MoneyLetter Eyes Emerging Asia

09/04/2020 5:00 am EST

Focus: GLOBAL

Brian Kelly

Founder, BKCM, LLC

Fidelity Emerging Asia (FSEAX) invests primarily in stocks within Asian emerging markets, and those economically tied to these markets, notes Brian Kelly, mutual fund expert and editor of MoneyLetter.

Current manager Xiaoting Zhao has had full charge of this fund since January 1, 2020, but began running the fund with prior manager John Dance six months earlier.

Zhao also manages the information technology and communication services sleeves of a number of other Fidelity emerging markets funds.

Zhao does not have to adhere to any strict parameters in managing the fund. His approach has been to focus on companies with strong long-term growth prospects, strong competitive advantages, and the potential to compound earnings over the long term.

He also favors industry leaders, companies with solid free cash flow, strong business models, and capable, focused management teams.

Zhao targets certain thematic opportunities as well. He looks for companies he identifies as disruptive to existing business functions, for example.

He also at times has selected cyclical investments, although he has felt, for the most part, these have become increasingly risky in this year’s market environment. He also looks for certain macro-oriented opportunities.

Recently, these have included the move to 5G wireless networks; opportunistic investments in stocks overly beaten down by coronavirus concerns, but that still have good recovery potential; working from home and remote communication; and gaming and entertainment.

Underlying the investment strategy is the philosophy that markets are not wholly efficient, due to investor psychology, inefficient information distribution, and other factors. This can cause stock mispricing — leading to opportunities for active portfolio management. The manager, backed by an extensive global research team, employs in-depth fundamental research to find these opportunities.

The construction of the portfolio is driven by bottom-up stock selection, and often, industry and country allocations will deviate from the benchmark MSCI AC Asia ex-Japan Index.

At the end of June there were about 100 positions in the fund, with about 40% of assets concentrated in the top ten stocks.

Compared to the benchmark, the fund was overweight in information technology, consumer discretionary, and health care, and underweight in financials, industrials, and consumer staples. The majority of assets (85%) were in emerging Asia nations, with 15% in developed markets.

The fund’s largest position is Tencent Holdings, an internet conglomerate, which has benefited from being the leading provider of instant messaging in China.

It has also profited from earnings potential from its online gaming business. The stock has gained 45.4% this year. The third holding is Pinduoduo (up 312.2%) one of China’s largest e-commerce platforms.

Zhao notes that the firm offers a “‘social shopping’ business model that offers greater discounts when customers encourage their contacts to shop the site and join in on a deal.” He adds, “I think this company offers an innovative way for value-conscious shoppers to use their social media networks to save money.”

The other big gainer is the fourth holding, Bilibili (up 187.7%), which has been described as the YouTube of China. It has expanded its customer base beyond its initial younger demographic to older consumers via an expanded content base.

Under previous management, Fidelity Emerging Asia performed well in recent calendar years compared to funds in its category, only once dipping below the average group performance since 2012.

This year, under the guidance of Zhao, fund results — though negative — held up well during the coronavirus-driven downturn in early 2020 compared to the benchmark index.

Looking at the year-to-date through the end of July, the fund has recouped its losses and is registering a gain of 28.9%, outpacing 92% of its Morningstar category peers.

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