Morningstar Fund Awards 2010
Winner of Japan Large-Cap Equity
Fidelity Funds – Japan Advantage Fund
Morningstar Fund Award Winning History of Fidelity Funds – Japan Advantage Fund
- 2010 Japan Large-Cap Equity
- 2009 Japan Large-Cap Equity
Japan is an interesting “system” in Asia. Japan is one of most developed countries in the region and is less economically dependent on other Asian countries. Adding that Japanese Yen has been one of the strongest hard currencies over the past five years, Japanese stock market is of low correlation with other Asian markets. Given this unique characteristic, we are keen to have Japan Large-Cap Equity category in Morningstar Fund Awards in Hong Kong. This year, Fidelity Funds – Japan Advantage Fund won in this crowd arena, and this is the second time in a row.
Performance
Fidelity Funds – Japan Advantage Fund returned 20.82% in 2010, 8 percentage points ahead of its rivals. Indeed, this best-decile showing isn’t the only bright spot. Over the longer-term, the Fund’s 3- and 5-year annualized returns are 6.63% and 1.34% respectively as of the end of April 2011. They don’t look good in absolute term, but they are stellar in relative terms – the average fund in category lost 7.10% and 7.54% on annualized basis in the same timeframe.
Key to Success
“I attribute the fund’s successful performance so far to the fact that my stock selection strategy is consistently guided by share price valuations.” Ronald Slattery, helmsman of the Fund, claimed. Guided by this religious investment philosophy, the core holdings of the portfolio are typically cheap in terms of normalized price-to-earning ratio (adjusted for net cash/debt), and/or price-to-book ratio (adjusted for unrealized gains or losses). Cash flow and balance sheet health are other key factors of the equation.
Successful stock selections in three areas – banking, transport equipment and information & communication - are key contributors to the Fund’s strong 2010 performance. Supportive policy and improving transparency of regulations, together with rising long-term rates, banking sector was benefited. Maneuver in the transport equipment sector was another great move.
A heavy industries company with bright earnings projection for fiscal 2010 added value to the portfolio. Slattery underweighted a major motor company after its extensive product recall in the US market proven prudent. His decision to underweight an attractive looking electrical machinery stock was uneasy, but has proven rewarding.
Slattery emphasized that the investment team backing the Fund is essential for the Fund’s success. The team consists of 30 analysts based in Tokyo, who cover more than 85% of the total Japanese market capitalisation. “The most important ingredients to my valuation analysis are our research analysts’ earning forecasts and balance sheet analysis.” Slattery commented. “They are held accountable for updating their research notes that include financial models and in-depth analysis of corporate and industry fundamentals at least once a quarter. Frequent updates of earnings models help me find valuation anomalies in the market”.
Focuses
Though the team and the strategy execution are great, the earthquake and the failure of nuclear plant in Fukushima hurt investors’ confidence. However, Slattery didn’t panic at all. “I do not make bets on any particular market cap size, sectors or investment themes.” He believed that the post-earthquake sell-off was emotion-driven and indiscriminate. He admitted that he had selectively added positions in stocks that appear to be oversold, and reducing exposure to names that appeared more expensive than the market average. But he stressed that there was no major change to sector positioning. At the end of March, the fund overweighed chemicals and pharmaceuticals, and underweighted utilities.
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“The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” is a famous quote from Sir John Templeton. The pith of the matter is the courage to act against the crowd. The one who can get over the fear will be the winner. To achieve this, Slattery always looks straight to the gist and sticks to his valuation-cautious bottom-up stock selection process, as he genuinely believes that “investors’ herding mentality fuels market sell-offs, but share price valuations eventually revert to the mean”.
Company Profile Fidelity International provides investment products and services to individuals and institutions in the UK, continental Europe, the Middle East and Asia Pacific. Established in 1969, the company has over 5,400 staff in 23 countries and total customer assets US$309.7 billion as at 31 March 2011. Fidelity has over 7 million customer holdings and manages more than 750 equity, fixed income, property and asset allocation funds. Fidelity’s fund managers receive research from one of the largest proprietary research teams, covering 99% of the world’s largest listed companies. Fidelity International is an independent company which is privately owned. |
