Shorting a now-bankrupt Brazilian retailer and a strong show from banking stocks have kept  Fidelity Emerging Markets (FEML ) ahead of the market this year.

The £535m portfolio shrunk 2.6% in the year to end of June, just staying ahead of the 2.8% decline in the MSCI Emerging Markets index. The share price fell 5.2% over the year, widening the discount to net asset value (NAV) from 12% to 14.6%.

Chair Heather Manners said the ability of manager Nick Price to hold short positions, or bets that the value of a stock will decrease, is ‘starting to feed into the positive performance’.

Price said that he hunts for companies with a ‘deteriorating fundamental outlook, or red flags such as a broken balance sheet, bad corporate governance, poor relations with regulators, or a shareholder that is acting to the detriment of minority investors’.

This strategy saw him pick up Americanas, a Brazilian retailer that is losing market shares.

‘Because of this, it resorted to fraud and hiding its debts off balance sheet,’ he said. ‘We spotted these red flags and took out a short position… the company subsequently went bankrupt, and we closed the position at a profit earlier this year.’

Price also ‘pairs trades’ where a long position is matched with a short position, or a winner is matched with a loser.

This strategy was used in the South African food retail space, where ‘elevated inflation has created a very competitive operating environment’.

‘We have a long position in a company called Shoprite, which has consistently gained market share over the years due to its strong value proposition and cost control,’ Price said.

He matched this with a competitor that is struggling to keep up and is losing market share.

Price has also paired trades in the Chinese real estate market, where ‘state-owned enterprises have rapidly gained market share since 2017 and are benefiting as many private developers go bankrupt’.

He has a long position in state-owned China Resources Land which he has matched in several short positions in indebted private developers.

The exposure that the trust has to financials has also been beneficial to performance over the year despite the mini banking crisis that occurred in US regional banks earlier this year.

One of the top performers is the fund’s second-largest holding, India’s HDFC Bank, which makes up 5.3% of the portfolio. Mid-cap names, such as Greek lender Piraeus Financial Holdings, Brazilian digital challenger bank Nu Holdings, and Kazakhstan’s e-commerce and payments platform Kaspi, also gained over the year.

Taiwan and South Korean technology names also did well over the period, despite a tough 2022, as they benefited from China’s reopening and growing hype around artificial intelligence.

‘We have trimmed many of these positions on strength and I think it’s important to point out that we are disciplined in taking profits following bouts of strong performance,’ said Price.

This year is Price’s 14th year managing the fund, and he said emerging markets has been ‘broadly flat’ over that period.

‘The index is as cheap as it has ever been and is trading at multi-decade lows relative to developed markets,’ he said.

‘I do think that over the next decade, we should see decent returns, particularly relative to regions such as the US… Given that emerging market equities have underperformed over more than a decade now, valuations are very attractive and appear out of sync with what I think is an increasingly positive fundamental backdrop for many companies.’