HEAD-TO-HEAD: Fidelity versus JP Morgan

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Performance

Owing to the macro environment, both the funds and the index have suffered double digit percentage losses over a three-year period.

The JP Morgan Emerging Markets Equity Fund posted a three-year loss of 16.88%, while the Fidelity Emerging Markets Fund lost 18.43% over the same period.

The funds bottomed out in the second quarter of 2020 after central banks globally intervened to support markets in the wake of the pandemic; the JP Morgan fund even posted a 60% return in March 2021.

However, this momentum has not continued, with the JP Morgan fund losing 40.13% and the Fidelity fund losing 42.73% over the past 12 months.

The MSCI Emerging Markets index, which both funds are benchmarked to, has lost 30.94% since the end of October 2021. Liu believes it has been a difficult year for the Fidelity fund as the fund managers have bet on Russia.

“At the start of the invasion, the fund had around 6.8% of exposure to Russia, which is a four percentage point overweight compared with the MSCI Emerging Markets index,” she said.

“Although the manager had tried to trim down some exposure after the event, the market eventually closed and they had to stop trading Russian stocks. So the managers had to write down the valuations for the Russian stocks to zero, which really hurt the fund.”

Another factor leading to the Fidelity fund’s underperformance is its quality bias in stock selection.

The fund mostly invests in companies that have proven resilience in terms of long-term earnings and strong balance sheets.

It has missed out on opportunities such as commodities and energy companies, which have performed well amid the Russia-Ukraine war.

Although the JP Morgan fund did not overweight Russian stocks, it struggled when the economic cycle underwent a growth-to-value rotation in 2021.

As the fund has a growth bias, it had a rather large exposure to technology and internet stocks and its performance was hurt when internet-related companies heavily sold off last year.

In terms of annualised alpha, Fidelity generated -9.87 over the past 12 months, while JP Morgan posted -5.65.

However, when looking at the long term, Liu believes both funds are still performing pretty well. For instance, the JP Morgan fund generated 32.64% return in 2020 and 30.12% in 2019, while the Fidelity fund posted 26.48% and 28.1% returns for both years respectively. Meanwhile, the emerging market sector returns for 2020 and 2019 were 14.51% and 19.21% respectively.

“The numbers this year don’t look great, but no one always makes the right call. While it is good to understand why both funds underperformed recently, it is also important to understand the philosophy of the funds by looking at strategy and the investment process,” said Liu.

“I know that they could outperform both the index and their peers when the market focuses back on fundamentals and earnings.”

Discrete calendar year performance

Source: FE Fundinfo. Annual returns in US dollars. *1 Jan 2022 – 1 Nov 2022

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