Fidelity Closed-End Funds
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M A R T E N & C O Review of investment trust range | Investment trusts 27 July 2017 Fidelity Closed-End Funds This is a regular publication looking at Fidelity and recent Fidelity Asian Values perf. developments in three of its investment trusts – Fidelity Asian Time period 30/06/2012 to 30/06/2017 Values, Fidelity Japanese Values and Fidelity Special Values. 260 220 In this issue: 180 It is now over two years since Nitin Bajaj was appointed as manager of Fidelity Asian Values in April 2015. Nitin’s 140 appointment has been good for the trust – it has markedly 100 outperformed its peer group and benchmark since Nitin took up 60 the reins. Year-to-date, the trust has faced a headwind as large- 2012 2013 2014 2015 2016 2017 cap stocks (in which the trust has an underweight position) have Price (TR) NAV (TR) Blend. Ind. (TR) outperformed, but its absolute returns (the trust’s prime focus) Source: Source: Bloomberg, Morningstar, Marten & Co. have nonetheless been very strong. Nitin expects that in time this headwind will reverse and the trust will benefit. Fidelity Japanese Values perf. Fidelity Japanese Values has performed strongly this year as Time period 30/06/2012 to 30/06/2017 investors have switched their focus back towards growth stocks. When we last wrote, the trust’s manager, Nicholas Price, felt that 260 weak Japanese earnings were close to their nadir; these have 220 also recovered strongly. Despite these improvements, Nicholas 180 thinks that shareholder returns (also at a high) still have room to 140 grow. 100 60 With market valuations close to all-time highs, Fidelity Special 2012 2013 2014 2015 2016 2017 Values’ manager, Alex Wright, is sounding a note of caution and Price (TR) NAV (TR) Topix (TR) has moved the UK-focused trust to a circa 3% net cash position (a more natural level is 10% net borrowings). However, with his Source: Source: Bloomberg, Morningstar, Marten & Co. contrarian style, Alex is currently overweight more cyclical stocks as this is where he sees value. He is underweight ‘expensive defensives’, which he believes will suffer as interest rates rise. Fidelity Special Values perf. Time period 30/06/2012 to 30/06/2017 300 260 220 Special feature: Fidelity Asian Values 180 140 In this special feature, we provide a recap of Nitin’s investment 100 approach, an update on his market outlook and two case studies of 60 stocks he has added to the trust’s portfolio: Power Grid Corporation 2012 2013 2014 2015 2016 2017 of India and TISCO Financial Group. Price (TR) NAV (TR) MSCI UK Value Source: Source: Bloomberg, Morningstar, Marten & Co. NB: this marketing communication has been prepared for Fidelity international by Marten & Co (which is authorised and regulated by the Financial Conduct Authority) and is non-independent research as defined under the Financial Services Act 2000 (Financial Promotion) Order 2005. It is intended for use by investment professionals as defined in article 19 (5) of that Order. Marten & Co is not authorised to give advice to retail clients and, if you are not a professional investor, or in any other way are prohibited or restricted from receiving this information you should disregard it. Charts and data are sourced from Morningstar unless otherwise stated. Please read the important information at the back of this document. M A R T E N & C O Fidelity Closed-End Funds Contents 3 Recent developments at Fidelity 3 Fidelity International 3 Fundamental investment process 4 Previous research publications 5 Fidelity Asian Values 5 Two years on and all is well 5 Long-term growth from small-cap Asia ex Japan 6 Asset allocation 7 Performance 9 Fidelity Japanese Values 9 Reasons to be cheerful 9 Long-term growth from Japanese-listed equities 10 Despite challenges, Japanese corporates continue to prosper 10 Asset allocation 11 Performance 13 Fidelity Special Values 13 Sounding a note of caution 13 UK-focused special situations 14 Bifurcated markets are a headwind for the value investor 14 The Trump reflation trade has reversed this year 14 The Current environment remains challenging for the value investor 14 Asset allocation 16 Performance 17 Special feature: Fidelity Asian Values 17 Nitin Bajaj 17 Investment approach – smaller companies with a value bias 18 Manager’s outlook 19 Power Grid Corporation – a case study 20 TISCO Financial Group – a case study Review of investment trust range │ 27 July 2017 Page 02 M A R T E N & C O Fidelity Closed-End Funds Recent developments at Fidelity Fidelity International has been celebrating being highly commended in the 2017 Money Observer Investment Trust Premier Group Awards. With Fidelity European Values celebrating its 25th anniversary in November 2016, Fidelity has now been running investments trusts for over 25 years. Fidelity European Values’ portfolio manager, Sam Morse, also celebrated his fifth anniversary, of manging the trust, at the end of last year, while Alex Wright, is due to celebrate his fifth anniversary of managing Fidelity Special Values later this year. Fidelity is committed to Investment Trusts over the long term and to having the right managers who can continue this success. Fidelity International Fidelity International has Fidelity International is a global investment manager that has substantial expertise in US$279.1bn of assets under equity and fixed income investments, as well as other asset classes. It had management. It has a US$303.3bn (£233.4bn) of assets under management, as at 30 June 2017, and offers significant presence in an impressive range of funds to both private and institutional investors. Fidelity London, Hong Kong, Tokyo, maintains a global network of fund managers, but has a significant presence in Singapore and Sydney. London, Hong Kong, Tokyo, Singapore and Sydney. Managers are supported by an extensive analytical team that also has a global footprint (Fidelity has a network of around 390 investment professionals located in 12 countries) and Fidelity is renowned for both its bottom-up stock-picking investment process and its focus on long-term performance. Fundamental investment process Portfolio managers are Fidelity’s managers, while having access to extensive macroeconomic analysis and incentivised based on their market-cycle information, do not have top-down macro views imposed upon them. long-term performance. Instead, asset allocation decisions reside with portfolio managers whose incentive schemes are primarily based on the longer-term performance of the funds that they manage. Managers and analysts will typically form opinions taking a three-to-five-year view. They maintain projections over this time frame and are not encouraged to follow fads or chase trends. Core to Fidelity’s approach is that, irrespective of the strategy (growth, value, etc.), each investment opportunity is researched in depth, from the bottom up, with a view to ensuring that every holding is a sustainable longer-term investment. Following this approach, consistently, has been a pillar of Fidelity’s success during the last 40 years. Review of investment trust range │ 27 July 2017 Page 03 M A R T E N & C O Fidelity Closed-End Funds Previous research publications Additional information is Readers interested in further information about Fidelity Asian Values, Fidelity available at the fund Japanese Values and Fidelity Special Values may wish to read our previous reviews manager’s website, of Fidelity’s closed-end funds range, as detailed in Figure 1. You can read the notes https://www.fidelity.co.uk/ by clicking on them in Figure 1 or by visiting our website. investor/investment- trusts.page Figure 1: Marten & Co. previously published research on Fidelity’s investment trusts Date Company profiles Special feature 15 October 2015 FAS, FJV, FSV FAS 20 May 2016 FAS, FJV, FSV FJV 2 February 2017 FAS, FJV, FSV FSV Source: Marten & Co. 234567891011121314 Review of investment trust range │ 27 July 2017 Page 04 M A R T E N & C O Company profile | Investment companies 27 July 2017 Fidelity Asian Values Sector Asia Pacific Ex Jap Two years on and all is well Ticker FAS LN Base currency GBP Since Nitin Bajaj’s appointment in April 2015, Fidelity Price 377.00p Asian Values (FAS) has markedly outperformed its NAV 410.84p peer group and benchmark. This is despite relative Premium/(discount) (8.2%) Yield 1.2% performance suffering this year, as large-cap stocks (where it is underweight) have outperformed smaller companies (FAS’ absolute returns have nonetheless Share price and discount Time period 30/06/2012 to 30/06/2017 been very strong). Over the long term, Nitin expects 450 4.0 that this will reverse and the trust will benefit. 400 0.0 350 (4.0) 300 (8.0) Long-term growth from small-cap Asia ex Japan 250 (12.0) 200 (16.0) 150 (20.0) FAS aims to achieve long-term capital growth by investing in a 2012 2013 2014 2015 2016 2017 portfolio of companies that are listed on the stock markets of the Asia ex Japan region. Nitin Bajaj, the portfolio manager, takes a value- Price (LHS) Discount (RHS) orientated stock-picking approach, based on fundamental research Source: Source: Morningstar, Marten & Co. that is coupled with an absolute return mindset. The portfolio is overwhelmingly focused on smaller-cap companies: this is where he sees the greatest opportunity to find valuation anomalies, given that Performance over five years this section of the market is less well-researched. Time period 30/06/2012 to 30/06/2017 260 Nitin seeks to identify investments that he believes can return 50% 220 over a three to five-year period, while looking to avoid sharp capital 180 losses. In addition to valuation, the research process places 140 considerable emphasis on a company’s financial strength; ability to generate cash-flows; competitive advantages; business prospects; 100 and earnings potential.