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Fidelity Emerging Markets offers defensive growth

Get defensive growth with Fidelity Emerging Markets
February 8, 2018

After we wrote our fund tip last week Templeton Emerging Markets Investment Trust (TEMIT) announced that its manager, Carlos Hardenberg, would be leaving at the end of March. Although a number of analysts say that this is not a reason to panic and sell the trust, if you are looking to introduce or add to your existing emerging markets exposure, you might not want to put money into a fund undergoing a manager change.

IC TIP: Buy at 158p
Tip style
Growth
Risk rating
High
Timescale
Long Term
Bull points

Good long-term performance

Defensive bias

Well-resourced management team

Emerging markets growth 

Bear points

Can lag rising markets

A good alternative could be IC Top 100 Fund Fidelity Emerging Markets (GB00B9SMK778), which has delivered strong returns, meeting its objective of long-term capital growth. Over one, three and five years the fund made 24.5 per cent, 45.8 per cent and 71 per cent, respectively, outperforming its benchmark MSCI Emerging Markets index's returns of 20 per cent, 43.9 per cent and 42.6 per cent. The fund is also in the first quartile of the Investment Association (IA) Global Emerging Markets sector in terms of performance over one and five years.

Fidelity Emerging Markets is managed by Nick Price, who has been investing in emerging market equities for over 10 years. During this time he has built up a good track record, delivering a cumulative total return of 120.6 per cent over 10 years compared with 74.3 per cent for a composite of his peer group, according to research company FE Trustnet.

Mr Price is supported by a team of six portfolio managers who cover different geographic regions, while he is in charge of portfolio allocation and stock selection. A team of 49 emerging markets analysts also feeds ideas into the managers.

Tilney Group counts the fund among its top-rated funds. "[Mr Price] is an accountant by background and scrutinises companies' reported numbers, working his analysts hard," say analysts at Tilney Group. "We believe this is helpful in picking companies with robust business models, where share prices are typically more stable. This tends to better protect the fund's performance in falling markets, so it also displays a defensive bias."

Fidelity Emerging Markets aims to find quality growth companies that make superior and sustainable returns on assets, and have strong unleveraged balance sheets, shareholder-friendly managements and reasonable valuations over a full economic cycle. Financials are the fund's largest sector exposure, accounting for a third of its assets – 9 per cent more than its benchmark's weighting to the sector. The fund is also substantially overweight consumer discretionary companies, its second-largest sector exposure. However, it is 10 per cent underweight its benchmark in terms of IT companies.

 

China is the fund's largest single country allocation at 20.1 per cent of assets, but this is underweight MSCI Emerging Markets index's exposure of 29.6 per cent. 

Emerging markets have huge growth potential as they include some of the fastest growing areas in the world. But they can also be highly volatile, so Fidelity Emerging Markets is likely to be more volatile than a developed markets fund. And because of its focus on quality growth companies it can lag its benchmark and some of its peers when markets are rising strongly.

However, its defensive investment style should help it perform better in more challenging markets, which could be a useful attribute at the moment. And over the long term it has outperformed its benchmark and sector average by a considerable margin. 

So, if you want to add emerging markets exposure, Fidelity Emerging Markets Fund's defensive approach, well-resourced team, and good manager track record mean it still looks like a good way to exploit the long-term growth potential of this area. Buy. EA

 

Fidelity Emerging Markets Fund (GB00B9SMK778)

PRICE158pMEAN RETURN15.12%
IA SECTORGlobal Emerging MarketsSHARPE RATIO1.02
FUND TYPE Open-ended investment companySTANDARD DEVIATION13.53%
FUND SIZE£2.4bnONGOING CHARGE0.98%
No OF HOLDINGS73*YIELD0.77%
SET UP DATE28/07/1997MORE DETAILSwww.fidelity.co.uk
MANAGER START DATE22/03/2010  
Source:Morningstar as at 06/02/18, *Fidelity International as at 31/12/17

 

Performance

Fund/benchmark1 year total return (%)3 year cumulative total return (%)5 year cumulative total return (%)
Fidelity Emerging Markets 24.545.871
MSCI Emerging Markets index20.043.942.6
IA Global Emerging Markets sector average18.743.242.1

Source: Morningstar, as at 5 February 2018

 

Top 10 holdings as at 31/12/17 (%)

Naspers7.4
Taiwan Semiconductor Manufacturing 6.1
Sberbank Russia5.8
AIA Group5.0
HDFC Bank4.7
China Mengniu Dairy2.8
Inner Mongolia Yili Industrial Group2.7
Alibaba2.7
Housing Development Finance Corporation2.6
Grupo Mexico2.3

Source: Fidelity International

Geographic breakdown as at 31/12/17 (%)
China20.1
South Africa11.6
India9.9
Hong Kong9.8
Russia8.5
Taiwan8.1
South Korea 6.4
United Kingdom4.4
Mexico4.0
Brazil4.0
Other13.2

Source:Fidelity International