Fidelity EM manager’s contrarian calls pay off

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The MSCI Emerging Markets index returned 17.6 per cent in the seven months to July; impressive when compared with the 5.6 per cent generated by the FTSE 100 over the same period. Earnings growth has been steadily improving as well. Analysts expect the sector to continue to rally, benefiting from improving profitability, rising incomes and expanding economic growth.

In addition, the International Monetary Fund has raised its outlook for emerging market growth, forecasting a 4.5 per cent expansion this year versus 4.1 per cent in 2016. It also expects growth in 2018 to be around 4.8 per cent.

Significantly, the outlook for the Chinese economy has improved noticeably as fears of a hard landing and extreme devaluation have receded. This has enriched the overall prospects for the sector in general.

That said, the biggest threat comes from geo-political events, as an increase in risk aversion implies outflows for the sector. This is exactly what has happened recently in light of  the standoff between the US and North Korea.

Despite these losses, overall capital inflows into the sector remain quite strong, with EPFR data showing an increase of more than $90bn into such strategies this year.

Analysts also remain quite bullish as they believe stronger economic growth and attractive valuations make emerging market equities a compelling long-term proposition.

However, the size and diversity of the sector, along with the large number of propositions to choose from, means investors looking to dip their toes in this market need to be careful when it comes to strategy selection.

The Fidelity Emerging Markets fund, managed by Nick Price, comes highly recommended by the FE Research team and forms part of the FE Approved List. Fifty analysts specialising in different industries across Latin America, emerging Asia and emerging Europe, Middle East and Africa conduct detailed analysis of individual companies to generate ideas. The best ideas are used to create regional portfolios and the best-of-the-best are then used for this general emerging markets fund.

Price focuses on companies that generate consistent profits in good and bad environments.

Economic, political and currency issues are analysed as inputs to companies’ cashflows and costs, rather than as reasons to invest in themselves.

Price looks for companies with good corporate governance in order to limit losses and pays special attention to the amount and the nature of their debt. This strategy has ensured the fund only invests in high-conviction stocks helping it outperform its peers.

The fund outperformed the IA Global Emerging Markets sector over three and five years, and is ranked in the first quartile over the same time periods, as at the end of July.

One thing to bear in mind is that the manager makes unpopular and contrarian calls and runs a portfolio very different from his peers, so the fund is likely to go through periods of significant out- and under-performance.

Key facts

Sector: Global Emerging Markets
Benchmark: MSCI Emerging Markets Index
AUM: £2087m as at 31/07/2017
Launch Date: 28/07/1997
Management: Nick Price
FE Alpha Manager rated: No
FE Crown Fund Rating: Four

In 2013, the fund did exceptionally well when almost all other emerging market portfolios fell. This was due to the benchmark-unconstrained approach, which meant the fund was not invested in the “fragile five” emerging economies – Turkey, Brazil, India, South Africa and Indonesia – most dependent on foreign investment. These five suffered the most when the sector fell as US monetary easing came to an end. This shows that, although the manager focuses on bottom-up stock picking, his macro analysis has also benefited the fund’s performance. The combination of good macro analysis and bottom-up stock picking is attractive, and the fund stands out in its sector.

This fund is best suited to those willing to invest for at least seven years and willing to tolerate large swings in value. It has an OCF of 1.01 per cent and has an FE Risk Score of 122 currently (zero being cash and the FTSE 100 being 100).

Namrata Nanda is institutional marketing manager at FE