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Fidelity Asian Values PLC

Highlights from the Fidelity Asian Values PLC AGM

The Annual General Meeting of Fidelity Asian Values PLC was held at 25 Cannon Street on 7 December, at which Nitin Bajaj, the Company's Portfolio Manager updated shareholders.


Fidelity Asian Values PLC: Control the controllables

Nitin Bajaj, December 2017

2017 has proven to be another decent year for global equity markets. Within this, a much commented on dynamic has been the very strong performance from Asia where regional equities, as measured by the MSCI AC Asia ex Japan Index, have returned 27.9% over the first 10 months of the year - more than double the 11.9% rise in the broad MSCI AC World.

Around this time of the year, I’m often asked where I think markets will head next. This year we also have some market commentators predicting that this could be the start of a longer period where Asia and other emerging markets will outperform developed markets.

The return of Asia? 2017 returns by equity market region

Past performance is not a guide to the future.

Source: Datastream, 31 October 2017. Index performance based on total return in GBP. Fidelity has been licensed by   FTSE International Limited to use the name FTSE All-Share Index.

So will Asian equity markets continue to deliver attractive returns in 2018? My honest answer is that I don’t know and I don’t wish to spend any time even attempting to make a prediction as to where the broader market is headed.

Experts and media provide 24/7 commentaries on market outlook. I pay little attention to such forecasts and have never found them useful in making money for investors. I feel that our time at Fidelity is better spent understanding the businesses that we invest in.

That said, I can share with you my assessment of the current investment backdrop. The purpose of this is not to make a forecast, but to better understand the current risk preference and tolerance among market participants. As it stands:

  • Most economies are growing at a healthy rate, with unemployment falling quickly and in a few large economies the unemployment rate is close to all-time lows.
  • Interest rates continue to be low, as does inflation.
  • Profit margins for most businesses are very healthy and close to their all-time peaks.
  • Liquidity is ample. Within Asia, China continues to lead the charge in liquidity creation through record amounts of incremental debt being injected into the economy.
  • This has driven most equity markets to all-time highs (albeit not significantly ahead of their previous peaks).
  • That in turn has led to record amounts of margin trading activity.
  • And finally, Cyclically Adjusted Price to Earnings ratio (CAPE – current prices divided by average profits of the last 10 years) is currently at a level that was exceeded only twice in its history, during the market peaks of 1929 and 2000.

None of the above mentioned data are individually a cause of alarm – and some of it is actually quite encouraging. But all of them put together paint a very clear picture that most market participants are leaning towards “greed” rather than “fear”. Either there is general belief that the buoyant global scenario is likely to continue for quite a few years, or everyone believes that they can ride the wave better than others and get off at the right time. They may be right. Or they may not be. Do we want to dance until the music stops playing?

I am more inclined to the old adage - be fearful when others are greedy (and vice versa). As a result, over the last few months in Fidelity Asian Values PLC I have sold more stocks than I have bought. This has led to the trust holding more cash than is usual.

Some may take issue with this. Even though I understand that point of view, I am a firm believer that I should only invest when I find the right opportunity; not just because the trust has the money. ‘Marry in haste; repent at leisure’ holds true in the investing world as well.

During times of such optimism in the stock markets, I think it is even more important that we stay true to our investment philosophy in trying to buy good businesses run by good management teams and buy them at good prices (that leave enough margin of safety). To accomplish this, I follow three key guiding principles:

1.  Understand the business

Stocks are not merely tickers on a screen but a reflection of businesses that exist and compete in the real world. So, it is important to understand the economic characteristics of the underlying franchise. I don’t think we can pick winning stocks if we do not pay close attention to the business of a company.

If, for example, I decide to invest in Cebu Air – I am basically investing in the future of low cost airlines in Philippines and the competitive advantages of Cebu Air within that industry. To make a sound investment decision, it is critical to understand the industry and how Cebu Air will continue to maintain or even enhance its market strength. This is the starting point of every opportunity that is investigated.

2. Valuation is critical

For me investing is as much about protecting downside as it is about participating in the upside. I want to buy good businesses when either they are ignored or misunderstood by the market. These are times when one can get them at valuations that leave a lot of upside for the investors.

Valuation anomalies are at the core of the investment process – where the market either ignores or misunderstands a business. I therefore rarely buy into good businesses when valuations are high. The reason for this is that in these cases there is little margin of safety or room for error. Return of capital is as important as return on capital.

3. Beware of chasing hot stories

I consciously try to stay away from existing trends in the market. This links back to valuations as well-loved sectors generally tend to be more expensively priced than warranted. There are many examples of these – from tulip mania to Nifty 50 to the tech boom to the housing bubble of the mid-2000s. At their peak, these themes were always appealing but they seldom led to good long term returns. I am generally more curious about businesses where expectations are low and which are out of a mainstream investor’s sight.

Given this philosophy, most of our investments are made with a long-term view and a two to three year time horizon. To be successful in the stock market, I need to know more about the businesses I invest in than others do. There is only one way to do it – research, research and more research.

So while I have no special insight over the future direction of markets, politics or economic data releases, the one thing I am absolutely sure of going forward is that I will wait patiently and only deploy capital where I have conviction. If I truly understand the businesses I invest in - and enter at a valuation which provides a margin of safety and limits the prospects of future declines - then over time we should be able to win.

This information does not constitute investment advice and should not be used as the basis of any investment decision, nor should it be treated as a recommendation for any investment. Reference in this article to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. Past performance is not a reliable indicator of future results. Fidelity does not give advice. If you’re unsure of the suitability of an investment for you, you should speak to a financial adviser.

The value of investments can go down as well as up so investors may get back less than they invest. Overseas investments are subject to currency fluctuations. Investments in emerging markets can be more volatile than other more developed markets. The investment trust can gear through the use of bank loans or overdrafts and this can be achieved through the use of derivatives. Where this is the case, their use may lead to higher volatility in the Net Asset Value and Share Price. Some investment trusts, like Fidelity Asian Values PLC, invest more heavily than others in smaller companies, which can carry a higher risk because their share prices may be more volatile than those of larger companies.

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Money Observer 2017
Fidelity Asian Values PLC
Fidelity Asian Values PLC