Fidelity EM moves closer to clearing tender hurdle

Fidelity Emerging Markets (FEML ) has fully shaken off its Russia write-down, notching up a third successive year of gains and edging closer to cancelling next year’s performance-related tender.

Managers Nick Price and Chris Tennant continued their impressive turnaround of the £660m trust since taking over what was the poorly performing and stubbornly discounted Genesis Emerging Markets trust in 2021.

Despite Russian exposure being written down to zero following the 2022 invasion of Ukraine, the duo has regained significant ground, evidenced by the latest full-year results.

In the 12 months to end of June, the fund delivered a second consecutive year of double-digit net asset value (NAV) total returns, totalling 11.8%, putting it well ahead of the MSCI Emerging Markets index return of 6.3%.

Shares advanced 14%, narrowing the discount from 11.9% at the start of the period to 10.5%. The trust also cheered investors with a 30% increase in its dividend to $0.26.

The extension of benchmark-beating performance into a third year means the trust is closing in on the threshold for scrapping its conditional tender. It is offering shareholders the chance to cash in 25% of their shares at close to NAV should returns fail to exceed the index over the five years to 30 September.

Heather Manners, chair of the trust, said at the time of writing the results, the trust was just 8 percentage points behind the index over a five-year timeframe, although over three years it was 21 percentage points ahead.

The fund has already shrunk significantly since Fidelity’s takeover in 2021, when the NAV stood at over £1bn. Since then it has completed a 15% tender in 2024 and last month confirmed it would buy back Strathclyde Pension Fund’s 25% stake − the second largest shareholder in the trust.

‘It is important to remember that the five-year period – both currently and in September 2026 – includes the period before the Russian invasion of Ukraine in February 2022, which had a starkly negative impact on the company’s returns given its overweight positioning in Russia at the beginning of the war,’ she said.

‘The majority of these Russian assets are still in the portfolio but are currently valued at zero given the inability to trade; any potential resolution to the conflict and applicable sanctions could therefore provide a NAV uplift.’

The managers did manage to sell one Russian holding, jobs board Headhunter.

Over the year the top performer was Naspers, the South African holding company that has a stake in China’s internet giant Tencent. The former ‘significantly outperformed’ the latter, thanks to its ongoing share buybacks and ‘indications its other investments are starting to turn a profit’, said the managers.

Mid-caps also made up a chunk of the best performers, including gold miner Lundin Gold, Taiwan’s Elite Material, and Georgia’s TBC Bank.

Price and Tennant said they were ‘particularly excited’ about TBC Bank, which is one of two dominant banks with 80% market share in a population of just under 4m people.

It earns a return on equity of more than 25% but trades on just 5 times earnings, ‘a very cheap multiple for such a dominant, profitable bank’. It has also just launched a digital bank in Uzbekistan, which has a population 10 times that of Georgia’s, which offers ‘huge scope for expansion’.

The duo also scaled up their exposure to gold miners despite the stellar run from the precious metal this year. They said for years the price of gold had correlated with the treasury inflation-protected securities (TIPS) yield but ‘this broke down after the confiscation of Russia’s FX reserves and the explosion of fiscal largesse in the US, which reduced the appeal of US treasuries versus gold’.

Despite the rally in mining stocks, Price and Tennant said they still offer ‘good value’ and several of their new additions generate a 15% free cashflow yield.

They increased exposure to China with a new position in Bosident, a down jacket maker that has doubled its market share over the past 10 years and offers a 6% dividend yield.

Tencent Music, known as the ‘Spotify of China’, was also added to the portfolio as it trades a third of the multiple of Spotify.

Exposure to Taiwan was also increased as the region suffered an ‘indiscriminate sell-off’ following the US ‘liberation day’ tariff announcements. This provided the opportunity to buy into digital ink business E Ink, which had previously been too expensive to own.

E Ink has a ‘more than 95% market share and a monopoly, IP-protected position’ but derated from 30 times to 20 times earnings in April despite having no exposure to tariffs.

Indian stocks remain expensive, but Price and Tennant said there were opportunities among financials, and they added HDFC Asset Management to the trust, describing it as ‘operationally lean’.