28 Sep 2022
After a long period of underperformance, value investing has been making a comeback over the past year or so. Against this backdrop, Nitin Bajaj, portfolio manager of Fidelity Asian Values PLC & the Fidelity Asian Smaller Companies Fund, outlines how his portfolios have benefited from this environment and provides an insight into the value areas which still offer unrecognised investment potential.
Key points
In the last 12 months ending August 2022, the trust generated positive absolute returns in a falling market. This was mainly because we avoided speculative investments, expensive stocks and blue-sky business models. This flows directly from our investment philosophy of investing in good quality businesses which are run by competent and honest management teams but buying them only when valuations provide enough margin of safety.
Return of value
The market sell-off this year has not been even. Like in most down markets, the losses have been lower in small-caps than large-caps. This has been largely driven by different geographic mix of indices, with the large-cap index much more weighted to China, for example. Additionally, value as a style has done better than growth this year.
We continue to believe that this is only the initial phase of the mean reversion for small-cap value stocks that started last year. Given the starting valuation dispersion between growth and value stocks, as well as quality characteristics of parts of the value universe, we are likely to see a period of sustained outperformance from value stocks in coming years.
Past performance is not a guide to the future. While this market environment has provided a positive backdrop for our small-cap value tilted style, our focus on bottom-up fundamental research has meant that stock selection has still been the biggest contributor to relative performance.
Rising allocation to China
Given the macroeconomic concerns around China, it is unsurprising that Chinese stocks have sold off. However, there are many interesting companies that are now trading way below intrinsic value in our opinion, a situation similar to what we saw in India in 2012/13, or in the US in 2008/09.
Looking at Fidelity Asian Values PLC, our combined exposure to China and Hong Kong now stands just under 40%, the highest level over my management tenure. The chart below shows how our allocation to China has increased over the last 18 months or so as market valuations have come down.
China's valuation and portfolio's exposure to China + Hong Kong over tenure
Forward PE
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Price to book
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Source: Fidelity International, FactSet, 31 July 2022. Index: MSCI China Index
We are very conscious of the macro risks of investing in China due to geopolitical tensions, regulatory interventions and economic cycles. Based on our analysis, the businesses we own adequately price these risks in current valuations and are operating in areas that are beneficial to the society - either through proving household products or essential infrastructure services which are critical to the smooth functioning of the economy.
The risks to monitor
In my opinion the biggest risks are always things we do not know yet or the “unknown unknowns”. What is in the news can be priced.
Of the things that we do know, the biggest risk continues to be the medium-term impact of experimental monetary policy of the last decade. The world has never had free money the way it did in last 10 years. Neither has the world lived with this quantum of debt before. Consequently, it is very hard to have a playbook to figure how things will pan out.
Having said that, our strength is stockpicking, rather than macro analysis. Legendary Fidelity fund manager Peter Lynch’s view was “if you spend 13 minutes on macro analysis, you wasted 10”. I am of the same school of thought. We continue to focus on analysing individual investment opportunities, looking for good businesses that are run by good management at valuations that offer a decent margin of safety.
In this context, I am pleased with the current shape of the portfolio, which comprises businesses that are dominant in their industries, earning good returns on capital and are available at attractive valuations.
Important information
This information is for investment professionals only and should not be relied upon by private investors. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. The Fidelity Asian Smaller Companies Fund and Fidelity Asian Values PLC can use financial derivative instruments for investment purposes, which may expose them to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Both portfolios also 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. Investments in small and emerging markets can be more volatile than other more developed markets. Changes in currency exchange rates may affect the value of investments in overseas markets. The shares in the investment trust are listed on the London Stock Exchange and their price is affected by supply and demand. The investment trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. The shares in the investment trust are listed on the London Stock Exchange and their price is affected by supply and demand. 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.