Nitin Bajaj, manager of top-performing Fidelity Asian Values, has used a small amount of gearing, or borrowing, to take advantage of buying opportunities during recent volatile markets.
Top-performing Fidelity Asian Values (FAS) has used a small amount of gearing, or borrowing, to take advantage of buying opportunities during the volatile end of last year.
Medha Samant, an investment director at Fidelity International, said fund manager Nitin Bajaj had invested the 3% cash he had held and introduced 2% gearing on the trust as he put money into the market after the 'Red October' sell-off.
This was a change of tack from Bajaj, a Citywire AA-rated stock picker who took over the smaller companies trust nearly three years ago and who had regretted being fully invested in 2017.
According to Samant, the manager felt his biggest mistake that year - which led him to underperforming his stock market benchmark - was not to sell stocks and hold more cash.
‘He felt he was at the mercy of compliance and couldn't get into cash,’ she said. 'So he held on and made a mistake and says he's never going to do that again.'
‘So now he'd rather hold onto to cash and know that there is always a time he can put it and that's right now.’
According to Morningstar, Bajaj did not have a bad 2017 in absolute terms with the trust's net asset value (NAV) growing 9.7% although this was well behind the 24.5% gain in the MSCI AC Asia ex-Japan index.
Last year NAV was virtually flat although a 0.8% decline beat the 8.8% decline in the Asia index.
Bajaj took over the trust from John Lo in April 2015 and overhauled its portfolio. Over three years its NAV has grown by 57.9%, matching the benchmark's return. However, a re-rating of the shares, which moved from trading 10% below NAV to the current 5% above asset value, has delivered a 90.4% return for shareholders.
This is the best of any Asia investment trust, including its direct rivals Scottish Oriental Smaller Companies (SST) and Aberdeen Standard Asia Focus (AAS), which recently announced manager Hugh Young would resume a hands-on role to improve performance.
FAS also tops the AIC Asia Pacific ex-Japan sector over five years with a total shareholder return of 111.7%.
Since reshaping the portfolio the £277 million investment trust now holds 53% of assets in smaller companies with a market value under £1 billion.
One stock Bajaj recently bought is Chinese company Xingda (1899.HK), which is the world’s second largest manufacturer of steel cords for car tyres. It represents a 1.6% stake of the trust’s portfolio.
It has a 40% market share in China – the world’s largest automobile market – and its shares trade on just six times earnings, says Fidelity.
When asked what the secret was for staying ahead of the competition, Samant said it was the trust's sturdy portfolio of what might be characterised as 'boring' companies.
‘Given where trends are and headwinds are, the environment has never been better for compounding money,’ she said. ‘Because when you look at stock price today, he [Bajaj] is getting a lot of companies which are very cheap and boring businesses.
Bajaj, whose Citywire AA rating relates to FAS' sister fund Fidelity Funds - Asian Smaller Companies, has argued that the 'small cap' space offers better opportunities to find both the 'winners of tomorrow' and 'mispriced' businesses.
These two factors combined is intended to have more of an absolute return effect, said Samant, which varies from the vast majority of its peer growth-style trusts in the Asia Pacific ex Japan sector.
'Nobody tends to think of Asia as value but this is more of a small cap [trust] with a focus to value,' she said.
As such, Bajaj avoids 'blue sky' internet companies over concerns about poor capital allocation and corporate governance.
‘People are favouring internet names and completely ignoring mobile companies like your incumbent telecom operators but paying out good dividend yield, churning out cash - why not it's a good company?’, said Samant.
China Mobile (0941.HK), a US $208 billion giant, is the trust’s third largest holding at 2.5% and the trust’s exposure to Chinese companies stands at 19.9%, as bearishness over the US-China trade is overplayed so this was now the best time to find small value stocks.
‘Trade wars do create risk but it's not earth shattering, it’s not a game changer,’ she said. ‘A lot of the changes people have been talking about, relocation of supply chains, exposure to the developed side of China, the change is already happening.’
While markets were down the economies were holding up, so Samant said this was the best time to put ‘dry powder to work’.