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Traditionally, Special Situations funds have looked to invest in unloved or overlooked companies, firms undergoing a turnaround story, or those set to benefit from some external catalyst to business. While the style has evolved over time beyond that initially employed by Fidelity’s Anthony Bolton, the ‘Special Situations’ fundamentals are still felt through the investment approach of Suranjan Mukherjee, manager of the Fidelity Funds - Asian Special Situations Fund, part of our Select 50 list of favourite investments.
Mukherjee is a bottom-up stock picker. Throughout his near 25-year investment career - which has seen him manage three Asian equity portfolios with Fidelity - the manager has continually looked for stocks which are priced attractively relative to improving earnings.
What’s more, he is confident that it’s an approach especially suited to tell apart the winners from the losers as Asia emerges from lockdown. He believes the region is a stock picker’s market, one in which active management and strong bottom-up analysis of companies’ fundamentals will be rewarded as investors navigate these uncharted waters.
Bottom-up stock picking
The fund is focused on companies in three categories - those which stand to benefit from a turnaround story; those that have established themselves as global leaders through technology, scale or cost structure; and strong franchises that benefit from long-term structural drivers.
That’s a broad remit, but it’s one that looks to capture the diverse range of options available in Asia’s widely varying economies. Those structural drivers are at the heart of the portfolio - of its current 77 holdings, 42.1% of total assets are held across the top ten names, with large positions held in Alibaba, Taiwan Semiconductor Manufacturing and Samsung - all familiar names to regular Asia investors.
Alibaba, which is the fund’s largest holding at 7.9% of total assets, well demonstrates the far-reaching, familiar franchises which Mukherjee hopes to capture in the fund. Often described as the Chinese equivalent to Amazon, Alibaba is a huge e-commerce and online payment company which boasts around 874 million mobile active users, and which has driven the charge behind China’s rapidly expanding domestic consumer economy.
It also embodies the market resilience which the region has, for the most part, demonstrated over the course of the Coronavirus pandemic. First in and first out of lockdown, China in particular has coped well - despite shrinking by 6.8% in the first quarter of the year during a strict lockdown,
China’s economy expanded by 3.2% over the next three months.1 And, like Amazon in the West, Mukherjee expects Alibaba to come out of the pandemic even stronger, particularly as its cloud ecosystem gathers strength.
Maintaining a positive trajectory
Far from thinking the pandemic has derailed the region’s growth prospects, Mukherjee remains confident that broader economic trends across Asia remain fully intact. His thinking here is evidenced by another one of his large holdings, the Macau casino operator Galaxy Entertainment, which accounts for 2.3% of total holdings. Despite suffering under lockdown-imposed drops in footfall, the manager feels companies like these are benefitted by a consumer base which is likely to return to pre-pandemic levels when able to do so.
Mukherjee is also optimistic that, while companies like Galaxy Entertainment suffer short-term hits and investors’ faith wavers, their valuations are likely to grow compelling. The manager scours the region for cheap valuations attached to strong companies - as such, he feels that ‘now is an opportunity to own companies with structural drivers at attractive valuations.’
One measure Mukherjee uses to uncover opportunity is a company’s level of return, especially its return on invested capital (ROIC). ROIC is a profitability ratio that measures how efficient a company is at turning investors’ money into profits - those with high levels of ROIC are using their invested capital well and can demonstrate that investors’ money is effectively generating income.
This is an approach that’s focussed on individual stocks - about understanding their fundamentals, and their return profiles over the long-term. It’s one which Mukherjee has employed for the past couple of decades as he’s grown accustomed to Asian markets, and one which he feels will prove its worth as Asia’s economies continue to expand.
1 National Bureau of Statistics, 17.07.20
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Select 50 is not a personal recommendation to buy or sell a fund. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.