Capture growth at a good price with Fidelity Asian Values

Markets have for some time been led by mega-cap growth stocks and this trend has been exacerbated by the coronavirus pandemic, with technology and biotech companies particularly in favour and on arguably high valuations. But as Asia ex Japan small caps have lagged their large counterparts for the past few years, they could now present better value.

A good way to get exposure to these could be Fidelity Asian Values (FAS). At the end of June, it had about 55 per cent its assets in companies with a market capitalisation of under £1bn, and 20 per cent in companies with a market capitalisation of between £1bn and £5bn. 

The trust was trading at a premium to net asset value (NAV) for much of last year, but for most of this year has been at a discount to NAV. As of 22 July it was trading at one its wider discount levels of recent years – 10.1 per cent. The trust’s manager, Nitin Bajaj, aims to invest in companies with high returns on capital at what he thinks are good prices, and have the potential to deliver a 50 per cent increase in value over three years. And the trust’s largest sector exposure is consumer discretionary and its third largest is financials – areas that should benefit from growing regional wealth. So both this trust and its assets could present a bargain.

Mr Bajaj also likes companies with very well financed balance sheets, which should be better placed to weather the current crisis and possibly come out of it in a better competitive position.

Fidelity Asian Values has under performed MSCI AC Asia ex Japan Small Cap index over six months, and one and three years, and there is no guarantee that its performance will improve or its discount will tighten. 

Smaller and value companies may appear cheap, but if investor sentiment towards them does not improve their share prices will not experience strong growth.

Smaller companies are also a very volatile, high-risk area, in particular in emerging markets such as Fidelity Asian Values invests in.

However, analysts at research firm Edison say that Fidelity Asian Values’ recent performance “is due in part to the trust’s small-cap bias and value style [being] out of favour with investors, as large growth companies, particularly large-cap technology stocks which the trust does not hold, have been the major driver of Asian share price returns.”

The poor cumulative numbers are largely due to underperformance of MSCI AC Asia ex Japan Small Cap index over this year, and in 2019 and 2017. In the other years since Mr Bajaj has run the trust it has made NAV returns ahead of this index.

This trust’s board has recently been proactive in buying back shares to try rein in the discount and since late March has repurchased 1.3m shares, equivalent to 1.8 per cent of the share base, according to analysts at broker Edison. This should at least help to prevent it trading at wider levels for long periods.

The trust also has well over 100 holdings, which helps to spread stock-specific risk. And the fundamental reasons why Asia and smaller companies look well placed to grow over the long-term remain intact.

So, if you are looking for growth over the long-term and diversification from more mainstream Asian funds, and can tolerate some volatility along the way, Fidelity Asian Values looks like a good way to get this. Buy.