Nitin Bajaj is manager of the Fidelity Asian Smaller Companies Fund, he spoke to us about his portfolio and the strategy behind it.
Your investment strategy favours value stocks, where are you seeing opportunities currently?
I would say the two biggest baskets of opportunity are China and Indonesia. China is amongst the most hated markets in the world. In my experience, the situation in China is not so dissimilar to the United States in 2008 or India in 2012 and 2013, where there was almost consensus negativity because of economic downturn. I remember in 2008 during the American financial crisis when people were not even ready to buy things like Microsoft on six or seven times earnings.
For China the downturn is cyclical in nature, not structural, because when you go to China, you see the quality of physical capital they have. For instance, Beijing University alone does more peer-reviewed research papers
in the top 10 scientific journals of the world than India, the UK and Germany together. The other place is Indonesia, it just doesn’t seem to register on people’s radar. You get very interesting businesses there.
How do you go about portfolio construction?
I look for the best ideas based on a risk reward. I look at one business at a time deciding if I want to own it and if I want to work with the people. I also ask, is the valuation leaving me enough safety margin for things to go wrong? If those boxes are ticked, then I’m interested in investing in that business.
Tell us about a few stocks currently in portfolios that you believe are providing the best opportunities right now.
Let’s look at Qingdao port, it’s the gateway port for Shandong, China. It’s very well diversified between bulk liquids, containers and logistics. They get revenue from all the streams that a port should get. It’s been around for 130 years. It’s a naturally deep port that has significant geographic advantages because it doesn’t freeze in the winter, it doesn’t get storms in the summer. It has top class infrastructure and connections, you cannot replicate this asset.
Another company is a newer business called Tuhu, the largest aftermarket auto parts retailer in China. They have an app and if you need your car serviced, you put in its details and the app comes up with a diagnostic based on an algorithm and it then directs you to a car service centre it’s connected with. I’ve owned AutoZone in the US in the past, the stock is up a hundred times over the last 25 years. I’m not saying Tuhu will be, but it’s a fantastic opportunity.
What’s the case for small versus large caps within your region?
If you look at a long-term history of investing in Asia by style factor, by far the best performing subclass within Asia has been small cap value stocks. Nothing else comes even close to it. I think the reason that happens is basically the process of capitalism. That capital and talent flows into industries that are doing well and capital and talent flows out of industries which are doing badly. What happens when capital and talent flows into industries doing well is that competition goes up and when competition goes up, prices go down, profits go down, stocks go down.
The exact opposite happens in value areas, not doing so well. Talent and capital leave, competition declines and then prices go up, profits go up, stocks go up. Value investing in Asia also has a historic track record of doing well. When you do small caps in Asia, you get a completely uncorrelated set of cashflows. For example, I own a funeral home in China, a security service company in India. These are completely uncorrelated cash flows, so it adds diversification to the fund portfolio.
Important information: This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.