Genesis Emerging Markets to appoint Fidelity as new manager – The board of Genesis Emerging Markets (GSS) has completed its extensive review of its management arrangements and has revealed that it intends to appoint Fidelity International as its new manager and to rename the trust as Fidelity Emerging Markets. The named managers will be Nick Price and Chris Tennant.
The investment policy will also be updated to allow investment in a diversified portfolio of equity, equity-linked securities and derivative instruments which provide exposure to companies, either based in or listed in emerging markets or with assets, operations, income or revenues that are predominantly derived from emerging markets. This may range across all cap sizes, both listed and unlisted. There will also be a significant reduction in management fee from the existing 0.9% of net asset value to 0.6% and a commitment to both a performance-triggered tender offer in 2026 and the introduction of a continuation vote for the company to be held every five years.
While the board believes many shareholders will wish to continue with their investment in the company. it will also make a tender for up to 25% of the shares in issue at a 2% discount to the prevailing NAV per share, so shareholders wishing to realise part, or potentially all, of their investment will be able to do so.
These proposals will each be subject to shareholder and applicable regulatory approvals. The company intends to seek shareholder approval of the proposals at an extraordinary general meeting to be held in August this year. The appointment of Fidelity International will be conditional on approval of the new investment policy and the change of name will be conditional on the appointment of Fidelity International becoming effective. The tender offer however will not be conditional on approval of those two factors.
The board has thanked Genesis Investment Management for their “commitment and hard work over the past three decades”. Following long discussions with Genesis, the board fully understands and appreciates Genesis’ focus on its institutional mandates.
[This is great for Fidelity, who adds another mandate to its investment trust offerings as well as for the trust and its shareholders. The board has made a good choice in an investment manager which has a strong global brand and solid emerging markets team while long-standing manager Nick Price, who launched the group’s first international emerging EMEA portfolio in 2005, has a decent track record having returned 275% since he first took on the Fidelity Emerging Europe Middle East & Africa fund. He also co-manages five other EM mandates. The proposed fee reduction and ongoing discount control mechanisms will also be very welcome for shareholders. The trust has performed well over the long term, delivering a huge 1032% over the past twenty years. Over one year, though performance is still positive with a return of 30%, this is behind its AIC Global Emerging Markets sector average return of 35%.]
Proposed investment approach:
Fidelity International plans to adopt an all-cap global emerging markets strategy with enhanced investment powers which seeks to exploit a broad range of opportunities. The managers adopt an active ‘extension’ investment style, benefitting from an extended toolset versus a traditional long-only equity fund:
- Equities: Predominantly invested in equity securities that offer a significant degree of absolute upside to each stock’s specific target price. The portfolio managers will seek opportunities across the market cap spectrum, geographies, and consider listed companies, IPOs and unlisted investments.
- Short extensions: Offering the ability to access positive returns from securities perceived to be exposed to material absolute share price declines via the use of short equity derivative positions.
- Long extensions: Providing the ability to deploy additional long equity exposure through the use of equity derivative instruments to further enhance performance from the stocks with the greatest upside potential, and also to offset the reduction in equity exposure introduced by the fund’s short positions.
- Other instruments: Access other instruments to take best advantage of perceived sources of return and to control risk. These instruments include equity option positions to both capture option premium as well as to control active risks in the portfolio.
Fidelity International believes that many emerging market companies can sustain high levels of economic growth for years to come, driven by attractive demographic profiles, immature markets, an abundance of untapped natural resources, and generally low levels of indebtedness. However, whilst these positive attributes provide a fertile environment for companies to grow their earnings, it is critical to ensure that each company Fidelity International invests in can generate superior and sustainable returns on assets that permit them to fund the growth of their business, withstand competitive pressures and achieve attractive returns for minority shareholders.
With this in mind, Fidelity International defines high quality companies as those that exhibit:
- Quality – high quality, well capitalised companies capable of achieving superior returns on assets, and where strong free cash flow generation can be used to either self-fund future growth or pay dividends to shareholders
- Consistency of returns – dominant companies that can maintain superior levels of growth and profitability resulting from a sustainable competitive advantage, such as market share, technology, or cost leadership; companies which exhibit a solid track record of delivering attractive total shareholder returns over time
- Reasonable price – attractive valuations that understate the intrinsic value of a company. Target prices are determined for every stock considered for the portfolio, reflecting each company’s sustainable level of earnings power across the economic cycle and an appropriate valuation multiple.
Conversely, it is those weaker peers who are unable to compete with the strongest franchises that are likely to fall by the wayside. Using short positions, these weaker businesses form some of the additional investment opportunities that Fidelity International can take advantage of, as an additional source of performance.
GSS : Genesis Emerging Markets to appoint Fidelity as new manager