Fidelity’s locally-based Asian equities team discuss the next chapter of the region’s growth story
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Like all emerging markets, Asia is not immune from periods of heightened volatility and swings in sentiment. While this naturally warrants a certain risk tolerance, the opportunities being created by the region’s long-term structural growth story remain significant. With valuations also attractive - particularly relative to some developed markets - could now be an opportune time to increase or initiate exposure to Asian equities?
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In this guide, we review how Fidelity’s Asia range offers a different and distinct way of accessing an exciting region.
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. Fidelity’s range of Asian equity funds have the potential of having high volatility either from their composition or the techniques used to manage them. The funds can use financial derivatives which may expose them to a higher degree of risk and can cause investments to experience larger than average price fluctuations. 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. 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. Investments in Fidelity funds should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document, current annual and semi-annual reports free of charge on request by calling 0800 368 1732. Issued by FIL Pensions Management, authorised and regulated by the Financial Conduct Authority and Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM1019/25049/SSO/NA
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Portfolio Managers Teera Chanpongsang, Jochen Breuer and Hyomi Jie give their market views and discuss how their portfolios take an active, bottom-up approach which maximises the group’s research-led philosophy and seeks to deliver consistent client returns.
Asia's maturing leaders
From disruptive beginners to maturing market leaders
Teera Chanpongsang, Portfolio Manager, Fidelity Asia Fund
Stan Verhoeven From 2007 to 2011, Stan worked at Kempen & Co as a quantitative analyst and (exotic) derivatives trader. He joined RBS in London in 2011 and moved to PGGM in 2012, where he was responsible for research into alternative risk premia. In 2015, he joined the Factor Investing team at NN Investment Partners, where he develops and manages a broad range of rule-based strategies, in addition to being Lead Portfolio Manager of MAFO. He is a CFA charterholder and holds an MSc in Business Administration from Radboud University, Nijmegen.
ASIA'S MATURING LEADERS
I am a bottom-up stock picker and I use a mosaic approach to investing, where I search for companies with a potential for sustainable growth that trade below intrinsic value as mentioned above. This can take the form of improving fundamentals not reflected in the price, growth potential not fully understood, restructuring and turnaround opportunities, and cyclical turns in certain industries.
Can you discuss the fund’s approach and investment style?
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ASIA - AN INCOME POWERHOUSE
NEED TO KNOW
Propelled by rising income levels and the associated shift to a more sustainable consumption-led growth model, I have witnessed first-hand Asia grow up and mature from a frontier market to a region that is now a key contributor to global growth.
As a long-term investor in Asia, how has the region evolved since you first started out?
You manage the Fidelity Asia Fund. What is it designed to do?
The fund aims for consistent alpha generation based on a clear investment philosophy that has been tested across a variety of market environments. The strategy is to identify high quality stocks with robust business models and strong management teams, where the current stock price does not reflect these fundamentals.
I am then looking to hold these positions over the long-term to offer structural growth from Asian economies and outperform the benchmark. To achieve this, I rely on my deep experience in these markets, in addition to Fidelity’s extensive proprietary research capabilities.
I am sensitive to valuation and will not pay any price for growth. Meeting companies and in-depth discussions with Fidelity’s in-house analysts form the basis of my investment decisions. I emphasise company visits to assess profitability, the attractiveness of a business, the track record and suitability of the management structure and the level of returns given to shareholders. This underpins my conviction in stocks and helps build the portfolio with high-quality opportunities in the Asian markets.
Changing Asia:
Supor had a different goal - to establish its brand and stamp its presence on the industry map. In 2004, it listed on the Chinese domestic A-share market and by 2006, it had become the largest company in this area. Its economies of scale, brand visibility and market size as well as its distribution capabilities attracted global suitors. In 2006, the French appliance manufacturer SEB Groupe, which owns well-known international brands like Tefal, acquired a majority stake in Supor.
SEB brought its technical expertise to Supor, which then used its well-established domestic brand strength and expanded into categories like vacuum cleaners and air purifiers. Supor also became a part of SEB’s integrated production base and its Shaoxing facility in China is SEB’s largest small electrical appliance production site.
Looking at their use in social media and online purchases, it was evident that phone upgrades were here to stay.
In 1994, cookware and small appliances company Zhejiang Supor was set up in China. These were fragmented market segments with many players and little to distinguish one frying pan from another.
Could you provide an example of a company that you feel has managed this transition particularly well?
I have seen the changing consumption patterns in smartphone purchases evolve first hand over the last decade. Our on-the-ground research in China highlighted at an early stage the increasing penetration of smartphones and looking at their use in social media and online purchases, it was evident that phone upgrades were here to stay.
Asia’s consumption story is well-known - how have you played this theme at the company level?
Against this backdrop, I zoomed in on smartphone camera manufacturer Sunny Optical - identifying it as a small-cap opportunity with a strong product proposition with potential to grow into a future leader. Back in 2013-14, Sunny operated in a market dominated by Apple-focused Taiwanese player Largan Precision.
At the time, Largan ruled the 8 mega pixel (mp) lens arena and enjoyed substantial margins. It was clear that there was room for another player. Sunny took the challenge and scaled-up from 3mp to 8mp image quality. The smartphone market itself matured from single phone cameras to dual cameras and now tri-camera phones are gaining traction. Sunny is a clear beneficiary of this trend and has matured over recent years into a market-leader in the camera module space in the Android phone segment.
FUND SNAPSHOT
The rise of China’s local leaders
This change has also unfolded at ground level - where beginners have matured into market leaders and at the same time, I have witnessed the collapse of giants. What remains a key distinguishing factor is decisive and astute management teams that are willing and able to evolve in response to changing market dynamics.
Supor is now the largest Chinese cookware company and ranks second globally. It offers a unique growth profile as a combination of domestic presence and international revenues. Over the last decade, Supor has grown its revenues at a compounded annual growth rate of 17.5% and it continues to earn higher returns than industry averages.
Sunny’s prospects extend further into optoelectronics as it is uniquely positioned in the vehicular camera arena as well. Increasing adoption of sensing modules in automobiles, for example, will benefit both volume growth and price increase, potentially supporting its revenue growth.
Asia - an income powerhouse
Jochen Breuer, Portfolio Manager, Fidelity Asian Dividend Fund
This is generally supported by a more progressive regulatory environment. For example, in China we are generally seeing improving dividend pay-outs, especially by the state-owned enterprises. Another example is in Korea, where companies face tax penalties for sitting on too much cash and tax incentives for putting this cash to work for shareholders. As a result, we have seen superior dividend growth in Asia versus other markets in recent years.
Crucially, dividends are supported by strong balance sheets, which can be traced back to the 1997 Asian financial crisis. During this period companies learned a hard lesson in what happens if you do not allocate capital correctly and borrow for domestic ventures in foreign currency. Consequently, Asian companies now enjoy some of the most solid and stable balance sheets in the world, creating a strong foundation for dividend pay-outs.
Lessons from 1997
In running the Fidelity Asian Dividend Fund, I aim to provide investors with an attractive dividend-based total return, whereby they enjoy capital growth driven by the structural growth opportunities in Asia, but via some of the region’s most solid and stable companies with developed capital allocation policies. As a result, investors should expect lower volatility and drawdown relative to the broader market. The fund also aims to provide investors with an attractive yield and an underlying dividend that grows above the rate of inflation.
We concentrate the portfolio into approximately 40 names and construct it with no reference to an underlying index. I aim to hold position sizes of 1% - 5% based on factors such as downside risk, company fundamentals, liquidity and dividends. All of this is managed with a strict valuation framework that looks to widen the margin of safety for the underlying holdings in the portfolio.
We have seen superior dividend growth in Asia versus other markets in recent years
by a combination of investor demand, regulatory change and more disciplined capital allocation by companies as they mature. Whilst growth is still a key goal for Asian companies, management are rewarding shareholders via increasing dividends and buybacks.
sia has typically been viewed as an investment destination for those seeking growth and willing to accept higher bouts of volatility. Over the last few years we have seen significant dividend policy developments for Asian companies, driven
A
Ultimately, I see my role as portfolio manager in three parts: stock picker, risk manager and income generator.
Heritage in Asia
Source: Fidelity International, 30 September 2019. Data is un-audited. Research professionals include equity analysts and associates.
49
China offshore manager by equity AUM*
#2
Years of doing business in Asia
Equity research analysts in Asia Pacific ex Japan
40
Asian regional manager by equity AUM*
Key facts
Fidelity’s research footprint across the region
1 Portfolio Manager 4 Research Professionals 1 Trader
16 Research Specialists
AUM in Asia Pacific ex Japan
£58bn
QFII quota, amongst the highest allocated to a foreign buy-side asset manager
£975m
companies under active research coverage in Asia Pacific ex Japan
725
Dalian
Shanghai
3 Portfolio Managers
Taiwan
13 Research Specialists
Delhi
1 Portfolio Manager 8 Research Professionals
Mumbai
6 Portfolio Managers 9 Research Professionals 2 Shorting Analysts
Singapore
4 Portfolio Managers 8 Research Professionals 1 Technical Analyst
Sydney
9 Portfolio Managers 3 Multi-asset Portfolio Managers 13 Research Professionals 1 Derivatives Analyst 10 Traders
Hong Kong
Source: Fidelity International. 30 June 2019, Assets quoted include Assets under Administration. AMAC = Asset Management Association of China; WFOE = Wholly Foreign Owned Enterprise; *Broadridge (formerly Lipper) 31 August 2018, data includes active funds only; China Equity funds are those listed in Broadridge sector equities Greater China. Includes funds from all domiciles that Broadridge cover which currently excludes US but does include some Asian domiciled funds. AUM and QFII quota figures calculated in GBP based on exchange rates as at 30 June 2019.
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Strategies to access Asia
Click on a fund name to view the information on that fund
Fund
12.8%
Index
9.3%
Excess
+3.5%
Past performance is not a guide to the future. Source: Morningstar, 31 October 2019. Basis: bid-bid, income reinvested in GBP. The funds’ primary share class according to the IA is shown. Holdings can vary from those in the index quoted. For this reason the comparison index is used for reference only. All OCFs are estimated for the W GBP share classes and actual expenses may be higher in the future. These figures may also vary from year to year.
Discrete five year period performance overview
For more information on Fidelity’s fund range please visit professionals.fidelity.co.uk
Fidelity Asia
Fidelity Asia Pacific Opportunities
Fidelity Emerging Asia
Fidelity Asian Dividend
Fidelity China Consumer
Teera Chanpongsang
Portfolio Manager since 1 January 2014
Over 24 years of investment experience
Annualised performance over tenure
93%
Peers beaten
Fund details
Fund launch
13.10.84
Fund size
£3bn
Holdings
Comparative index
80-100
MSCI AC Asia ex Japan
Ongoing charges
0.94%
as at 30.09.2019
• A core fund of quality well-run companies that are positioned to benefit from ongoing structural change and reforms across the region.
• Teera adopts a disciplined investment process to identify stocks trading below their intrinsic value. He looks for companies where improving fundamentals are not reflected in the price, or where the growth potential is not fully understood.
• Teera also favours restructuring and turn around opportunities, as well as cyclical turns in certain industries to find overlooked potential.
24.09.14
£465m
0.90%
25-35
MSCI AC Asia Pacific ex Japan
16.3%
9.2%
+7.1%
100%
Anthony Srom
Portfolio Manager since 24 September 2014
Over 21 years of investment experience
• Anthony looks for weak sentiment and low valuations, where fundamentals are strong and improving relative to consensus expectations.
• If a stock ticks all three boxes – and liquidity is ample and correlation with other holdings low – he is willing to take a significant active position.
• A high conviction stockpicking approach which brings together the region’s best investment ideas in a concentrated portfolio.
11.07.11
£91m
60-90
MSCI Emerging Markets Asia
12.9%
9.9%
+3.0%
96%
Dhananjay Phadnis
Portfolio Manager since 1 November 2013
Over 17 years of investment experience
• A key characteristic of Dhananjay’s focus is moat stocks. In this approach he looks for companies with sustainable growth prospects with the ability to reinvest at attractive rates.
• Dhananjay favours industry consolidators with improving returns and is cautious on stocks with high regulatory risk.
• Focused exposure to Asia’s true emerging economies such as ASEAN, China and India through a portfolio of high quality growth stocks.
19.08.13
£83m
30-50
MSCI AC Asia Pacific ex Japan High Dividend Yield
10.5%
7.5%
88%
Jochen Breuer
Portfolio Manager since 1 October 2016
Over 11 years of investment experience
• Jochen looks for companies with a good track record of capital allocation and an attractive yield struck off a dividend that will be well-supported throughout a range of economic scenarios.
• Combining characteristics like strong balance sheets and predictable cash flows with a strict valuation discipline also has the potential to provide strong relative downside protection.
• An unconstrained approach which aims to deliver a dividend-focused total return with an emphasis on capital preservation.
14.09.11
£157m
MSCI China
6.7%
2.2%
+4.5%
77%
Hyomi Jie
Portfolio Manager since 1 August 2017
Over 14 years of investment experience
• Hyomi Jie looks for solid cash generative businesses based on bottom-up research and value-chain analysis, as well as looking for incremental change that will drive an improvement in a company’s earnings.
• The portfolio exhibits a structural growth bias and will tend to be more expensive than the broader China market as growth, and especially certainty of growth, comes at a premium.
• Investing in companies related to what China consumers buy and the way they consume; trends underpinned by the long-term structural drivers of China’s growing middle class, rising income, increasing urbanisation and technological innovation.
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Name xxxxxx xx xxxxxxx
There are a number of industries where local Chinese firms are becoming the leading brand or premium product due to having a deeper understanding of the local market
Many consumers have that TV or fridge, and they do not need another. Now people want to use their hard-earned cash for experiences such as eating out and travel, and for better products. This combined with higher income, better quality of living, higher sophistication and greater choice, is driving a change in consumer trends.
These same consumers are now looking to trade up, which means consumer premiumisation and greater brand awareness. The interesting nuance is that there are a number of industries where local Chinese firms are becoming the leading brand or premium product due to having a deeper understanding of the local market and being able to cater to local customs and taste.
Trading up
Premiumisation is a trend that extends right across the consumer sector, from beer to home appliances to fashion, and we are just at the start of the journey. We are moving from ‘Made in China’ to ‘Designed and Created in China’.
Another company is JNBY which has one of the biggest shares among domestic designers in the affordable luxury market and has successfully been able to adapt to fast changing fashion trends. JNBY has also built a loyal and wealthy following here with nearly three million people in its membership programme: shoppers who still spend even when the economic climate is a little weaker. JNBY’s WeChat account is a key way to reach customers; they invite everyday customers to model their clothes and send in pictures. The company then reposts photos as a way to interact with their shoppers and gain authentic promotion at the same time.
From Made in China to Designed in China
international businesses setting up in China to take advantage of low wages and a large workforce, but now we see local companies adapting and innovating to become industry leaders in their own right and cater for a local population with greater earnings power.
he consumer story has been a dominant theme in China for some time, but the dynamics of this are changing. Since the turn of the century China has seen tremendous growth in wealth due to better paid jobs. This was initially led by
T
This first wave of the consumer story saw people simply buying everyday goods like TVs, fridges and cars. While there are still vast untapped markets here, such as rural China, we are also entering a new stage of consumption - services and premiumisation.
International brands continue to be popular in areas like autos. There are also a small number of product categories which just fail to gain customers’ trust, especially infant milk formula and wine. It has been interesting to note recently that one of China’s biggest dairy companies, Mengniu Dairy, announced a bid to acquire 100% of Bellamy’s, a popular Australian organic infant formula company. This will enable Mengniu Dairy to see the economic benefits of selling a premium foreign brand to domestic consumers.
On the whole, however, Chinese consumers have a growing appetite for local brands as they become increasingly affluent and proud of their own culture. People are willing to pay more for higher quality everyday items like tissues and paper made of organic materials like bamboo.
Homegrown brands
This has not gone unnoticed, and Chinese companies are responding by implementing multi-pricing strategies. For example, China’s largest brewer, CR Beer, now has a number of brands in its portfolio that tap into different market segments and generate a desire for customers to purchase the next tier up.
Domestic fashion companies are also taking notice and are building premium lines for their brands. Sports company Li Ning, a company well-known in China for functional sportswear, has developed a high-end streetwear line that debuted during New York Fashion Week in 2018. This approach has helped boost sales and its share price.
Hyomi Jie, Portfolio Manager, Fidelity China Consumer Fund
Hyomi Jie takes a closer look at the strategy of successful domestic designer brand JNBY, which is nurturing a growing audience in the affordable luxury market
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