Fidelity's Anthony Srom tells us why relative caution about China at the macro level won't stop him pursuing a high-conviction investment strategy
You've been managing the Fidelity Asia Pacific Opportunities Fund since September 2014. How do you run the portfolio and where has performance come from?
My approach is very much stock-specific, leveraging Fidelity's large research network to find the best ideas across the region. The fund is a high conviction portfolio that runs between 25 and 35 names at any time. This concentrated approach means each stock can meaningfully contribute to performance and it also allows me more time to focus on each holding and the key drivers of returns: fundamentals, sentiment and valuations.
Managing for risk is important and given the concentrated nature of the portfolio I spend a lot of time looking at how stocks behave relative to each other, favouring stocks with relatively low levels of correlation. It is pleasing that we have managed to deliver the performance we have over the last five years with less volatility than the broader market.(1)
Our holdings in China have been contributors to this performance and we've had a material position in liquor maker Kweichow Moutai since the fund was launched. Chinese Soy sauce manufacturer Foshan Haitian Flavouring & Food has also been a standout performer and we've also had some success with selective holdings in Australia such as Sydney Airport, Charter Hall Group and Bellamy's Australia.
Can you provide an example of how you're taking advantage of any recent regional trends?
While headline news is currently focused on the coronavirus outbreak, you may have also read that African Swine Flu has had a devastating impact on pig stock in China, slashing supply and causing pork prices to rise significantly.
Consumers have taken to other sources of protein; thus we have seen chicken price increases too. KFC is the key cash generator for China's largest restaurant company Yum China, who have exclusive rights to operate and sub-license the KFC, Pizza Hut and Taco Bell brands in China. And 2019's rising chicken prices have increased costs, hurting its share price. Additionally, Pizza Hut has been in the doldrums in China.
So why am I excited for Yum China's future? Because sentiment is negative, valuation supportive, and fundamentals can improve as we move through 2020. Starting with Pizza Hut, Yum China is adapting to local tastes and revamping their stores, which could turnaround that franchise. With regards to KFC, they have been able to lock in future chicken prices with suppliers due to their scale and re-working their menu to lessen cost pressures. In addition, KFC has been able to hike prices as the actual RMB hikes are quite small and people are willing to pay for convenience.
Much of the negative sentiment is already priced in to current valuations, where even small improvements in Pizza Hut or KFC could see the stock rerate.
Within your portfolio where are your highest conviction ideas?
Despite being relatively cautious on China at a macro level, I'm still finding interesting stockpicking opportunities in the domestic A-share market. There are companies here that have great products, a clear market opportunity and solid balance sheets. However, investors need to be aware of potential governance issues and discount that in their investment thesis.
The Indian financials sector is also interesting. Last year's liquidity crunch caused by the nonbank financial sector defaults pretty much halted wholesale funding and increased regulation. This has affected lending in India and the financial sector has faced significant headwinds. Sentiment remains negative, but we could be passed the worst, which may see valuations ‘mean revert' over the course of 2020.
(1) Past performance is not a reliable indicator of future returns. Reference in this article to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only.
This is for investment professionals only and should not be relied upon by private investors. The value of investments can go down as well as up so the client may get back less than they invest. Past performance is not a reliable indicator of future returns. Investments in overseas markets can be affected by changes in currency exchange rates. Some Fidelity funds invest in a relatively small number of companies and, therefore, may carry more risk than funds that are more diversified. They may also use 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. Investments in small and emerging markets can be more volatile than other more developed markets. Investments in Fidelity funds should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document, current annual and semi-annual reports free of charge on request by calling 0800 368 1732. Issued by Financial Administration Services Limited and FIL Pensions Management, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbols are trademarks of FIL Limited. UKM0220/26476/SSO/0620