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Fidelity Emerging Markets delivers welcome performance improvement

a view of Sao Paolo looking towards a cluster of high rise buildings

Fidelity Emerging Markets has published results covering the year ended 30 June 2024 and they are good. After a difficult year in 2022, when the trust was hit hard by Russia’s invasion of Ukraine, and then a period of consolidation in 2023, for the latest year the trust reported a NAV total return of +18.7% and share price total return of +22.6%. These compare to a return of 13.2% from the benchmark MSCI Emerging Markets Index.

During the year the discount to NAV narrowed somewhat, from 14.6% to 11.9%. A tender offer in March 2024 was fully subscribed and 13,531,881 shares (14.99% of the shares in issue) were repurchased at a 2% discount to NAV. The trust also bought back 2.9m shares in the market, and since year-end, it has repurchased an additional 2.8m shares. At 2 October 2024, the discount to NAV stood at 12.2%.

A resolution to declare a final dividend of $0.20 per share (2023: $0.19) will be proposed at the AGM that will be held on 10 December 2024.

[Fidelity Emerging’s NAV returns are middle of the pack over one year but its longer term returns still bear the scars of the decision to ramp up exposure to Russia just ahead of the invasion of Ukraine. We like the ‘toolkit’ approach that uses the strengths of the closed-end structure to enhance returns, but it probably needs another good year to convince investors of its merits.]

Extract from the manager’s report

What were the main contributors to the outperformance during the year and why?

The company’s extensive ‘toolkit’ added significant value over the year. When managing the portfolio, we draw on a broad range of ‘tools’, namely the ability to adjust the level of gross exposure via gearing, to invest in mid-cap companies, take out short positions, and use options. It is pleasing to see that many of these tools, including the mid-cap exposure and the short book, added substantial value over the past year. While yield enhancement (or the options book) detracted, this is a function of it being a hedging tool, which means it detracts when performance is strong.

The short book in particular generated very positive performance. We take out short positions in businesses that are in structural or cyclical decline, and that have a number of red flags around aspects like their balance sheet structure, cash conversion, or related party/management conflicts of interest. Over the year there were two short positions in the top ten contributors to relative returns, a notable achievement given that we limit the size of short positions to c.100bps. The top performer in the short book was a declining Asian utility that is unsuccessfully pivoting into unrelated business areas, and which saw its share price halve during June, following poor earnings and after the major shareholder faced margin calls.

Looking to the rest of the portfolio, several holdings in the financials sector stand out. These included high-conviction positions like Brazilian digital challenger bank Nu Holdings, and Kazakhstan’s e-commerce and payments platform Kaspi. Another contributor was Russia’s TCS Group, a provider of online financial services, which we disposed of after identifying a liquidity opportunity. The company’s holdings in Russian securities have been fair valued at nil since the first quarter of 2022. Within information technology, Taiwanese semiconductor foundry business TSMC performed well given the growing tailwind from AI-related demand.

The Chinese consumer names held in the portfolio were the main headwind to performance. The portfolio had a marginal underweight exposure to China and Hong Kong combined at the end of June, but the Hong Kong listed names held such as sportwear company Li Ning and insurance company AIA lagged the domestic A-share market. A feature of 2023 was the significant underperformance of Hong Kong listed H-shares as foreign investors exited the market, although this started to reverse over the first half of 2024 as sentiment began to improve.

FEML : Fidelity Emerging Markets delivers welcome performance improvement

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