Fidelity Asian Values plc (LON:FAS) has announced its final results for the year ended 31 July 2023.
Financial Highlights:
- The Board of Fidelity Asian Values PLC (the “Company”) recommends an annual dividend of 14.50 pence per share.
- The net asset value (NAV) total return increased by 11.4% for the year ended 31 July 2023, outperforming the Company’s Comparative Index (MSCI All Countries ex Japan Small Cap Index) which rose by 7.5% over the same period.
- The ordinary share price total return for the reporting year was an increase of 17.3%.
- The Company maintains net gearing of approximately 4.9%, reflecting opportunities found across the region.
CHAIRMAN’S STATEMENT
This is my last Annual Report for the Company, having served as your Chairman for nine years this December. During that time, your Company has gone through significant changes. Having begun as a large-cap Asia fund, it now operates in a very different area, primarily investing in smaller companies with a focus on value stocks. As I prepare to retire from the Board, I have taken the opportunity to look back at the impact of these changes, beginning with the selection of Nitin Bajaj as your Portfolio Manager in April 2015. From Nitin’s appointment until 31 July 2023, your Company has produced a Net Asset Value (“NAV”) total return of 112.6% and a share price total return of 129.0%, outperforming the Comparative Index (MSCI All Countries Asia ex Japan Small Cap Index (net) total return (in sterling terms)) of 72.9% and also the peer group average total returns of 87.5% (NAV) and 117.1% (share price). During this time, the discount to NAV has narrowed from the mid-teens to low single digits (occasionally trading at a premium, which is testament to a very clear and well-supported investment proposition), and we have also been able to deliver a significant increase in the dividend, both of which have been to the long-term benefit of shareholders.
Coming back to the year just ended, it is pleasing to report a year of strong performance, in which your Portfolio Manager’s strong stock selection has been complemented by a market environment that has favoured the Company’s quality and value-focused investment approach. In the year to 31 July 2023, the NAV total return was 11.4%, while the Comparative Index total return was 7.5% over the same period. After experiencing negative performance in the last financial year, the share price has rebounded strongly, producing a total return of 17.3% as the discount to NAV has narrowed from 9.8% at the start of the year to 5.3% at the end. This is particularly notable given the general widening in investment trust discounts during the year. Nitin talks more on the drivers for the positive performance in his Portfolio Manager’s Review below.
DUE DILIGENCE 2023
In March 2023, your Board took an in-person due diligence trip to Asia for the first time since 2018. We travelled first to Singapore, where the portfolio management team is based, and spent time with Nitin, Ajinkya Dhavale, who has now been the Assistant Portfolio Manager of the Company for three years, and colleagues, including Fidelity’s Head of Equities for the Asia Pacific region. We also met with some locally based companies to see how Fidelity’s meetings with them are run and how they form part of the stock picking process. We then went to South Korea for three days of company visits. What stood out to us as a Board was the quality of the management teams we met in Korea and the depth and calibre of the businesses; although these companies are not the largest, their global presence was really startling. One example was Hankook Tire, a provider of e-vehicle tyres and a growing contributor to profits. It has recently taken over from Michelin as the official supplier for the Formula E motor racing competition. It was most interesting to observe Nitin and Ajinkya as they interviewed companies, and to see during a process of incisive questioning, the very obvious mutual respect in which they hold both management and each other. This really underpins our continued confidence in the team that manages your – and our – investment in the Company.
DISCOUNT MANAGEMENT AND SHARE REPURCHASES
After the spike in market volatility seen in the first half of 2022 when Russia invaded Ukraine, conditions continued to be unsettled into the first half of the Company’s financial year ended 31 July 2023. Between August and November 2022, the Board approved the repurchase of 569,000 ordinary shares (0.8% of the issued share capital) for holding in Treasury, at a cost of £2,618,000. Since then and up to the date of this report, no shares have been repurchased, given an encouraging narrowing of the Company’s discount even as peers’ and broader investment trust average discounts have widened.
Your Board closely monitors the Company’s share price discount to NAV and will undertake active discount management where necessary, the primary purpose of which is to limit discount volatility. Repurchases of ordinary shares are made at the discretion of the Board, within guidelines set by it and considering prevailing market conditions. Shares will only be repurchased in the market at prices below the prevailing NAV per ordinary share, thereby resulting in an enhancement to the NAV per ordinary share. In order to assist in managing the discount, the Board has shareholder approval to hold in Treasury any ordinary shares repurchased by the Company, rather than cancelling them. Any shares held in Treasury would only be reissued at NAV per ordinary share or at a premium to NAV per ordinary share.
DIVIDEND
Your Portfolio Manager invests principally for capital growth, but his value-oriented investment style tends to lead him towards unleveraged, cash-generative businesses that may themselves be able to pay rising dividends. As such, the Company’s revenue return was 15.17 pence per ordinary share (an increase of 6.8% from the prior year revenue return of 14.21 pence per ordinary share). Last year your Board declared a substantially increased dividend of 14.00 pence per share (2021: 8.80 pence). While we noted at the time that shareholders should not assume that such dividends would continue in the future, we are very pleased to be able to recommend another increase in the dividend for 2023, to 14.50 pence per share which will be paid to shareholders on 6 December 2023. The Board is again recommending that almost all of the income earned be paid out as a dividend. We would reiterate, however, that income is an output rather than an aim of the investment process, and that no guarantees can be offered as to the level of any future dividends.
GEARING
As I noted in last year’s Annual Report, the Company’s level of gross gearing is directly proportional to the investment opportunities that your Portfolio Manager sees. When Nitin is optimistic about opportunities and he and his team generate ideas in response to market conditions, then the Company will be more geared. As such, it is notable that gearing during the year reached the highest level we have seen during Nitin’s tenure, ending the year with gross gearing at 11.7%, up from 4.4% as at 31 July 2022; net gearing was 4.9% (2022: nil). As Nitin notes in his review below, gearing has been increased largely in response to a number of particularly interesting investment opportunities in China, which have been out of favour with investors. The Company’s gearing is achieved using contracts for difference (“CFDs”); we have no bank borrowings or structural long-term debt. We regularly review the use of CFDs and have again concluded that they remain a more efficient and flexible form of financing than either secured or unsecured debt, as well as enabling your Portfolio Manager to be fleet of foot in the deployment of gearing. We are fortunate that Fidelity has the infrastructure and capability to allow the use of CFDs in the portfolio; few other management groups can offer this.
USE OF SHORT POSITIONS
A few years ago, the Board approved giving your Portfolio Manager the ability to ‘short’ stocks, and we are pleased to report that this approach is adding value and has been a positive contributor during the year. A short position is taken on the view that the price of a stock or the value of an index will go down rather than up. Ajinkya has extensive experience in shorting, and Nitin is encouraged by the availability of such opportunities in the market today, given a real disparity between the prospects of the smaller value stocks that he favours and some of the large and mega-cap stocks in Asia that he thinks are vulnerable. Short positions are limited to a maximum of 10% of the portfolio and do not usually exceed ten stocks. While there is no intention to increase the limit, the combination of Ajinkya’s (and Fidelity’s) competence and the current market environment means that Nitin may maintain and even opportunistically increase the short exposure, within the investment limits. Total short exposure as at 31 July 2023 was 3.4% (2022: 2.2%).
ENVIRONMENTAL, SOCIAL & GOVERNANCE (ESG)
There has been something of an ESG backlash in recent times. Your Company is not an ‘ESG fund’, but good governance and social behaviour and a strong regard for the environment have always been fundamental to the way Nitin invests. Assessing ESG in Asia can be quite different from that in developed economies. Smaller Asian companies may not have the resources to report on ESG as companies do in the West, so the strength and depth of Fidelity’s large analyst team in the region is invaluable in making properly thought-through assessments in the process, both on a fundamental and an ESG basis.
In the Portfolio Manager’s Review, Nitin shares the example of Shriram Finance as a position that has not only added value to the portfolio, but is also a well-governed company doing social good as well as mitigating environmental impact. Shriram Finance was formed from the merger of two companies offering affordable finance on used commercial vehicles and two-wheelers. It serves communities and micro, small and medium enterprises that would otherwise face high interest costs from unregulated lending, enabling them to grow their businesses without the unaffordable expense or the environmental impact of scrapping old vehicles and building new ones.
BOARD OF DIRECTORS AND BOARD SUCCESSION
Grahame Stott, having served nine years on the Board, retired as a non-executive Director and Chairman of the Audit Committee at the Company’s AGM in November 2022. At the same time, we welcomed Hussein Barma as a new non-executive Director and Chairman of the Audit Committee. Hussein is both a qualified lawyer and a chartered accountant and has considerable experience in the listed company sector in the UK and long familiarity with Asia, as well as a good eye for detail. Clare Brady will be stepping up as Chairman as I step down and will continue to bring her invaluable experience and skills to the Board. She will be replaced as Senior Independent Director by Matthew Sutherland.
As noted in last year’s Annual Report, Michael Warren will shortly have served nine years on the Board, but as part of the Board’s succession plan, he has agreed to stay on until the 2024 AGM in order to ensure a good handover of the institutional and historical knowledge of the Company. We have already begun the process of selecting his replacement and will make a further announcement in due course. We will continue to maintain a Board with a diversity of backgrounds and an appropriate mix of skills to ensure the Company’s continued good governance.
MARKET OUTLOOK
The outlook for financial markets globally remains uncertain in light of the ongoing war in Ukraine and US/China tensions. However, while the Western world continues to struggle with the highest levels of inflation and interest rates in nearly a generation, in many Asian markets, the economic environment is very different, and on a relative basis there are particularly good opportunities compared to the West. The structural case for investing in developing economies remains extremely strong: attractive demographics, a burgeoning middle class providing new markets for goods and services, and economies that can grow more rapidly. This is the backdrop against which your Portfolio Manager looks to buy companies, but it is not what drives the investment process, which is fundamentally to buy good companies, run by good people and at attractive valuations. As we enter our new financial year, Nitin continues to find good companies he wants to buy and I am therefore optimistic that this, combined with a positive market backdrop in Asia will continue to provide opportunities for investors in the coming year.
I wish him, the team and the Board every success for the future and would also like to thank all our shareholders for their continued support.
ANNUAL GENERAL MEETING
The AGM of the Company will be held at 11.00 am on Wednesday, 29 November 2023 at 4 Cannon Street, London EC4M 5AB (nearest tube stations are St Paul’s or Mansion House) and virtually via the online Lumi AGM meeting platform. Full details of the meeting are given in the Notice of Meeting in the Annual Report.
For those shareholders who are unable to attend in person, we will live-stream the formal business and presentations of the meeting online.
Nitin Bajaj, the Portfolio Manager, will be making a presentation to shareholders highlighting the achievements and challenges of the year past and the prospects for the year to come. He and the Board will be very happy to answer any questions that shareholders may have. Copies of his presentation can be requested by email at [email protected] or in writing to the Secretary at FIL Investments International, Beech Gate, Millfield Lane, Lower Kingswood, Tadworth, Surrey KT20 6RP.
Properly registered shareholders joining the AGM virtually, will be able to vote on the proposed resolutions. Please see Note 9 to the Notes to the Notice of Meeting in the Annual Report for details on how to vote virtually. Investors viewing the AGM online will be able to submit live written questions to the Board and the Portfolio Manager and we will answer as many of these as possible at an appropriate juncture during the meeting.
Further information and links to the Lumi platform may be found on the Company’s website at www.fidelity.co.uk/asianvalues. On the day of the AGM, in order to join electronically and ask questions via the Lumi platform, shareholders will need to connect to the website https://web.lumiagm.com.
Please note that investors on platforms, such as Fidelity Personal Investing, Hargreaves Lansdown, Interactive Investor or AJ Bell Youinvest, will need to request attendance at the AGM in accordance with the policies of your chosen platform. They may request that you submit electronic votes in advance of the meeting. If you are unable to obtain a unique IVC and PIN from your nominee or platform, we would welcome your online participation as a guest. Once you have accessed https://web. lumiagm.com from your web browser on a tablet or computer, you will need to enter the Lumi Meeting ID which is 109-975-634. You should then select the ‘Guest Access’ option before entering your name and who you are representing, if applicable. This will allow you to view the meeting and ask questions, but you will not be able to vote.
KATE BOLSOVER
Chairman
11 October 2023
PORTFOLIO MANAGER’S REVIEW
QUESTION
How has the investment Company performed in the year to 31 July 2023?
ANSWER
Over the year ended 31 July 2023, the Company’s net asset value (“NAV”) total return was +11.4%, outperforming the Comparative Index, the MSCI All Countries Asia ex Japan Small Cap Index (net) total return (in sterling terms) which rose by +7.5%. The share price total return for the year was +17.3% due to a narrowing of the Company’s discount.
Performance for the reporting year can be attributed primarily to stock picking, with our country allocation being a headwind to performance.
Our investment process is driven by owning good businesses which are run by management teams whom we trust and investing in them only when we have ample margin of safety. This often leads us to take contrarian positions as it is easier to find undervalued businesses in countries which are out of favour with investors. Following this philosophy, we have a significant percentage of the Company’s portfolio in China and are underweight in Taiwan and India compared to the Index. Accordingly, while country selection would be a headwind to performance, this was more than offset by good stock selection in line with our investment philosophy, especially in our three key markets of China, India and Indonesia.
Over the longer-term (since 2015 when the Board changed the strategy of the Company to invest more in smaller companies), the NAV (post fees) has risen by +112.6% versus the MSCI All Countries Asia ex Japan Small Cap Index’s (net) total return of +72.9% and the MSCI Asia ex Japan Large Cap Index’s total return of +62.2%, both in sterling terms.
QUESTION
China’s reopening from COVID lockdowns has had a significant impact on the performance of global markets this year. How do you feel about China and the economic recovery?
ANSWER
When China reopened, there was a lot of optimism in the market, but it turned out that the recovery has been uneven and softer than expected in many areas. The property downcycle, geopolitics, the reining in of local government spending and increasing centralisation of political power has resulted in China being one of the few markets where profitability has not recovered post COVID. Consequently, there is a heightened perception of risks around Chinese companies, leading to a decline in stock prices. We agree with some of the reasons for negative sentiment around China and understand that it is difficult to predict when the economy will turn around.
However, we should also be cognisant of the strengths of the country’s economy, its people and its businesses. It is the second largest economy in the world and consumption is expanding as a share of its GDP. It houses a significant part of the global supply chains of most products we use in our daily lives. Hence, we feel that these negative macro factors are transitory (as they were in the US post the housing crises of 2007-10 or in India post the policy paralysis of 2012-13). Good businesses will not only survive but are likely to be in a stronger competitive position post this downturn and by taking market share from their weaker peers. This is probably the best time to be investing in China as we are able to buy good businesses when both expectations and valuations are low.
Thus, there are good opportunities in China at the moment, which in turn has seen our combined exposure to China and Hong Kong increase to about 38%.
QUESTION
Looking beyond China, where do you see value in stocks in the Asian region and how are you reflecting this in the Company’s portfolio?
ANSWER
Our investments are based on our bottom-up fundamental analysis of companies and their businesses and our exposure to countries is primarily a result of our stock selection.
Looking at the portfolio beyond China, we are excited about the opportunities we see in Indonesia (around 14% exposure). Our holdings there are a mix of banks and consumer-facing companies which are best-in-class operators with high Returns on Equity (“ROEs”) and reasonable valuations. For example, we own shares in two banks – Bank Mandiri (Persero) and Bank Negara Indonesia (Persero). The former has seen a sustained improvement in asset quality through better underwriting and risk management since 2016 under a new management, while the latter is going through restructuring with the same team of people who turned around Bank Mandiri (Persero). The portfolio is invested in the country’s leading ceramic tiles manufacturer Arwana Citramulia, a business with long-term growth potential and a strong management team. Among a few other positions, we also have exposure to the country’s KFC master franchisee, Fastfood Indonesia, which again has structural growth opportunity to expand as well as enhance operational efficiencies.
In India, while it has not been easy to find businesses with a suitable margin of safety, we are still able to identify specific stocks that fit our criteria. Our positions in India centre around financial sector companies as they are growing more quickly, have strong balance sheets and are available at prices which offer a good margin of safety. We have studied these businesses for over 15 years and trust the management teams who have delivered substantial shareholder value over time.
QUESTION
Your mandate is to look for smaller companies to invest in. Can you give some examples of how smaller companies outperform?
ANSWER
We invest in a subset of these smaller companies – in what are popularly called ‘value’ stocks. Value stocks are classified as companies that are currently trading below what they are worth and are thus expected to provide superior returns. Almost 80% of the portfolio is invested in companies which fit this description.
As shown in the charts in the Annual Report, over the long-term, this has been an attractive place to invest as small value stocks have grown earnings faster than the market and hence have delivered superior returns.
Despite this performance, the cohort of small value companies continues to trade at a significant discount to the rest of the market and looks very attractive today.
QUESTION
How has the Company’s portfolio’s exposure to unlisted companies changed during the year under review?
ANSWER
We have not added or sold any unlisted securities in the past year. It continues to be a small part of the portfolio at less than 0.5% of the Company’s invested assets. We believe that there are sufficient opportunities in the listed space in Asia and, therefore, would only want to invest in an unlisted company in exceptional circumstances.
QUESTION
You have increased gearing within the Company’s portfolio in the reporting year. What is the reason behind this?
ANSWER
We have always maintained that gearing is a function of the number of investment ideas we find. The level of gearing increases when we find more ideas to invest in than we have money and it reduces (or we keep a higher cash balance) when we do not find as many ideas.
Over the past year, gearing has increased as we have found particularly interesting investments in China given the market has fallen out of favour. At the year end, gross gearing was 11.7% (2022: 4.4%) and net gearing was 4.9% (2022: nil). See the charts in the Annual Report on the Company’s gearing history over my tenure.
QUESTION
The rising cost of living continues to pressure consumers. How has higher inflation and rising interest rates impacted Asian markets?
ANSWER
Inflation dynamics are different from country to country in Asia. China is now in deflation whilst some of the South East Asian countries have seen a moderate rise in inflation (albeit lower than that observed in Europe or the US). This has led to higher interest rates and weakening consumption as governments have behaved responsibly and not expanded fiscal spending (unlike the US).
We believe, therefore, that while there has been some consumer price inflation in Asia, it is not as big an issue as it is in the West.
QUESTION
Can you give an example of how your active management has added value to the Company’s portfolio this year?
ANSWER
As discussed earlier, our process is focused on finding misunderstood situations where we can own a good business with a margin of safety. Shriram Finance is a good example of this. It has become the largest retail non-banking financial company (NBFC) in India caused by the merger of Shriram Transport Finance Company, the largest financier of used commercial vehicles, and Shriram City Union Finance, the largest financier of two-wheelers and the underserved micro, small, and medium enterprises (MSME).
We have owned Shriram Transport Finance Company since late 2016 when we bought it at an attractive valuation when Indian non-banking financials saw short-term pressures due to tight liquidity. Over several decades, the company created its niche in a segment where banks did not compete due to difficulty in valuing and underwriting loans for second-hand trucks. It owned a quarter of the market share in the segment while the rest of the market was dominated by local money lenders, outside of the banking system, charging very high interest rates. We also owned Shriram City Union Finance for its strong track record in segments that have semi-formal and irregular sources of income and hence were credit starved.
The merger last year has created a lender with a more diversified book while also bringing benefits from synergies between the two businesses. The stock rerated as a result.
QUESTION
Can you explain to us how you integrate ESG considerations into the Company’s portfolio?
ANSWER
The Company’s primary objective for shareholders is to achieve capital growth. In order to achieve the best possible returns, we have always looked to invest in good businesses, managed by efficient management teams and available at reasonable valuations. Good businesses are those that solve a problem for their consumers, and which are managed by efficient teams who are competent and which respect laws, their employees, customers, the environment and shareholders, as well as managing their businesses responsibly. ESG considerations have, therefore, always been at the heart of our investment thinking, and well before it became a buzz word.
Investing in smaller companies in Asia using the strength of Fidelity’s research team has always offered us the opportunity to identify quality companies on fundamentals and ESG considerations ahead of other investors. Regulations are constantly evolving and ESG is no exception to this. We believe this presents us with opportunities. The development of ESG ratings covered by the external rating agencies has not yet evolved to cover many of the smaller companies in which we invest. This provides an exciting opportunity as the ESG credentials of many of the smaller companies are best in class. They are in fact ‘double gems’: companies with good prospects, strong management and well-priced alongside their strong ESG credentials.
Additionally, Fidelity as a firm is committed to principles that are consistent with the stage of economic development of countries. As part of this process, we have regular engagements with companies in the portfolio.
Examples of our ESG case studies are in the Annual Report.
QUESTION
What do you view as the biggest risks and opportunities for the next twelve months?
ANSWER
We think macro risks will eventually pass, especially if we own a diversified set of leading businesses and own them at valuations which are below intrinsic value. However, this does not mean that these stocks cannot decline in value – to the contrary, forecasting price movements is impossible. But we believe that the quality of our portfolio gives us holding power to go through head winds as they emerge and come out stronger on the other side.
As can be seen from the chart in the Annual Report, the ROE of our portfolio is at a premium to the market while the Price to Earnings ratio of our holdings is at a significant discount. We own businesses which are of a better quality and at cheaper market valuations. This has been the bedrock of our investment process for over a decade and has served us well.
Our skills lie in business analysis, finding best in class management teams and mispriced stocks. We are known to repeat the phrase below often and it is fair to say that it has become known as something of a mantra for the Company:
Find good businesses run by good management and buy them at prices with a good margin of safety.
We continue to focus on this.
NITIN BAJAJ AJINKYA DHAVALE
Portfolio Manager Assistant Portfolio Manager
11 October 2023
Fidelity Asian Values Plc (LON:FAS) provides shareholders with a differentiated equity exposure to Asian Markets. Asia is the world’s fastest-growing economic region and the trust looks to capitalise on this by finding good businesses, run by good people and buying them at a good price.
