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MUTUAL FUND SPOTLIGHT
Concentrating on emerging markets Fidelity Investments’ Emerging Markets Fund limits exposure to sectors, countries and individual stocks to give investors a diversified solution
SECTOR ALLOCATION OF THE FIDELITY EMERGING MARKETS FUND 100%
22.5% Financials 80%
60%
16.4% Information technology 14.5% Consumer discretionary 10.5% Communication services 9.7% Materials
BETWEEN THE pandemic and a strong US dollar, emerging markets have had a tough time lately, but it’s an area where Fidelity Investments sees opportunity on the horizon. “The EM opportunity is exciting today,” says portfolio manager Sam Polyak. “EMs have had a tough time in general relative to developed markets. When the dollar is strong, EM currencies are weak; it leads to inflation, and these countries raise interest rates, which hurts consumption and growth. Because of that, you have a lot of pent-up demand that I think will dissipate.”
blow up if one area significantly underperforms. It has, therefore, been able to deliver in up and down markets, growth and value cycles, and been consistent because the focus is the individual stocks.” Fidelity’s experience with emerging markets goes back more than a decade when it rebuilt its approach. Today, a seasoned team focuses on stock selection and returns, not just individual themes. Polyak notes that the team is looking for companies that will continue to grow for years to come. A few of Fidelity’s capabilities help add to
“The EM opportunity is exciting today. EMs have had a tough time in general relative to developed markets” Sam Polyak, Fidelity Investments Polyak is analyzing areas that will benefit and getting those exposures into the Fidelity Emerging Markets Fund. While many EM funds are index-focused, Polyak takes a concentrated approach, focusing on 40 to 50 stocks, then adding a layer of protection to ensure the fund isn’t overexposed to one area. “We have these guardrails in place that make it unique,” he says. “As such, the fund will not be more than 5% overweight or underweight a sector, 10% for a country and 5% of the benchmark weight for an individual stock. It keeps the volatility down. From a risk perspective, the fund will not
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the fund’s uniqueness. The first is its corporate governance team, which looks at balance sheets and income statements for aggressive accounting, but also at the people behind the companies. The second is Fidelity’s geopolitical analyst, a former CIA agent who helps the team understand geopolitical relationships so they are not caught off guard by an event. When selecting stocks, Polyak says his philosophy is growth at a reasonable price, and he looks for companies that have a great product, consumer demand and are run by a management team with a good track record. “The other thing I do is not mess with cash
40%
9.3% Consumer staples 5.0% Industrials
20%
4.2% Healthcare 3.5% Energy
0% Source: Fidelity.ca, as of April 30, 2021
or developed market stocks,” he says. “I try to stay under 2% cash. As for developed market stocks, other funds may sometimes benefit by owning US tech stocks in an EM fund, for example, but I try to provide my investors pure EM exposure.” Right now, Polyak is focusing on a few themes in emerging markets, including automation, local brands taking market share, innovation, e-commerce and infrastructure. While he has historically liked China, he is now looking at areas that have been hit hardest by the pandemic, such as Latin America and India, as he believes they will begin to grow at a faster rate during the rest of 2021 and into 2022. “I think advisors who consider buying into EMs should look at active managers – they have outperformed through time because of two reasons,” Polyak says. “One, EMs have a big proportion of state-owned enterprises that often have the interests of the population and not minority investors in mind. The other area is corporate governance. An index buys a company because it is big, but they don’t care if the people running the company have other personal interests in mind. Those reasons are why I think active does well.”
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25/06/2021 5:38:00 AM