Energy, Technology and Consumer Defensive are the three top sectors of this geographically-diverse fund.
Fidelity EMEA (FEMEX)
From Moneyletter
Fidelity EMEA (FEMEX) normally invests 80% of assets in emerging Europe, Middle East, and African (EMEA) issuers, plus the stocks of firms economically tied to the region. Fund manager Adam Kutas has been at the helm since the fund’s May 2008 inception. That year, incidentally, was a terrible one for the region as the MSCI Emerging Europe, Middle East, Africa benchmark index declined by 55.6%.
The EMEA Index rebounded 61.4% in 2009, with the Fidelity fund lagging slightly behind. Since then, however, the fund has generally outperformed its benchmark on a calendar year basis and has bested the index for the trailing one-, three-, and five-year periods. Looking at 2016 through November 30, the fund is up 20.7% compared to 12.4% for the index.
The strategy Kutas aims to provide both capital appreciation and capital protection for investors via careful stock selection. He notes that he looks for “great, well-funded companies trading at a discount to fundamentals. I try to achieve this by pursuing stocks with low valuations—as measured by price-earnings (P/E) ratios and free-cash-flow yields—and a high return on equity funded by free cash flow, as opposed to high levels of debt.”
Because of the lower stock liquidity and higher trading costs in EMEA markets compared to more established regions, Kutas also aims to keep portfolio turnover low, which should aid fund returns. Furthermore, he emphasizes thorough knowledge in the investment process. “As I see it, deep knowledge of local companies is key to success in the EMEA markets. Crossover investors—those not dedicated to emerging markets—historically dominate capital flows in the region and emerging markets generally. I think this situation creates opportunities for investors like me, who are dedicated to seeking value and uncovering contrarian ideas in the EMEA region, when these crossover investors exit the markets in a price-insensitive process.”
By region, Africa accounts for 47% of assets, emerging Europe for 35%, followed by the Middle East and developed markets (10% and 8%, respectively). Compared to the benchmark index, the fund is overweight in materials, consumer staples, and industrials, and underweight in energy, real estate, and telecommunications services.
Materials stocks, especially metals holdings, have been a large boost to performance this year, as have several bank holdings. South Africa’s DRDGOLD, while accounting for only 1.2% of the portfolio, has nonetheless been a huge contributor, with a gain of more than 155% this year. The company has tailored its business model to focus on extracting gold from surface tailings. South Africa gold miners have left hills of tailings as by-products of a century of mining, and DRDGOLD is profiting. Extracting the metal from these hills is less capital- and operationally-intensive than mining, giving the firm higher margins. South Africa miners AngloGold Ashanti and Northam Platinum have also been strong performers.
Two of the fund’s Russian holdings have also been notable, with gains exceeding 55%. Sberbank of Russia (the fund’s second largest holding at 5.1% of assets) began a rebound late last year. Kutas bought the stock in late 2014 on price weakness caused by a falling ruble and declining oil prices. Yet the bank had a strong competitive advantage with its more than 10,000 branches, and has rebounded as the economy proved not as weak as was feared. Meanwhile, oil and gas giant PJSC Lukoil (4.0% of assets) has benefited from higher energy prices.
Walter Frank, Moneyletter, www.moneyletter.com, 800-890-9670, December 2016