HEAD-TO-HEAD: Fidelity versus Stewart

123456

Source: FE Analytics. Three-year cumulative returns in US dollars.

Performance

The difference between the three-year cumulative returns of the two funds is stark. Fidelity has posted 24.20% during the period, more or less in step with its MSCI Emerging Markets index (24.78%), but the Stewart fund has barely broken even, returning only 3.89%, according to FE Analytics data.

“China exposure has been the biggest driver of the Fidelity fund’s performance during the past three years, and returns have also been helped by individual holdings in India and Russia,” said Daniels.

The strategy’s standard deviation of returns has trended below its benchmark during Price’s tenure, so risk-adjusted results are also impressive.

“However, performance has been choppy in recent years,” said Daniels.

“In 2016, when value stocks outperformed growth stocks, the strategy posted dismal results, placing in the bottom decile among peers.”

He is surprised that the Fidelity fund underperformed the benchmark during last year’s market rout, because the quality metrics that Price and his team use should have ensured that the fund’s portfolio comprised more highly-rated stocks than those contained within the index.

“Stock selection was largely to blame for the underperformance, with holdings in Petrobras and Sberbank particularly detracting,” he said.

Nevertheless, the fund bounced back this year, vindicating Price’s confidence in his China and Russia stock-picks, he added.

The Stewart fund was resilient last year, holding up well compared with the MSCI Emerging Markets Index and its peers. Its value certainly declined, but 1.3% less than the benchmark and 2.6% less than the sector average.

The fund benefitted from solid stock selection in information technology and consumer staples, with primary contributors including India-based Tata Consultancy Services and Uni-President Enterprises.

Daniels believes that the manager’s preference for stocks with lower market capitalisations than the “leaders” in the index also gave the fund some protection.

However, failure to have any significant allocation to China has been a “huge headwind” for the Stewart fund, which also made a couple of unfortunate stock-picks in South Africa, notably Remgro and Tiger Brands, according to Daniels.

This year has also started poorly for the fund, with weak performances by two key India holdings – pharmaceutical firm Cipla and Tata Power – dragging down returns on an absolute basis.

Meanwhile, Swarup’s continued reluctance to take on China exposure, while maintaining an outsized 28% weighting to India hasn’t done the fund’s relative performance any favours.

Nevertheless, “both strategies should perform better than the index in market downturns, and that has generally been the case in the past,” said Daniels

He has more confidence in the Stewart fund’s continued ability to do so, because of “its focus on strong balance sheets, good management and all around quality”.

Discrete annual performance

Source: FE Analytics. Annual returns in US dollars.

123456