Fidelity Asian Values 01 August 2024

Nitin Bajaj and Ajinkya Dhavale, co-managers of Fidelity Asian Values (FAS), aim to provide investors a unique portfolio of smaller-cap equities from across Asia. They look to differentiate the trust by using a bottom-up benchmark agnostic approach to identify potential stocks, combined with a strong valuation discipline. This has contributed to a portfolio that is significantly differentiated from the benchmark and most other vehicles investing in the region. This has contributed to outperformance over the long term.

Ajinkya has recently been promoted to co-manager, having previously been Nitin’s assistant manager since 2020 (see Management).

FAS’ differentiation is best exemplified by Nitin and Ajinkya’s current ‘anti-tech’ positioning, based on the belief that valuations are too high as a consequence of momentum rather than quality driving share prices. In contrast, the managers are significantly overweight China, an allocation that has recently been increased and refocused on the domestic consumption story (see Portfolio).

The trust’s Gearing level, while still modest, remains above historical averages. Fidelity’s house style is to use derivatives instead of traditional borrowing facilities which also allows the managers to take short positions in stocks they believe will fall. As at 31/05/2024, net exposure was 107.7% and gross exposure 114.3%, both figures being somewhat above their long-term averages.

Another unique feature of FAS is the variable management fee (see Charges). This is designed to align the interests of the manager with investors, by changing the fee depending on performance relative to the benchmark. Should the trust underperform, the charges are reduced, and vice versa for outperformance.

Asian small caps are an overlooked asset class that we think can act as a portfolio diversifier. However, FAS has taken these diversification benefits even further through managers Nitin and Ajinkya’s benchmark agnostic approach and strong value discipline, which leads to a highly differentiated portfolio from the wider market and peers.

We believe this is particularly apparent in the current positioning (see Portfolio). Whilst a number of industry commentators have highlighted elevated valuations following the run up in the tech sector, few have taken such an explicit stance as Nitin and Ajinkya in their ‘anti-tech’ positioning. As such, we believe FAS could offer diversification benefits to a wider portfolio by being used as a complementary holding alongside those with a tech bias, or India-focussed vehicles, which the managers believe is a consensus, momentum-driven trade that is also overvalued.

Instead, the managers have focussed on the Chinese domestic consumption story which is available on much lower valuations and offers a significant margin of safety. They believe this provides the trust with optionality – if they are wrong, much of the downside is already priced in, but if they are right, there is significant upside on offer (see Performance). The trust’s Gearing could also add to the upside potential.

This potential could be further enhanced by the trust’s Discount, which is currently wide versus its own history. We believe this could offer long-term investors an attractive entry point. Furthermore, the board has begun share buy-backs which we believe is an indication the board believes there is value at the current discount level.