Price, who manages the Fiedlity Emerging Markets Fund, said the portfolio is underweight Samsung by 4% relative to the index, as he believes the smartphone value chain has peaked.
However, the stock has performed well, influenced by ETF flows as well as investors anticipating a better outlook for their smartphone business, according to Price.
As a result, the fund’s return has been down -1.76% year-to-date, compared to the MSCI Emerging Market Index, which has a gain of 8.49%, according to FE Analytics.
“I do not hold companies that are large constituents of the index merely for risk mitigation reasons. Samsung remains squeezed between Apple and some of the cheaper Chinese suppliers. Smartphones represent around 60% of the company’s profits and, given that we think this is under threat, I am quite comfortable not owning the shares.”
Brexit has also contributed to the fund’s underperformance, said Price. Other IT stocks, such as Indian outsourcer Cognizant, which the fund is overweight on by 2.6%, have been marked-down as a result of greater uncertainty surrounding the outlook for financial services, according to Price.
“When we consider the implications of a Trump victory, the outcome could be perceived as a negative for certain components of our global emerging market equity portfolios.
“The Indian IT outsourcers to which we have exposure generate dollar revenues and so a weaker dollar, if that were to emerge after the current volatility, may drive some investor concerns. However, I remain positive that they remain attractive cash generative businesses which are very capital-light.
“In conjunction with this, given these stocks are trading at multi-year lows, I believe the probability of them suffering significant negative returns from here is low.”
China’s NPLs
The manager also remains cautious on the Chinese financial sector, as he believes that there remain huge pitfalls in some of the heavy industrial businesses. As a result, the fund’s exposure to China is focused on the new economy, with the fund investing in NetEase, Alibaba and Baidu, which he said are “robust.”
“We continue to be selective in the financial sector and do not own any Chinese financials as we believe that the non-performing loans within the banking sector will be realised in time and this will be painful.”
In spite of this, he’s comfortable having a 5.6% overweight position in Hong Kong insurer AIA, as he anticipates that it will benefit from “structural growth.”
The manager added that he likes to take a long-term approach to stocks and has increased the number of holdings in the portfolio slightly in order to give “a little more breadth to the portfolio on a country and sector basis”.
Whilst short-term performance doesn’t look favourable, the fund’s five-year performance shows a 12.3% return versus a benchmark return of 0.80%.
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The Fidelity Emerging Markets Fund vs its benchmark, year-to-date. EM equities have been strong this year but an underweight to IT companies has hit the fund’s comparative performance:
The fund over a five-year period vs its benchmark:
