspiration from Warren Buffet’s style of ‘value investing’. This advocates targeting good businesses run by trustworthy management teams, and buying them at the best possible price. Accordingly, he has largely avoided the technology sector and many other growth-orientated areas because these lack the “margin of safety” he requires. He explains that while he wants to own robust companies with good management he will not do so at any price, and he is sticking firmly to his process that aims to uncover good-value opportunities in unfashionable areas. For him investing is as much about protecting the downside as it is about participating in the upside.

This investment approach tends to lead him to smaller companies that are not widely followed by professional investors and areas that are being widely ignored, for instance telecoms and utilities. At the same time he looks to take profits from areas that perform strongly over his 3 to 5 year investment horizon and reinvest in new ideas through overlooked, cheaper stocks.

Asia is home to 18,000 listed companies offering a huge pool of opportunities for Mr Bajaj to find what he is looking for. Many smaller firms receive little or no research from the investment industry, and we believe this plays to the strength of the manager and his team as they search among Asia’s lesser-known businesses. Given the focus on smaller firms the investment trust structure also suits the approach. The ‘closed ended’ nature of a Trust means the manager is able to focus entirely on owning the best stocks for shareholders, rather than having to manage cash in and out of the portfolio resulting from changing investor sentiment towards the asset class.

Every decision he makes is based on the merits of an individual business - rather than the country or industry they operate in - although it is notable that stock selection has recently resulted in a substantial positon in the Indian mortgage market. This is spread across Housing Development Finance Corporation and Indiabulls Housing with these stocks exhibiting the traits he looks for.

Mr Bajaj explains each has a significant competitive advantage based on low cost operations and low borrowing costs. In addition, he believes they also have prudent and trusted management teams which have kept both operating costs as well as non-performing loans in check for long periods of time. The growth dynamics of the Indian mortgage market is also attractive. India has less than 10% mortgage/GDP ratio - the comparable ratio in the UK is around 60% - and he believes these companies can continue to grow for the next decade and beyond.

Our view

The ‘value’ approach adopted by the manager has tended to hamper performance over the past few years. Despite this, the manager’s pragmatic investment process has led to decent returns and we believe this Trust could deliver strong, longer term performance in this exciting and higher risk area. The Trust remains part of our Foundation Fundlist of preferred investments across the major sectors.

Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

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