Fidelity International manager Nitin Bajaj says he invests his own money in the investment trust he took over in 2015, with the small-cap strategy rising by more than 50 per cent since.
He took over management of the £270m, five FE Crown-rated Fidelity Asian Values investment trust from veteran manager John Lo following a review in 2015.
Bajaj said: “In 2015, the board of Fidelity Asian Values was looking to reposition the trust to be more different rather than just becoming another Asian fund and realised that the small-cap strategy could help them achieve that objective.”
Since his appointment to the trust as manager in January 2015, Bajaj has repositioned the portfolio to reflect his smaller companies strategy.
Over this period the trust has generated a total return of 54.66 per cent, compared with a 25.04 per cent gain for the MSCI AC Asia ex Japan index and a 23.32 per cent rise for the average IT Asia Pacific ex Japan Equities sector fund.
Performance of fund vs sector & benchmark since appointment
Source: FE Analytics
The manager had a strong 2016 also, returning 42.3 per cent compared with the sector average of 28.95 per cent.
Bajaj joined Fidelity in 2003 as an investment analyst before taking on portfolio management duties and was appointed manager of the offshore Fidelity Asian Smaller Companies fund in 2013.
The smaller companies strategy employed by the investment trust is the same as used on the sister £715m Fidelity Asian Smaller Companies fund, which is also five crown-rated.
The fund’s investment universe includes more than 17,500 listed stocks drawn from across the Asia Pacific ex Japan region and more than 50 per cent of the fund is invested in companies with a market capitalisation of less than $1bn.
Bajaj says the fund’s investment approach is similar to broad investment principles of seeking out the best companies, managed by the best people and investing at the best possible price.
“It is easier said than done,” he explained. “In the stock market there have always been distractions.”
One such ‘distraction’ is the benchmark, which he says he ignores. Indeed the trust has an alpha score – which is a measure of a fund's over- or underperformance to its benchmark - of 11.75 and an information ratio figure – risk-adjusted measure of actively-managed fund performance – of 1.15 over two years.
Performance of MSCI Asia Pac ex Japan indices over two years
Source: FE Analytics
The bottom-up manager says he aims to compound returns at around 15 per cent per annum. To do this, he looks at stocks with the potential to generate a 50 per cent return over three years.
Bajaj looks through the universe to identify stocks with the potential to generate those returns, taking in a number of factors such as business model, demand, growth opportunities, management quality and historic financial performance.
He says he avoids companies that he doesn’t understand, those with high levels of debt, high valuations and high margins.
“The process can take two weeks or two years,” he added. “It depends on the business complexity and my level of knowledge.”
One example of a stock favoured by Bajaj and the largest holding in the portfolio is Power Grid Corp of India.
Describing it as similar to the National Grid in the UK, Bajaj says it has a number of advantages in the domestic market as a regulated entity.
While four regions in India each have their own grid system, the central electricity transmission company rebalances and delivers energy where needed. Bajaj says the firm delivers 15 per cent regulated return on equity.
“It’s a complete monopoly in the sense that once you have the network, managed operating costs are zero,” he said, adding that any competitors would need to invest in their own network, thereby increasing costs.
“They are government-owned and you can’t really compete with them in terms of cost of borrowing.”
“It’s of national importance and they get anything [they need]. It’s trading on 11 times earnings and should be able to grow at 10-15 per cent for years to come.”
The fund manager says the investment process is never easy noting that if it were everybody would do it.
“It’s my strong belief that if over the next five years we don’t make money, it won’t be because of [a lack of] opportunities, it will be because the process didn’t work and we didn’t work hard enough.”
However, he warns that the strategy is not for short-term investor arguing that those buying the fund should have “at least a five-year view”.
“I run this money the way that I run my personal money and I have a lot of personal money invested in the two funds,” he explained.
According to Winterflood Investment Trusts, Fidelity Asian Values is currently trading at a discount of 2.01 per cent, as at 5 April 2017. The closed-end fund has an ongoing charges fee (OCF) of 0.9 per cent.