Fidelity Emerging Markets (FEML) has notched up a third year of outperformance and its second year of positive returns with shares trading at an all-time high as the weak dollar drives investors back to its sector and the investment recovery reduces the impact of losses arising from Russia’s invasion of Ukraine three years ago.
The £619m investment company managed by Nick Price and Chris Tennant at Fidelity achieved an 11.8% investment return in the year to 30 June, beating the 6.3% gain in its MSCI Emerging Markets index benchmark.
Helped by a narrowing in the share price’s discount to net asset value, which currently stands at 6%, shareholders enjoyed a 14% total return in the period. However, that understates the scale of the recent recovery with the shares currently up 43% over one year to last Friday.
Up 1% to 978.5p today, the shares surpassed their previous June 2021 peak of 935p at the end of last month, driven by improved investment sentiment to emerging markets and to a trust that is recovering from having to write off its overweight position in Russia in 2022.
According to the company’s latest fact sheet, as of 31 August the portfolio’s net asset value (NAV) had increased 39% over three years, beating the MSCI benchmark’s 17.2% with the shares offering 48.
While five-year returns continue to show the impact of Russia sanctions – with a 20.1% NAV and 24.2% share price total returns – that effect is wearing off. Chair Heather Manners even held out the prospect of an uplift to asset value if its frozen Russian investments were revalued from zero if the war ends and Western sanctions were lifted.
Manners said this after FEML was able to record a gain on Russian recruitment company Headhunter where an unusual “liquidity opportunity emerged” enabling it to sell the position previously written down to zero.
Today’s results show the company has a chance to avoid holding a 25% tender offer next year if its recovery continues. FEML has committed to buy back up to a quarter of its shares if its five-year underlying returns fail to beat the benchmark by September 2026. Manners noted that while the five-year NAV return was 8% behind the index at the end of August, over three years it was 21 percentage points ahead.
At a country level, stock picking in South Africa, India and Taiwan were among the largest contributors to performance, although stock selection in China and Hong Kong and Kazakhstan detracted from returns. The latter referred to sharp falls in payments platform Kaspi which suffered from weakness in the country’s currency leading to a spike in interest rates.
Naspers, the South African holding company with a stake in China’s social media giant Tencent, was the most positive stock position. “Naspers significantly outperformed Tencent, supported by its ongoing share buyback and indications its other investments are starting to turn a profit,” the company said.
Mid-cap holdings such as Canadian gold miner Lundin Gold, Taiwan’s Elite Material, a laminate producer for printed circuit board manufacturers, and Georgia’s TBC Bank also helped.
A 23% increase in the dividend has been declared with a final dividend from the dollar-based fund of 26 cents per share up from 20 cents a year ago.
Our view:
Matthew Read, senior analyst at QuotedData, said: “FEML can now boast three consecutive years of benchmark-beating performance under Fidelity’s management, which is no small achievement given a backdrop of geopolitical tension along with ongoing investor apathy toward the asset class. The managers’ use of shorts, mid-cap exposure and selective gearing continues to add value and is a genuine differentiator versus its peers.
“The board also deserves some credit for being proactive on trying to manage the discount – nearly 14% of issued share capital was bought back during the year – and the proposed repurchase of the Strathclyde block will remove an overhang and, as this is being undertaken at a 14% discount to net asset value, is expected to generate a c4% uplift to NAV for remaining shareholders.
“Emerging markets continue to trade at wide valuation discounts to developed peers and, with the US dollar now showing signs of softening – a big aim for President Trump, this could help to stimulate flows back into emerging markets. Assuming FEML’s managers can continue to exploit inefficiencies further down the market-cap spectrum, there could be more to come from this trust.”
