Fidelity Asian Values premium rises over strong year – Fidelity Asian Values (FAS) has reported annual results to 31 July 2019, including the following:
- FAS’s share price rose 12.3%;
- NAV increased by 8.2%, versus the 3.9% benchmark index;
- An increased allocation to non-banking finance companies in India supported strong returns;
- Out of favour small companies presented good buying opportunities;
Q&A exerts with manager Nitin Bajaj
FAS published a Q&A style interview with manager Nitin Bajaj in the annual report released this morning. We thought it would be useful to provide some exerts:
QUESTION
What has the market environment been like in the year under review?
ANSWER
“Stock markets have been choppy globally over the last year as investors try to balance prospects of declining interest rates and fiscal stimulus with an ongoing slowdown in economic growth. This has created volatility which is not uncommon late in the business cycle.
In this environment, the comparative Index returned 3.9% (including dividends) relative to a long-term average return of 7-10%. Against this, the MSCI all countries Asia ex Japan small cap (net) total return Index declined by around 4.2% (including dividends).
Within this, performance of larger companies and specially those perceived as growth companies was better than smaller companies and value stocks. This was also the case globally, with the MSCI world value Index performing materially worse than the MSCI world growth index. The result is that several well known value managers have had a tough time recently.
These trends between growth and value are part and parcel of investing in the stock market and can capture the imagination of both the media and investors from time-to-time before fading away. It is not possible to forecast the duration or magnitude of these swings but historically they always reverse. To use Howard Marks’ pendulum analogy: “the pendulum always swings one way and then the other, rarely settling at an equilibrium”.
QUESTION
Can you comment on the company’s performance over the last year?
ANSWER
“My comments regarding performance refer to the NAV of the company rather than the share price. Over the long-term, the share price will approximate the underlying NAV, but in the short-term, the share price can (and will) often diverge from the NAV.
The NAV appreciated by 8.2% versus 3.9% for the large cap index and -4.2% for the small cap index over the year under review.
As our investment philosophy is based on owning undervalued stocks, I have always had a significant share of funds invested in value stocks, and more specifically small and mid cap value stocks.
Over the last 4 years, small companies have been out of favour. Despite this we have been able to outperform broad indices over this period. This is due to the hard work and diligence of Fidelity’s small cap research team in Asia. The team is both motivated and excellent at what it does. I would like to thank them for their support as this performance would not have been possible without them.
If we analyse the performance in a bit more detail, the biggest driver of performance has been our ability to avoid big losses in situations where our investment thesis was incorrect.
Our losses from stocks where we got it wrong and suffered a material loss (stock dropping more than 30%) have been far lower than our profits from stocks where we have got it right and made material gains. Avoiding a big loss when we are wrong is key to our investment process. To achieve this, we need to:
· own good businesses;
· that are run by competent and honest managers;
· with well-financed balance sheets and ensure that;
· our buying price leaves enough margin of safety for mistakes and bad luck.”
QUESTION
What have been the major changes to the portfolio over the period?
ANSWER
“There have been two changes from last year which I would like to discuss.
First, I have deployed a lot more capital during the last year. As investors have paid greater attention to larger growth companies, I found several small companies which were being ignored and hence available on attractive prices. As a result, we have moved from a substantial cash position at the end of last year to a small amount of leverage now.
Our deployment of capital in these attractively valued businesses is represented through the aggregate P/E ratio of our holdings which now stands between 8-9x (substantially lower compared to the market average and our own past).
Such a P/E ratio is often associated with distressed or troubled situations. However, on aggregate, our holdings demonstrate robust balance sheets and high as well as stable returns on equity.
To put this in context, the MSCI all countries Asia ex Japan Index trades at around 14x P/E ratio, S&P 500 at around 17x and FTSE at around 12-13x.
I understand that the businesses we are buying are out of fashion with little investor interest. But I remain as convinced as ever that owning good businesses, run by able management teams and buying them at attractive prices has to be a sound way to invest.
The other change has been, an increased allocation to non-banking finance companies (NBFC) in India. Over the last 12-18 months there has been a crisis building in this sector with some prominent names in substantial financial difficulty.
This has led to extreme risk aversion and attractive valuations for the whole sector. These businesses are an essential part of the credit delivery mechanism in India as large parts of the economy are either under banked or ‘unbankable’ by traditional banks. Hence, NBFCs that survive will emerge stronger and will operate in an industry with substantially less competition.
We have done a lot of work on this sector and backed the companies we think have the best business models, management teams, credit underwriting skills and funding availability. Our entry price leaves enough margin of safety. We are confident and time will tell if we are right.”
QUESTION
What is your outlook over the next 12 months?
ANSWER
“I will say exactly what I said last year, “forecasts tell you more about the forecaster than the future.” I try to spend my time understanding businesses that I invest in rather than forecasting the direction of the economy or the stock market.
The world is uncertain, and I expect it to be a bumpy ride over the next 3 years. However, I also feel that the stock market has become very polarised and hence we have bought many excellent businesses at attractive prices over the last 12 months. This should serve us well in the coming three to five years.”
FAS: Fidelity Asian Values premium rises over strong year