Fidelity Asian Values 14 February 2024

Fidelity Asia Values (FAS) is managed by Nitin Bajaj who takes a value-orientated approach to building a portfolio of predominantly small-cap companies from across the Asian region. This approach is supported by a simple philosophy of identifying good companies that are run by strong management teams and buying them at an attractive price. Nitin has significant flexibility in where he can invest, including the ability to invest up to 20% in larger companies and Australian-listed businesses which, when combined with the valuation-driven approach, can lead to a Portfolio that is highly differentiated from both the benchmark and peer group.

Stock selection is designed to be the primary driver behind Performance. Nitin utilises the strength and depth of the on-the-ground analyst team at Fidelity to try to build an informational edge over the market and find value in companies that others overlook. The valuation focus has also led to Nitin finding a number of opportunities in China which is now at its largest overweight allocation in his tenure. He believes these deep-value opportunities offer significant upside if sentiment improves, as well as downside protection through deeply depressed valuations.

In order to capitalise on this value opportunity, the manager has increased the net exposure on the trust to 3.3%. Fidelity’s house style is to use derivatives instead of traditional Gearing facilities, which also allows Nitin to take short positions in stocks and benefit from a potential fall in value.

FAS continues to trade at a Discount to NAV. The level of discount is almost as wide as its nadir in mid-2023 at 9.7%.

We believe FAS offers investors exposure to the Asian region that is not matched elsewhere (see Portfolio). Being a small-cap trust with a value-driven process is enough to differentiate the vehicle, but when combined with Nitin’s flexibility to go anywhere, taking off-benchmark positions and shorting stocks means that FAS can be seen as a highly complementary trust to hold alongside a larger-cap peer, or even as a diversifier within a portfolio.

Currently, we think Nitin’s significant overweight to China offers differentiation to peers, many of whom are underweight the country. As we have discussed in Performance, Nitin believes this is an attractive valuation opportunity, offering considerable upside and a margin of safety on the downside. This positioning is further enhanced by the trust’s Gearing. Nitin significantly increased FAS’ level of net exposure at the beginning of 2023, and it remains notably higher than the average of the past five years. Should there be a market recovery in 2024, we expect the gearing to considerably increase the trust’s upside potential.

FAS currently trades at a Discount to NAV that is in line with the five-year average. The discount has proved volatile in the past few years, though the shares did trade close to NAV in mid-2023 due to ultimately misplaced optimism surrounding China’s re-opening. As such, we believe any further volatility could prove an attractive entry point for long-term investors, and the current level could easily narrow if the unique positioning proves prescient.