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Sustainability and Asian small-caps

Asian Values

Asian Values - Investment Trust Range

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In recent years, an increasing number of investors have become interested in sustainable investing or Environmental, Social and Governance (ESG) issues as they relate to individual stocks and portfolios.

Instead of only focusing on financial returns, investors are more closely examining the non-financial implications that investment decisions have on the natural environment and civil society. As a result of this, the spotlight is on investment managers and company management teams to act in a way which is sustainable over the longer-term, with an intention to generate a positive social and environmental impact.

I think this is commendable and I am encouraged that investors are thinking of businesses in a holistic fashion. To me, sustainable investing as a concept is important as without sustainable policies - whether they are social, towards employees and customers, or environmental - the business model of a company is not sustainable.

It makes good business sense to follow laws, respect your employees, customers and societies you serve. I have always looked at it from this perspective rather than following an “alphabet soup” of acronyms denoting different forms of guidelines, metrics and reporting standards.

​​​​​​​Defining sustainability

We must also be cognisant that sustainable investing is not yet a straightforward or standardised area of investment. It can often entail passing moral and ethical judgements on a way of life. For example, how do we determine whether sharing videos on Instagram (with its energy guzzling data centres) has more societal value versus a school electrified with thermal power in rural China or India? These are complicated decisions and I think simplistic models propagated by ESG rating agencies do not capture such ethical dilemmas.

By way of a more concrete example, a major staple in Asian food production is palm oil, without which it is hard to imagine how many Asian dishes could exist. There has been a great deal of commentary, particularly from countries outside of Asia, about the environmental impact of palm oil - the growing of which has led to deforestation.

It is doubtless true that deforestation has taken place as a result of the palm oil industry, just as it has as a result of almost every agricultural commodity in the distant past. There is no straight forward answer. I understand it is an essential commodity and to me the best way is to engage with companies I invest in and make sure they comply with guidelines set out by the Roundtable on Sustainable Palm Oil (RSPO). This is a basic minimum and in fact all the companies within the portfolio are well beyond that stage in their thinking.

As a portfolio manager, I’m encouraged that Fidelity is taking sustainable investing very seriously and we are moving beyond relying purely on external ratings as we have built our own internal sustainable ratings capability. I am confident that we are well on our way to having a best-in-class research and engagement model.

This is particularly valuable in smaller and medium-sized companies as external rating agencies do not cover around 50% of the stocks I own. This is even more pronounced in the MSCI All Country Asia ex Japan Small Cap Index although as the chart below shows, the Fidelity Asian Values portfolio is more likely to own higher rated stocks where these holdings are indeed rated.

Fidelity Asian Values PLC - MSCI ESG ratings

 

  Portfolio % Index % Relative %
AAA 0.0 0.1 -0.1
AA 4.4 1.0 3.4
A 8.6 4.5 4.1
BBB 7.8 4.9 0.2
BB 9.2 6.8 2.4
B 5.9 6.5 -0.6
CCC 1.2 1.2 0.0
Not rated 50.7 72.2 -21.5
Cash & other 12.2 0.1 12.1

Source: Fidelity International & MSCI ESG Research, 30 June 2020. Index: MSCI All Country Asia ex Japan Small Cap.

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Important information

The value of investments can go down as well as up and you may not get back the amount you invested. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments are subject to currency fluctuations. The shares in the investment trust are listed on the London Stock Exchange and their price is affected by supply and demand. The investment trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. This trust invests more heavily than others in smaller companies, which can carry a higher risk because their share prices may be more volatile than those of larger companies and the securities are often less liquid. This fund uses financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. This Investment Trust invests in emerging markets which 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.