Fidelity Emerging Market fund

Fidelity’s emerging market franchise is grounded in the view GDP does not automatically translate into equity performance and the region is therefore ripe for stockpicking.

Active management is particularly key in these markets as we expect clearer definition between winners and losers

While the group has always had popular Asian products, it has traditionally had less traction in the global emerging market (GEM) space although actually has more funds in this area than most peers. As ever with Fidelity, it can bring massive research strength to bear and has 45 emerging market analysts based around the world, with a bias towards Asia.Manager of the Emerging Markets fund Nick Price joined Fidelity back in 1998 and launched the group’s first Europe, Middle East and Africa (EMEA) product – which he still runs – in 2005. He inherited the GEM fund from a Boston based team in 2009 and has produced strong numbers since, despite a tough year in 2011.Mark Livingston, an investment director on the EM team, says the group sees a GEM mandate as too broad for an individual manager, with 800 companies in the index alone and a huge range of countries to cover. With that in mind, Price largely outsources stock analysis to regional teams, effectively picking the best ideas from underlying EMEA, Latin America and Asian portfolios. If he likes a business not included in these, Price can discuss its merits with the specialists but broadly speaking, he cannot own any companies outside the sub-funds.At present, Livingston says the portfolio is neutral on Asia, at around 55% with a bias towards the Chinese consumer, and overweight EMEA at 30%, where African exposure is key. An underweight in Latin America represents the remaining 15% of assets, with Fidelity concerned about the overall Chinese growth story and expressing this by a light position in Brazil.Outlining the group’s basic investment philosophy in the region, Livingston stresses the dislocation between GDP growth and stock market returns. “Everyone knows the strong economic growth story in emerging markets but our concern is whether shareholders receive the benefits of that,” he adds. “If you look at the Bric countries for example, they continue to lead the way in GDP growth but have underperformed markets like South Africa, which still boast major advantages in areas like corporate governance.”With that in mind, the team focuses on quality companies, seeking out the usual growth at a reasonable price. “We are looking for stocks with high return on equity and low net debt to equity levels, as well as quality management teams with a track record of delivering for shareholders,” adds Livingston. “This quality focus leads us to countries like South Africa where companies have the best corporate governance in the emerging world and therefore genuine honesty of earnings.”In addition, the group is also a strong believer in active stockpicking in the emerging region, to take full advantage of what remain less efficient markets. Price currently has 75 stocks in the fund, between limits of 60 and 120, and around 80% is active money, creating major scope to out-or underperformance the benchmark.Livingston says the team also tends to trade more frequently than peers, setting target prices for every holding and seeing more potential to top and tail positions with less efficient pricing. “Active management is particularly key in these markets and we see this as even more the case post the ‘free lunch’ period from 2003-2007, when the vast majority of GEMs all outperformed together as they benefitted from the China effect,” he adds. “This has now passed and we expect clearer definition between winners and losers, with the former comprising countries and companies that initiated reforms and moved up to the next level.”Looking at themes in the portfolio, the consumer is key, both in Africa and China. Livingston notes opportunities in countries such as Nigeria, which is benefitting from powerful shifts in consumerism, albeit from a very low base. GDP per capital has quadrupled since 2000, from $400 to $1600, and the population has risen from 120 million to 165 million in the same period, creating huge demand for lower- end goods such as basic food and drink. “We like companies such as South African supermarket business Shoprite, which is taking advantage of its geography to extend across the rest of the continent,” adds Livingston. “The issue is very much supply rather than demand-led in these countries and once you have a distribution network set up through supermarkets, this is an extremely profitable business. Shoprite is not a large active position in the fund now as the valuation has caught up with reality but the underlying consumer trend is clear.”