Back to basics in Asia

Nitin Bajaj, portfolio manager of Fidelity Asian Values PLC, discusses why sometimes simplicity is best when it comes to investing in Asia. He outlines the key tenets that inform his approach and how this plays out in his latest stock picks.

Key points
 

  • As macro uncertainties persist, I believe to be a successful investor you need a constant philosophy to which you stay true.
  • I apply a very simple philosophy in terms of buying good business, run by competent management at a reasonable price.
  • Asia’s diverse universe means these types of opportunities can be found across sectors, particularly among smaller and medium-sized companies.

I have a very simple philosophy which I apply when investing: buy good businesses, run by competent and honest people, and buy them at a price which leaves enough margin of safety for mistakes or bad luck.

As I’m trying to buy companies that other people aren’t looking at, this tends to lead me away from big index stocks and into less well known smaller and medium-sized companies. Looking at Fidelity Asian Values PLC, for example, mega-cap stocks comprise just 20% of the portfolio, compared to around 75% of the MSCI AC Asia ex Japan Index.

With around 18,00 listed companies across Asia, the opportunity to find hidden gems is immense and it is among small-caps where I tend find more mispriced stocks, where valuations offer both downside protection as well as the potential for future upside as and when things improve.

How this plays out - three examples of my process in action

BOC Aviation

This is an aircraft leasing business, which I started buying before most investors were aware of it. Many airlines don’t own their planes but lease them for seven to 15 years. BOC Aviation is the sixth largest aircraft lessor in the world.

Originally spun out of Singapore Airlines and then sold to Bank of China, 25% of the company was listed on the stock exchange in 2016.

I started buying the stock when it was trading 1x price to book, 6x earnings and I was getting a 7% dividend yield at that time. The business has a real competitive advantage because it is owned by a bank and therefore able borrow money at very low rates.

As luck would have it, other people started noticing it in a fairly short span of time and we were able to make a reasonable return on our investment.

Fufeng Group

This Chinese company has a c50% global market share in Monosodium Glutamate (MSG). It also produces other corn starches and animal feed additives, which is effectively a consumer staple in Asia.

Fufeng Group is a very low cost producer. It is broadening its product offering and importantly, has a clean balance sheet. Despite these positive attributes, the stock is cheap for a global leader. It has been misunderstood by many investors, especially those outside Asia, who have missed the consolidation taking place in the market, meaning the company should see better pricing power and margins throughout the next cycle.

LIC Housing Finance

LIC Housing Finance is India’s second largest housing finance company with a real competitive advantage because of its low cost of borrowing (it has the highest credit rating in the space) and low cost of operations – it shares a distribution network with Life Insurance Corporation which is its parent company and India’s largest insurer.

Its assets (mortgages) react to interest rates faster than the company’s liabilities, so throughout the falling rate environment over recent years, the company saw its Net Interest Margins shrink – putting many potential investors off.

With rates now beginning to rise, this trend will reverse, so I have been able to buy a long-term compounding business at just 10x price-earnings.

Each of these companies, though operating in very different markets, has potential for growth, but is protected by a real competitive advantage or barrier to entry – which is key to how I select businesses in which to invest.

Hard work and patience

Finding good businesses is easier said than done. It requires an immense amount of hard work and patience from our analyst team because we look at company after company after company and it could be only one out of every 15 or 20 that meet our strict criteria.

As political, economic and market events may continue to be unpredictable, I believe to be a successful investor you need a constant philosophy to which you stay true. In adopting this approach and combining it with a skilled team of analysts who are willing to work hard, we hope to continue to deliver superior returns for investors over the long-term.

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Important information

Past performance is not a reliable indicator of future returns. The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Fidelity Asian Values Trust PLC can use financial derivative instruments for investment purposes, which may expose it to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Investments in smaller companies can carry a higher risk because their share prices may be more volatile than those of larger companies. Changes in currency exchange rates may affect the value of investments in overseas markets. Investments in small and emerging markets can be more volatile than other more developed markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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