Fidelity Emerging Markets Limited (LON:FEML) is the topic of conversation when Kepler Trust Intelligence‘s David Kimberley caught up with Chair Heather Manners for an exclusive interview.
Q1: So, to kick things off, what’s the of state of play with Fidelity Emerging Markets at the moment? What’s going on?
A1: Well, there is quite a lot going on. Since I joined the Board and came to the end of 2022, there’s almost no stone that we have left unturned.
I guess the bigger most recent news is that we have launched a share buyback at the end of last year, in the final quarter of last year and we have also just completed a 15% tender offer in the first quarter of this year.
One of the things which I am also very proud of is how the performance of the trust has been steadily outperforming the index. The last 12 months have been particularly good,
but actually the 2-year numbers are also now well ahead of the index.
So, the managers themselves and the Board are all very excited about what the prospects are that we’re now seeing in emerging markets as well, and I think having completed what we have in the last 12 months and looking at the performance and the opportunities, now is a really good time to start raising awareness amongst our
potential investors of the opportunity that we think that the trust presents.
Q2: What sort of opportunities are there? I think emerging markets, I guess like any markets, are very dynamic and I think the structure of the index maybe not necessarily what people would quite expect, just because of how indices are structured and so on. Can you sort of talk through that? What are you excited about at the moment?
A2: Well, I think that emerging markets, as you alluded to, tend to do less well when interest rates are rising and the dollar is strong in the West and I think one of the things we can see now is that, with inflation coming back under control somewhat and the possibility of interest rates starting to fall, that we might be now moving into an environment where, from a macroeconomic perspective, you could see money flows going back into emerging markets. That would be very interesting and exciting.
In the meantime, the emerging markets themselves continue to present investors with an extraordinarily more interesting set of opportunities than perhaps Western markets. At the highest level, that tends to come from the fact that you’ve got highly populous countries with, relative to the West, very young populations, which leads tremendous amounts of growth in terms of areas like consumption, consumer discretionary, but also the formulation of the middle class.
So, whilst high GDP growth in itself doesn’t necessarily translate into markets performing strongly, what it does do is provide a backdrop for an active fund, such as ours, to go and find particular opportunities in companies which are growing disproportionately fast and have a really very strong future ahead of them. Given that emerging markets have really been left on the back burner by investors for a number of years now, a lot of those opportunities are now looking very attractively valued as well.
So, we think it’s a very good time for investors to start looking to diversify away from developed markets, and to start thinking about allocating a portion of money towards the emerging markets, certainly as seen through the lens of the opportunity set that our fund managers at Fidelity have been finding.
Q3: You’ve touched on this in that answer, but you take kind of a unique approach to markets, and we’ll talk about why that’s the case later on as well, but just to start off, what sort of traits are the managers looking for to deliver that outperformance?
A3: The fund itself is a very unique proposition, because it is an actively managed fund, it can go anywhere and it also has a unique set of tools in its toolkit, which is a differentiating factor from every other emerging markets trust in the investment trust sector. Which is to say that it can use derivatives, and it also has a short book so what’s very interesting about the fund is that it is actually able to make money in all environments.
So, the fund managers have not only identified some quite interesting, long ideas, as a matter of course, we are seeing the moment quite a nice overweight, for example, in the financial sector, which has been proving very strong performance for the fund in the recent months. We’re also seeing some very strong performance from some of the companies which the manager has identified as being weaklings, which are going to underperform and actually, since Fidelity took over the management of the trust, we have seen about 11% of performance contribution from the short and derivatives in the portfolio, which is a really significant number in terms of what contribution you’re getting.
For anybody who’s considering emerging markets, but anxious about risks, this is a very interesting trust to consider, because actually, the managers can make money even when markets are not performing well. We can identify those companies, for example, who are being disrupted and being managed very poorly and the managers have really produced some fantastic results from that process that they have as well.
Q4: One of the things you alluded to there as well is the fact that the managers can go anywhere, which may sound par the course to some people listening or watching, but I think what’s actually sets the trust apart, and we’ve actually written about this on the on the KTI site before, is the fact that you have this very broad research team. If you go to the FEML website, you can see, I think, some writing/videos about this?
A4: As a Board, we travel with the fund manager, we’ve now travelled with them twice since I joined the Board to go on one of their normal investment trips, research trips.
It’s an extremely valuable process for us as a Board to go through, because we really do see them properly at work and we can see the degree of thoroughness and the process that they have, and also understand better some of the opportunities that they’re looking for.
It’s been incredibly helpful from the point of view of allowing us to really support the managers in what they’re doing, because we understand so much better some of the opportunities that they’ve identified. It’s been very exciting as well for us to, for example, go to the Middle East and see what’s developing there, outside of the traditional energy sector, and meet some of the companies which the fund managers are now thinking or indeed already have bought as part of the medium-term upside for the fund.
So, we can say firsthand that the team is extremely impressive and Nick Price has been running this strategy within Fidelity Emerging Market and another product since 2011, but he’s a very, very experienced pair of hands, anyhow, with well over 20 years’ experience of investing in emerging markets. His team are also very experienced so Chris Tennant, who works alongside Nick, has also been working with Nick since 2015 so you’re looking at old hands when it comes to really understanding the nuances and the risks, but also being able to really identify the quality in emerging markets and between them, they have access to roughly 50 analysts to help support them and look at what is obviously a very wide opportunity set.
I think, again, one of the things that’s exciting about having such a big team with boots on the ground in a lot of these countries is that you can also dig down and find some of the medium and smaller companies which really can produce tremendous performance for the trust. Also, reach out into slightly more small markets and really get the benefits of going into all the corners, as it were, as well as just looking at the mainstream part of emerging markets. So I think that’s also been incredibly beneficial to the fund, even in the time that I’ve been there, I’ve seen some of these companies do very well for the trust.
Fidelity Emerging Markets Limited (LON:FEML) is an investment trust that aims to achieve long-term capital growth from an actively managed portfolio made up primarily of securities and financial instruments providing exposure to emerging markets companies, both listed and unlisted.
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Fidelity Emerging Markets . The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
