Fidelity Asian Values plc (LON:FAS) has announced its final results for the year ended 31 July 2022.
Financial Highlights:
- The Board of Fidelity Asian Values PLC (the “Company”) recommends an annual dividend of 14.00 pence per share, an increase of 59.1% from last year, and the highest since launch.
- The Company’s net asset value (“NAV”) increased by 3.9% for the year ended 31 July 2022.
- The Company’s small-cap value-oriented focus has generated positive absolute returns in a falling market.
- The Company continues to own a portfolio of businesses which are dominant in their industries, earn good returns on capital and have attractive valuations.
Chairman’s Statement
Investment and Market Review
The year under review has been a turbulent period for Asian and global equity markets. Concerns around the Russia-Ukraine conflict and the resultant surge in commodity and energy prices have dominated investor sentiment. Economies globally have continued to struggle with low growth as well as higher inflationary pressures amid supply-chain constraints. In such an environment, Asian and emerging market equities, which are perceived to be riskier, have been out of vogue.
Given this challenging backdrop, it is especially pleasing to report that the Company’s NAV strongly outperformed its Comparative Index. In the year to 31 July 2022, the NAV increased by 3.9%, compared to the MSCI All Countries Asia ex Japan Small Cap Index (net) total return (in Sterling terms) which returned -5.6% over the same period. Nitin and his team should be commended for their diligence and persistence in sticking to their style in what has been an especially challenging time for value investors and we, as a Board, are delighted that their approach is beginning to pay off. However, it has been disappointing that this strong relative performance has not been reflected in a narrowing of the discount, with the share price still lagging; it returned -3.4% over the period. While it is hard to comment on share price performance as it is largely a function of market sentiment, what can be said is that investors have generally become more risk averse with their capital.
Market Outlook
The long-term outlook for Asia Pacific ex Japan equities remains positive and the region’s relatively higher growth prospects should continue to attract investors. Also, at a time when the world is becoming increasingly protectionist, Asia’s robust domestic demand from an expanding middle class supports the outlook for the region. Nonetheless, the region remains vulnerable to a global slowdown and tightening of global financial conditions.
China’s near-term growth outlook remains skewed to the downside due to sporadic COVID-related lockdowns across the country. Government stimulus has so far prevented a contraction in annual growth, but a weakening external backdrop is weighing on exports, previously a key driver of activity. Elsewhere, most Asian countries have actively eased international border controls, and a significant improvement in vaccination rates has helped to bring local restrictions to a close. As a result, pent-up consumption demand is making its way into their economies.
Persistently high and broadening inflation remains one of the stiffest economic headwinds confronting the US, Europe and several other major economies. But so far, for most of Asia, the picture has been rather different. China is, in fact, in a monetary easing cycle while rates in developed markets are likely to continue rising. Other Asian economies are also close to the end of their tightening cycles and they should have room to cut rates when inflationary pressures ease.
We therefore continue to maintain our positive view on the region. Overall, Asian equities continue to trade at attractive valuations compared to long-term historical averages and developed markets. The Company will continue to focus on finding attractive long-term investment opportunities across the region based on strong fundamental research.
The depth and quality of research provided by Fidelity International is amongst the best in Asia and is currently undertaken by 56 analysts and 39 portfolio managers. Nitin draws extensively on this pool of talent in making his investment decisions. In this, Nitin has been well supported by Ajinkya Dhavale, who has over 14 years of investment experience. He originally joined Fidelity as an analyst in 2013, covering the Auto, Cement, Telecommunications and Property sectors. He became Assistant Portfolio Manager of Fidelity Asian Values PLC on 1 June 2020 and currently specialises in small and mid cap stocks in Korea, Taiwan and Frontier Asia.
Due Diligence 2022
Prior to the pandemic, the Board had visited Asia every other year to observe the Manager and his team in action and to meet the Fidelity analysts, and also to meet some of the companies in which we are invested. This year, we were unable to do that but instead had a virtual visit of three days in March. We used video conferencing facilities to meet members of the Fidelity team, market commentators and some investee companies. In addition, Nitin was able to travel from Singapore and we were pleased to be able to spend some time with him in person.
Among the companies we met was China Overseas Grand Oceans Group Limited (COGO), a subsidiary company of Chinese Overseas Land and Investment. Discussions were focused on the challenges for developers in China’s downward property market and the likelihood of consolidation in the industry. We also heard from the management team of Interojo, a Korean contact lens maker, with a wide variety of good quality products at affordable prices.
The Board was, once again, impressed by the breadth and depth of Fidelity’s team. In addition to the investment team (Nitin and Ajinkya and the analysts), we spent time with the Global Head of Stewardship and Sustainable Investing, the Global Head of Investment Research, the Head of Sales and members of the Environmental, Social and Governance (“ESG”) team.
We can confirm to shareholders that their money is being well cared for by a good and well-resourced team.
Gearing
Nitin and Ajinkya have increased the level of gross gearing from 3.0% reported last year to 4.4% as at 31 July 2022. They continue to believe that the main driver of the Company’s performance will be stock picking. Therefore, the level of gearing is entirely determined by the investment opportunities they see. Put simply, when they have more ideas than money, then the Company will be geared. When they have more money than ideas, then the Company will have a larger cash position.
Discount Management and Share Repurchases
The Board has undertaken active discount management, the primary purpose of which was, and remains, to reduce discount volatility.
Repurchases of ordinary shares are made at the discretion of the Board, within guidelines set by it and in light of prevailing market conditions. Shares will only be repurchased when it results in an enhancement to the NAV of the ordinary shares. 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 re-issued at NAV per ordinary share or at a premium to NAV per ordinary share.
There continued to be turmoil in the world’s financial markets in the reporting year and at times the Company’s discount was volatile in reaction to such market conditions. The Board, therefore, approved the repurchase of 780,543 ordinary shares for holding in Treasury during the year ended 31 July 2022. Since then and up to the date of this report, markets have continued to be volatile, and the Company’s discount has, at times, widened into double digits. As a result, the Board has continued to operate its discount management policy to narrow the discount and authorised the purchase of 352,816 ordinary shares into Treasury, since the year end.
Dividend
Subject to shareholders’ approval at the Annual General Meeting (“AGM”) on 23 November 2022, the Directors recommend a dividend of 14.00 pence per ordinary share which represents an increase of 59.1% over the 8.80 pence paid in 2021. This dividend will be payable on 7 December 2022 to shareholders on the register at close of business on 28 October 2022 (ex-dividend date 27 October 2022). Shareholders will know that the Company’s objective is long-term capital growth. In light of the higher income received and the current economic environment, the Board has elected to recommend almost all of the income earned to be paid as a dividend. Shareholders should not assume that such dividends will continue in the future.
Board of Directors and Board Succession
By 2023, I will have served four years as a Director and a further nine years as Chairman and will step down from the Board at the AGM in 2023. We had previously advised you that Clare Brady would succeed Grahame Stott as Chairman of the Audit Committee at the conclusion of this year’s AGM. The Board has now agreed that Clare should succeed me as Chairman next year and we are actively searching for a new Chair of the Audit Committee. We hope to be able to announce this new Board member in time for this year’s AGM.
As reported in last year’s Annual Report, Timothy Scholefield stepped down from the Board after the AGM on 3 December 2021. In anticipation of Timothy and Grahame’s retirements, Sally Macdonald and Matthew Sutherland were appointed to the Board on 1 January 2022. Both Sally and Matthew will be subject to election by shareholders at the AGM on 23 November 2022.
Michael Warren will have reached his nine-year tenure by the AGM in 2023. However, given the recent and ongoing changes to the Board, we are proposing to shareholders that he should remain on the Board for one additional year to ensure that institutional and historical knowledge of the Company is not lost. Accordingly, subject to shareholder approval, he will retire from the Board at the AGM in 2024.
Grahame Stott completed his nine-year tenure in September 2022 and will step down from the Board at the conclusion of the AGM on 23 November 2022. I would like to thank him on behalf of the Board and all of the Company’s stakeholders for his invaluable contribution to the Company, especially his meticulous attention to detail. He takes with him our very best wishes for the future.
All Directors, with the exception of Grahame, are subject to election or re-election at the forthcoming AGM. The Directors’ biographies are in the Annual Report, and between them, they have a wide range of appropriate skills and experience which form a balanced Board for the Company.
Annual General Meeting – Wednesday, 23 November 2022 at 11.00 am
The AGM of the Company will be held at 11.00 am on Wednesday, 23 November 2022 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.
Appropriate social distancing and hygiene measures will be in place for those shareholders attending the AGM in person. For those shareholders who would prefer not to attend in person or for whom travel is not convenient, 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 8 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 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 will also welcome 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 118-640-628. 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 2022
Portfolio Manager’s Review
Nitin Bajaj was appointed as the Portfolio Manager of Fidelity Asian Values PLC on 1 April 2015. He is based in Singapore and has over 20 years’ investment experience. He is also the Portfolio Manager for the Fidelity Asian Smaller Companies Fund as well as the Fidelity China Focus Fund. He first joined Fidelity in 2003 as an Investment Analyst and then took over the Fidelity India Special Situations Fund and subsequently started the Fidelity India Value Fund. He managed these funds until November 2012, when Fidelity decided to sell its India business.
Ajinkya Dhavale has over 14 years of investment experience. He originally joined Fidelity as an analyst in 2013, covering the Auto, Cement, Telecommunications and Property sectors. He was promoted to Assistant Portfolio Manager of Fidelity Asian Values PLC on 1 June 2020 and currently specialises in small and mid cap stocks in Korea, Taiwan and Frontier Asia.
Question
How has the Company performed in the year under review?
Answer
In the year to 31 July 2022, the NAV of the company increased by 3.9%. The MSCI All Countries Asia ex Japan Small Cap Index (net) total return (in Sterling terms) returned -5.6% over the same period. The share price total return was -3.4%.
The Company generated positive absolute returns in a falling market primarily because we avoided speculative investments, expensive stocks, and blue-sky business models. Investing in companies on very rich valuations had been the market norm during the pandemic so a pull-back was somewhat expected.
This approach reflects our investment philosophy of investing in good quality businesses which are run by competent and honest management, and only buying them when valuations provide a good margin of safety.
Question
Asian stocks have lost value over the period under review. Has the sell-off been consistent across the market cap spectrum? What have been the drivers for your outperformance?
Answer
The sell-off in Asian equities this year has certainly not been even. Losses have been lower in small cap stocks than their large cap counterparts primarily due to the reversal of the crowded ‘large cap growth’ trading bias that occurred in 2019 and 2020. In addition, small and large cap indices are further skewed by their geographic mix, with the large cap index having a significantly higher weight in China.
Stylistically, Value stocks have done better than Growth stocks during this period. In our opinion, we are in the early stages of a long-term style rotation out of Growth equities as the valuation gap between Growth and Value is still at a twenty-year extreme in favour of Value stocks. Given our significant bias towards small cap Value, we think a period of sustained outperformance is possible over the coming years.
While this market environment provided a positive backdrop for our style, our focus on bottom-up fundamental research meant that stock selection has been the biggest contributor to the Company’s relative performance. During the financial year, our stock selection was particularly positive in China, India, Korea, Australia and Indonesia. From a sector perspective, positive returns were posted in industrials, health care, financials and materials.
In terms of small/mid cap names, Indonesia’s largest yet lowest cost producer of ceramic tiles Arwana Citramulia benefited from a favourable demand-supply environment, while India’s fourth largest cables and wires maker KEI Industries was aided by a recovery in capital expenditure and its increased focus on higher margin retail and exports segments. In China, the Company’s exposure to a large cap state-owned property developer China Overseas Land & Investment added to performance after the company, which is operating in a consolidated industry, gained market share, driven by the flight to quality amongst developers. Companies which can demonstrate more disciplined operations and have both good balance sheets and access to land sales are better able to successfully complete construction projects.
QUESTION
With slightly over 35% of your investments in either China or Hong Kong, are you worried about single country exposure? What do you consider to be the main risks of investing in China?
Answer
From a risk management perspective, while country positions are an outcome of underlying stock selection, we restrict our exposure to any particular country to within Board set guidelines. Of course, the Board can change such limits, should it so decide, to suit market dynamics as well as the opportunity set. Given the macro-economic concerns around China, it comes as no surprise that Chinese stocks have been sold off; but in our view, there are many interesting companies that are now trading significantly below intrinsic value and are being overlooked by the broader investment community. You could almost compare the current Chinese multiples and sentiment to what happened in the Indian market crash in 2012/13 or in the sub-prime credit crisis in the US in 2008/09.
We look at the situation differently. While we are very conscious of the macro risks of investing in China due to geopolitical tensions, regulatory interventions and economic cycles, based on our analysis, the prices of the businesses we own reflect these risks. Furthermore, we believe that these companies are providing products or services that are beneficial to society – either through improving household products or providing essential infrastructure services – both of which are critical to the smooth functioning of the economy.
However, we would like to share some high-level thoughts regarding the two biggest risks that are being flagged when it comes to China – the demise of the property sector and the impact of the country’s zero-COVID policy.
The various lockdowns have taken a heavy toll on industrial activities and consumption given the lack of movement of citizens. Yes, we have seen some tweaks to policy requirements (such as allowing the ongoing operation of manufacturing activities during a city lockdown), but the government still measures its success in overcoming the pandemic as the number of lives saved and keeping fatalities low. We are monitoring any policy changes, or indeed fiscal or monetary support aimed at improving sentiment and underpinning growth. It is critical to note that the country’s zero-COVID policy can impact corporate earnings so it’s something that we consider when assessing a company’s earnings visibility.
The other risk associated with China is the health of the property sector. For years, China had seen a surge in property development, with many developers benefiting from growing demand. However, like any prolonged investment cycle, the property market in China has seen severe misallocation of capital and excessive risk taking by many private sector developers. In our opinion, quite a few of these “aggressive” developers will not survive the downturn. This will have a knock-on impact on the overall economy; but it will also create significant opportunities for well-managed companies to increase market share. We believe that the businesses we own fall in the category of market share gainers in a number of different sectors in China. Given the current macro backdrop and pessimism, we believe these businesses are quite significantly mispriced compared to their long-term potential.
Given this positive risk/return outlook, and importantly, the underlying stock opportunities, our combined exposure to China and Hong Kong is around 35% as at the end of July (see Charts in the Annual Report) – this is close to the highest it’s been during my tenure.
Question
Large cap stocks make up nearly 20% of your portfolio. How do you choose these stocks and why do you hold them?
Answer
Although the Company has a small cap bias, the investment policy is unrestricted, and we are therefore able to consider large companies for the portfolio where we believe they demonstrate the value characteristics that we seek for shareholders’ portfolios.
In order to be considered as investments, these large companies should demonstrate the same returns profile that we expect from any small cap holding in the portfolio. We like to think of them as adding some diversification benefits from the small cap companies in the portfolio and from the Company’s peer group.
Question
How do you approach shorting companies? Where do you see opportunities in this space?
Answer
The approach to shorting companies is the exact opposite of what we do when creating our long positions. Here we are looking for fragile business models, excessive leverage, management with poor reputations and/or stretched valuations.
That said, shorting is a specialised skill where risk/reward metrics can turn against you because your short position increases if the price increases. Theoretically, a stock’s price can increase to an infinite amount, but its lowest value can only ever be zero. We try to keep the short book well diversified and take smaller sized positions.
Question
Last year you invested in a pre-IPO holding – Tuhu Car. Can you provide an update on this company and will we see more investments like this in the future?
Answer
We continue to hold a position in Tuhu Car that we established in June 2021. It remains an attractive business due to its market dominance in the unique online-to-offline auto parts retailing space. In essence, succeeding in making customers shift online to buy spare parts and then collect them from physical stores. The long-term structural growth opportunity is very attractive, and we have seen similar companies in the US and Australia do very well in this space over a long period of time. China is still at an early stage in its development of auto parts retailing and Tuhu Car is the clear market leader.
Unlisted investments are different from our traditional value investments as these companies are in an early stage in their development. We are very careful about such investments, and I do not foresee the Company increasing unlisted holdings in a significant way.
Question
Can you explain to us how you integrate ESG considerations into your 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 sought to invest in businesses which respect laws, their employees, customers, the environment and shareholders as well managing their businesses properly. ESG considerations have therefore always been at the heart of our investment thinking.
Investing in smaller companies in Asia using the strength of Fidelity’s research team here has always offered us the opportunity to identify companies 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 the rating agencies (MSCI/Sustainalytics) has not yet evolved to cover many of the smaller companies which we invest in. This provides an exciting opportunity as the ESG credentials of many of the smaller companies (as you will see in the examples in the Annual Report) are best in class. They are in fact ‘double gems’: companies with good prospects, strong management and well-priced alongside their strong ESG credentials.
We have also included a summary of Fidelity’s house approach to ESG in the Annual Report. This is important as Fidelity covers 85% of the portfolio and is therefore able to give us evidence that my approach is working.
Question
What do you view as the biggest risks and opportunities for the next twelve months?
Answer
We believe that the biggest risks are always things we do not know yet or “unknown unknowns”.
Of the things that are known, in our opinion, the biggest risk continues to be the medium-term impact of experimental monetary policy of the last decade. The world has never had free money the way it did in the last ten years and neither has the world lived with this quantum of debt before. Consequently, it is very hard to have a playbook to figure out how things will pan out. This is something that we keep a close eye on and continue to learn about.
Having said that, we believe our strength is stock picking rather than macro analysis. Peter Lynch, the renowned and highly successful US portfolio manager, used to say, “if you spent thirteen minutes a year on economic (macro) analysis, you wasted ten”. We are of the same school of thought.
We are very happy with the current shape of the portfolio comprising businesses that are dominant in their industries, earn good returns on capital and are available at attractive valuations. The current vital statistics of the Company’s portfolio of investee companies are as follows:
· Return on Equity at 15.4% versus 11.2% for the Comparative Index;
· A stronger Balance Sheet than the Comparative Index;
· Price to earnings: 8.5x versus 11.2x for the Comparative Index; and
· Dividend yield at 4.6% versus 2.9% for the Comparative Index.
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’s 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
Portfolio Manager
Ajinkya Dhavale
Assistant Portfolio Manager
11 October 2022
Principal Risks and Uncertainties and Risk Management
As required by provisions 28 and 29 of the 2018 UK Corporate Governance Code, the Board has a robust ongoing process for identifying, evaluating and managing the principal risks and uncertainties faced by the Company, including those that could threaten its business model, future performance, solvency and liquidity. The Board, with the assistance of the Alternative Investment Fund Manager (FIL Investment Services (UK) Limited/ the “Manager”), has developed a risk matrix which, as part of the risk management and internal controls process, identifies the key existing and emerging risks and uncertainties that the Company faces and assigns a rating to each risk. The risk matrix is reviewed by the Audit Committee at least once annually. The Board has also established associated policies and processes designed to manage, and where possible, mitigate identified risks which are then monitored in the form of comprehensive reports considered by the Audit Committee. The Board determines the nature and extent of any risks it is willing to take in order to achieve its strategic objectives and works with the Manager, who also has responsibility for risk management for the Company, to continue to meet its UK corporate governance obligations.
Climate change is one of the most critical emerging issues confronting asset managers and their investors. The Board notes that the Manager has integrated ESG considerations, including climate change, into the Company’s investment process. Further details are in the Annual Report. The Board will continue to monitor how this may impact the Company as a risk, the main risk being the impact on investment valuations.
The Board considers the risks listed below to be the principal risks and uncertainties faced by the Company.
| Principal Risks | Description and Risk Mitigation |
| Economic, Political and Market Risks | The principal market related risks are market downturns, interest rate movements, deflation/inflation, exchange rate movements and market shocks, such as the ongoing pandemic and military conflict. Inflation continues to trend higher across most economies, driven by a combination of increased demand, as the pandemic restrictions are lifted, global labour shortages in some sectors and supply chain shortages. The Company is exposed to geopolitical risks on a number of fronts. In December 2021, the US issued a further Executive Order prohibiting transactions by US persons in publicly traded securities of certain Chinese companies. Any further restrictions on listings of Chinese companies in the US could negatively impact the demand for such stocks, and consequently, their share price. Although this is not directly relevant to the Company, it may have an indirect impact on the demand for equities in the portfolio. Additionally, the Company may be exposed to the economic impact from the war in Ukraine. Russia and Ukraine are both significant net exporters of oil, natural gas and a variety of soft commodities and supply limitations are fuelling global inflation and economic instability, specifically within western nations. Whilst the direct impact of the war to APAC markets has been less severe than European counterparts, a prolonged cost-of-living crisis risks impacting western shareholder funds and appetite. The fragile relations between US and China risk further deterioration, should China offer any meaningful support to Russia or if tensions escalate in the Taiwan Straits. The first is likely to result in sanctions or a trade war, and the latter, in military conflict. The Company’s portfolio is made up mainly of listed securities. The Portfolio Manager’s success or failure to protect and increase the Company’s value against the above background is core to the Company’s continued success. His investment philosophy of stock-picking and investing in attractively valued companies aims to outperform the Comparative Index over time. COVID continues to be a global pandemic with the potential for severe market and economic impacts. The risk of the likely effects of the ongoing pandemic on the markets is somewhat mitigated by the Company’s investment trust structure which means no forced sales need to take place to deal with any redemptions. Therefore, investments can be held over a longer time horizon. The Board reviews economic, political and market risks and legislative changes at each Board meeting. Most of the Company’s assets and income are denominated in currencies other than Sterling which is the Company’s functional and presentation currency. As a result, movements in exchange rates may affect the Sterling value of these items. Risks to which the Company is exposed to in the market and currency risk category are included in Note 17 to the Financial Statements below together with summaries of the policies for managing these risks. |
| Discount Management Risk | Due to the nature of investment companies, the price of the Company’s shares and its discount to NAV are factors which are not totally within the Company’s control. The Board has a discount management policy in place and some short-term influence over the discount may be exercised by the use of share repurchases at acceptable prices and within the parameters set by the Board. The Company’s share price, NAV and discount volatility are monitored daily by the Manager and the Company’s Broker and considered by the Board on a regular basis. The demand for shares can be influenced through good performance and an active investor relations programme. |
| Cybercrime and Information Security Risks | The operational risk from cybercrime is significant. Cybercrime threats evolve rapidly and consequently the risk is regularly re-assessed and the Board receives regular updates from the Manager in respect of the type and possible scale of cyberattacks. The Manager’s technology team has developed a number of initiatives and controls in order to provide enhanced mitigating protection to this ever-increasing threat. The risk is frequently re-assessed by Fidelity International’s (“Fidelity”) information security teams and has resulted in the implementation of new tools and processes, including improvements to existing ones. Fidelity has established a dedicated cybersecurity team which provides regular awareness updates and best practice guidance. Risks are increased due to the pandemic and from the Russia/Ukraine conflict. These primarily relate to phishing, remote access threats, extortion and denial of services attacks. The Manager has dedicated detect and respond resources specifically to monitor the cyber threats associated with COVID and cyber activity following the Russian invasion of Ukraine. There are a number of mitigating actions in place including, control strengthening, geo-blocking, phishing mitigants combined with enhanced resilience and recovery options. |
| Investment Performance Risk (including the use of Derivatives and Gearing) | The achievement of the Company’s investment performance objective relative to the market requires the taking of risk, such as investment strategy, asset allocation and stock selection, and may lead to NAV and share price underperformance compared to the Comparative Index and/ or peer group companies. Continued underperformance could lead to the Company and its objectives becoming unattractive to investors. The Investment Manager is responsible for actively monitoring the portfolio selected in accordance with the asset allocation parameters and seeks to ensure that individual stocks meet an acceptable risk/reward profile. In order to manage this risk, the Board reviews Fidelity’s compliance with agreed investment restrictions; investment performance and risk; relative performance; the portfolio’s risk profile; and whether appropriate strategies are employed to mitigate any negative impact of substantial changes in the markets. The Board also regularly canvasses major shareholders for their views with respect to company matters. Derivative instruments are used to enable both the protection and enhancement of investment returns. There is a risk that the use of derivatives may lead to higher volatility in the NAV and the share price than might otherwise be the case. The Board has put in place policies and limits to control the Company’s use of derivatives and exposures. Further details on derivative instruments risk is included in Note 17 to the Financial Statements below. The Company gears through the use of long CFDs which provide greater flexibility and are currently cheaper than bank loans. The principal risk is that the Portfolio Manager fails to use gearing effectively, resulting in a failure to outperform in a rising market or underperform in a falling market. The Board regularly considers the level of gearing and gearing risk and sets limits within which the Manager must operate. |
| Shareholder Relationship Risk | There is a risk that the Board has insufficient access to shareholders or that the Portfolio Manager’s investment style is not appealing for investors. A further risk is that weak investment performance may potentially make the Company less attractive to retail investors and wealth managers. The shareholder register and shareholder activity are reviewed at each Board meeting and regular shareholder meetings are organised by the Broker with the Board and Fidelity, including the Portfolio Manager. Fidelity has an investment trusts website which has dedicated pages for the Company and regular updates are provided for investors. |
| Key Person Risk | The Portfolio Manager, Nitin Bajaj, has a differentiated style in relation to his peers. This style is intrinsically linked with the Company’s investment philosophy and strategy and, therefore, the Company has a key person dependency on him. The Company has an Assistant Portfolio Manager, Ajinka Dhavale, who supports the Portfolio Manager, and has extensive experience in the Asian markets and companies and shares a common investment approach and complementary investment experience with the Portfolio Manager. Fidelity has succession plans in place for its portfolio managers which have been discussed with the Board and provide some assurance in this regard. |
| Environmental, Social and Governance (“ESG”) Risk | There is a risk that the value of the assets of the Company are negatively impacted by ESG related risks, including climate change risk. Fidelity has embedded ESG factors in its investment decision-making process. ESG integration is carried out at the fundamental research analyst level within its investment teams, primarily through Fidelity’s Proprietary Sustainability Rating which is designed to generate a forward-looking and holistic assessment of a company’s ESG risks and opportunities based on sector-specific key performance indicators across 127 individual and unique sub-sectors. The Portfolio Manager is also active in analysing the effects of ESG when making investment decisions. The Board continues to monitor developments in this area and reviews the positioning of the portfolio considering ESG factors. Further detail on ESG considerations in the investment process in the Annual Report. |
| Business Continuity and Operational Risks | Investment team key activities, including portfolio managers, analysts and trading/support functions, are performing well despite the operational challenges posed when working from home during the pandemic, and more recently, from the rail strikes. With variants of COVID continuing to evolve, it is evident that although the pandemic is being tackled by vaccines, risks remain. There continues to be increased focus from financial services regulators around the world on the contingency plans of regulated financial firms. The risks following Russia’s invasion into Ukraine, specifically regarding the potential loss of power and/or broadband services, are increasingly stable as work transfer recovery options are established for business-critical activities. The Manager carries on reviewing its business continuity plans and operational resilience strategies on an ongoing basis. The Manager continues to take all reasonable steps in meeting its regulatory obligations and to assess operational risks, the ability to continue operating and the steps it needs to take to serve and support its clients, including the Board. There has not been any significant changes to Fidelity’s control environment as a result of the pandemic and the Manager has provided the Board with assurance that the Company has appropriate business continuity plans and the provision of services has continued to be supplied without interruption during the pandemic. Specific risks posed by the pandemic continue to ease with increasing levels of staff returning to routine office-based working, albeit under hybrid working arrangements which allows greater flexibility on remote working as part of the new operating model. The Company’s other third party service providers, principally the Registrar, Custodian and Depositary, have also confirmed the implementation of similar measures to ensure no business disruption and that they continue to manage their operational risk and have appropriate business continuity plans in place. The Registrar, Custodian and Depositary are all subject to a risk-based program of internal audits by the Manager. In addition, service providers’ own internal control reports are received by the Board on an annual basis and any concerns raised are investigated. Risks associated with these services are generally rated as low, although the financial consequences could be serious, including reputational damage to the Company. |
Other risks facing the Company include:
Tax and Regulatory Risks
A breach of Section 1158 of the Corporation Tax Act 2010 could lead to a loss of investment trust status resulting in the Company being subject to tax on capital gains. The Board monitors tax and regulatory changes at each Board meeting and through active engagement with regulators and trade bodies by the Manager.
Going Concern Statement
The Financial Statements of the Company have been prepared on a going concern basis.
The Directors have considered the Company’s investment objective, risk management policies, liquidity risk, credit risk, capital management policies and procedures, the nature of its portfolio and its expenditure and cash flow projections. The Directors, having considered the liquidity of the Company’s portfolio of investments (being mainly securities which are readily realisable) and the projected income and expenditure, are satisfied that the Company is financially sound and has adequate resources to meet all of its liabilities and ongoing expenses and continue in operational existence for the foreseeable future. The Board has therefore concluded that the Company has adequate resources to continue to adopt the going concern basis for the period to 31 October 2023 which is at least twelve months from the date of approval of the Financial Statements. This conclusion also takes into account the Board’s assessment of the ongoing risks from evolving variants of COVID, the war in Ukraine and significant market events as set out in the Business Continuity and Operational Risks above. The prospects of the Company over a period longer than twelve months can be found in the Viability Statement below.
Viability Statement
In accordance with provision 31 of the 2018 UK Corporate Governance Code, the Directors have assessed the prospects of the Company over a longer period than the twelve month period required by the “Going Concern” basis above. The Company is an investment trust with the objective of achieving long-term capital growth. The Board considers long-term to be at least five years, and accordingly, the Directors believe that five years is an appropriate investment horizon to assess the viability of the Company, although the life of the Company is not intended to be limited to this or any other period.
In making an assessment on the viability of the Company, the Board has considered the following:
· The ongoing relevance of the investment objective in prevailing market conditions;
· The Company’s level of gearing;
· The Company’s NAV and share price performance;
· The principal and emerging risks and uncertainties facing the Company and their potential impact as set out above;
· The future demand for the Company’s shares;
· The Company’s share price discount to the NAV;
· The liquidity of the Company’s portfolio;
· The level of income generated by the Company; and
· Future income and expenditure forecasts.
For the five year reporting period to 31 July 2022, the Company’s NAV total return performance of +33.5% was ahead of the +30.2% total return of the Comparative Index. In comparison, the share price total return was +30.1%. The Board regularly reviews the investment policy and considers it remains appropriate. The Board has concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the next five years based on the following considerations:
· The Investment Manager’s compliance with the Company’s investment objective and policy, its investment strategy and asset allocation;
· The Company’s portfolio mainly comprises readily realisable securities which can be sold to meet funding requirements if necessary;
· The Board’s discount management policy; and
· The ongoing processes for monitoring operating costs and income which are considered to be reasonable in comparison to the Company’s total assets.
In preparing the Financial Statements, the Directors have considered the impact of climate change, particularly in the context of the climate change risk identified within the ESG Risk in the Annual Report. The Board has also considered the impact of regulatory changes and how this may affect the Company.
A continuation vote takes place every five years. There is a risk that shareholders do not vote in favour of the continuation of the Company during periods when performance of the Company’s NAV and share price is poor. The last continuation vote was at the Company’s AGM held on 3 December 2021. The next continuation vote will take place at the AGM in 2026.
PROMOTING THE SUCCESS OF THE COMPANY
Under Section 172(1) of the Companies Act 2006, the Directors of a company must act in a way they consider, in good faith, would be most likely to promote the success of the Company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to the likely consequences of any decision in the long-term; the need to foster relationships with the Company’s suppliers, customers and others; the impact of the Company’s operations on the community and the environment; the desirability of the Company maintaining a reputation for high standards of business conduct; and the need to act fairly as between members of the company.
As an externally managed Investment Trust, the Company has no employees or physical assets, and a number of the Company’s functions are outsourced to third parties. The key outsourced function is the provision of investment management services by the Manager, but other professional service providers support the Company by providing administration, custodial, banking and audit services. The Board considers the Company’s key stakeholders to be the existing and potential shareholders, the external appointed Manager (FIL Investment Services (UK) Limited) and other third-party professional service providers. The Board considers that the interest of these stakeholders is aligned with the Company’s objective of delivering long-term capital growth to investors, in line with the Company’s stated investment objective and strategy, while providing the highest standards of legal, regulatory and commercial conduct.
The Board, with the Portfolio Manager, sets the overall investment strategy and reviews this at an annual strategy day which is separate from the regular cycle of board meetings. In order to ensure good governance of the Company, the Board has set various limits on the investments in the portfolio, whether in the maximum size of individual holdings, the use of derivatives, the level of gearing and others. These limits and guidelines are regularly monitored and reviewed and are set out in the Annual Report.
The Board places great importance on communication with shareholders. The Annual General Meeting (“AGM”) provides the key forum for the Board and the Portfolio Manager to present to the shareholders on the Company’s performance and future plans and the Board encourages all shareholders to attend either in person or virtually and raise any questions or concerns. The Chairman and other Board members are available to meet shareholders as appropriate. Shareholders may also communicate with Board members at any time by writing to them at the Company’s registered office at FIL Investments International, Beech Gate, Millfield Lane, Tadworth, Surrey KT20 6RP or via the Company Secretary in writing at the same address or by email at [email protected]. The Portfolio Manager meets with major shareholders, potential investors, stock market analysts, journalists and other commentators during the year. These communication opportunities help inform the Board in considering how best to promote the success of the company over the long-term.
The Board seeks to engage with the Manager and other service providers and advisers in a constructive and collaborative way, promoting a culture of strong governance, while encouraging open and constructive debate, in order to ensure appropriate and regular challenge and evaluation. This aims to enhance service levels and strengthen relationships with service providers, with a view to ensuring shareholders’ interests are best served, by maintaining the highest standards of commercial conduct while keeping cost levels competitive.
Whilst the Company’s direct operations are limited, the Board recognises the importance of considering the impact of the Company’s investment strategy on the wider community and environment. The Board believes that a proper consideration of Environmental, Social and Governance (“ESG”) issues aligns with the investment objective to deliver long-term capital growth, and the Board’s review of the Manager includes an assessment of their ESG approach, which is set out in detail in the Annual Report.
In addition to ensuring that the Company’s investment objective was being pursued, key decisions and actions taken by the Directors during the reporting year, and up to the date of this report, have included:
· Seeking shareholder approval at the AGM on 3 December 2021 for the continuation of the Company (continuation votes are held every five years);
· Authorising the repurchase of 352,816 ordinary shares up to the date of this Annual Report when the Company’s discount widened, in line with the Board’s discount management policy;
· The decision to recommend a final dividend of 14.00 pence per ordinary share, the highest rate paid since the Company was launched;
· The decision to hold a hybrid AGM in 2022 in order to make it more accessible to those investors who prefer not to attend in person; and
· As part of the Board’s succession plans, the appointments of Sally Macdonald and Matthew Sutherland to the Board with effect from 1 January 2022.
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and Financial Statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare Financial Statements for each financial period. Under that law they have elected to prepare the Financial Statements in accordance with UK Generally Accepted Accounting Practice (UK Accounting Standards and applicable law), including Financial Reporting Standard FRS 102: The Financial Reporting Standard applicable in the UK and Republic of Ireland (“FRS 102”). Under company law, the Directors must not approve the Financial Statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss for the reporting period.
In preparing these Financial Statements, the Directors are required to:
· Select suitable accounting policies in accordance with Section 10 of FRS 102 and then apply them consistently;
· Make judgements and accounting estimates that are reasonable and prudent;
· Present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
· State whether applicable UK Accounting Standards, including FRS 102, have been followed, subject to any material departures disclosed and explained in the Financial Statements; and
· Prepare the Financial Statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time, the financial position of the Company and to enable them to ensure that the Company and the Financial Statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
Under applicable law and regulations the Directors are also responsible for preparing a Strategic Report, a Directors’ Report, a Corporate Governance Statement and a Directors’ Remuneration Report that comply with that law and those regulations.
The Directors have delegated to the Manager the responsibility for the maintenance and integrity of the corporate and financial information included on the Company’s pages of the Manager’s website at www.fidelity.co.uk/asianvalues. Visitors to the website need to be aware that legislation in the UK governing the preparation and dissemination of the Financial Statements may differ from legislation in their own jurisdictions.
The Directors confirm that to the best of their knowledge:
· The Financial Statements, prepared in accordance with UK Generally Accepted Accounting Practice, including FRS 102, give a true and fair view of the assets, liabilities, financial position and profit of the Company;
· The Annual Report, including the Strategic Report, includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties it faces; and
· The Annual Report and Financial Statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company’s performance, business model and strategy.
The Statement of Directors’ Responsibilities was approved by the Board on 11 October 2022 and signed on its behalf by:
KATE BOLSOVER
Chairman
Fidelity Asian Values Plc (LON:FAS) is an investment trust that provides shareholders with a differentiated equity exposure to Asian Markets.
Asia is the world’s fastest-growing economic region providing a wealth of investment opportunities with long term potential. This Asia investment trust looks to capitalise on this by finding good businesses, run by good people and buying them at a good price.
