Fidelity Asian Values has announced results for the 12 months endd 31 July 2023. The period was a relatively good one for the trust as the 11.4% NAV total return outperformed the comparative index (MSCI All Countries ex Japan Small Cap Index) which rose by 7.5% over the same period. A narrowing discount meant that the share price total return for the reporting year was an increase of 17.3%. The dividend has been increased to 14.5p from 14.0p.
Between August and November 2022, the board approved the repurchase of 569,000 shares (0.8% of the issued share capital) for holding in treasury, at a cost of £2,618,000. Since then and up to the date of this report, no shares have needed to be repurchased.
The chairman is stepping down after nine years in the role and had this to say – “As I prepare to retire from the board, I have taken the opportunity to look back at the impact of these changes, beginning with the selection of Nitin Bajaj as your portfolio manager in April 2015. From Nitin’s appointment until 31 July 2023, your company has produced a NAV total return of 112.6% and a share price total return of 129.0%, outperforming the comparative index (MSCI All Countries Asia ex Japan Small Cap Index (net) total return (in sterling terms)) of 72.9% and also the peer group average total returns of 87.5% (NAV) and 117.1% (share price). During this time, the discount to NAV has narrowed from the mid-teens to low single digits (occasionally trading at a premium, which is testament to a very clear and well-supported investment proposition), and we have also been able to deliver a significant increase in the dividend, both of which have been to the long-term benefit of shareholders.”
Extracts from the manager’s report
Our investment process is driven by owning good businesses which are run by management teams whom we trust and investing in them only when we have ample margin of safety. This often leads us to take contrarian positions as it is easier to find undervalued businesses in countries which are out of favour with investors. Following this philosophy, we have a significant percentage of the Company’s portfolio in China and are underweight in Taiwan and India compared to the Index. Accordingly, while country selection would be a headwind to performance, this was more than offset by good stock selection in line with our investment philosophy, especially in our three key markets of China, India and Indonesia.
When China reopened, there was a lot of optimism in the market, but it turned out that the recovery has been uneven and softer than expected in many areas. The property downcycle, geopolitics, the reining in of local government spending and increasing centralisation of political power has resulted in China being one of the few markets where profitability has not recovered post COVID. Consequently, there is a heightened perception of risks around Chinese companies, leading to a decline in stock prices. We agree with some of the reasons for negative sentiment around China and understand that it is difficult to predict when the economy will turn around.
However, we should also be cognisant of the strengths of the country’s economy, its people and its businesses. It is the second largest economy in the world and consumption is expanding as a share of its GDP. It houses a significant part of the global supply chains of most products we use in our daily lives. Hence, we feel that these negative macro factors are transitory (as they were in the US post the housing crises of 2007-10 or in India post the policy paralysis of 2012-13). Good businesses will not only survive but are likely to be in a stronger competitive position post this downturn and by taking market share from their weaker peers. This is probably the best time to be investing in China as we are able to buy good businesses when both expectations and valuations are low.
Thus, there are good opportunities in China at the moment, which in turn has seen our combined exposure to China and Hong Kong increase to about 38%.
Looking at the portfolio beyond China, we are excited about the opportunities we see in Indonesia (around 14% exposure). Our holdings there are a mix of banks and consumer-facing companies which are best-in-class operators with high Returns on Equity (“ROEs”) and reasonable valuations. For example, we own shares in two banks – Bank Mandiri (Persero) and Bank Negara Indonesia (Persero). The former has seen a sustained improvement in asset quality through better underwriting and risk management since 2016 under a new management, while the latter is going through restructuring with the same team of people who turned around Bank Mandiri (Persero). The portfolio is invested in the country’s leading ceramic tiles manufacturer Arwana Citramulia, a business with long-term growth potential and a strong management team. Among a few other positions, we also have exposure to the country’s KFC master franchisee, Fastfood Indonesia, which again has structural growth opportunity to expand as well as enhance operational efficiencies.
In India, while it has not been easy to find businesses with a suitable margin of safety, we are still able to identify specific stocks that fit our criteria. Our positions in India centre around financial sector companies as they are growing more quickly, have strong balance sheets and are available at prices which offer a good margin of safety. We have studied these businesses for over 15 years and trust the management teams who have delivered substantial shareholder value over time.
FAS : A good year for Fidelity Asian Values extends its good long term track record