Fidelity continues to believe new economy stocks in Asia offer too much risk and despite its recent ...
Fidelity continues to believe new economy stocks in Asia offer too much risk and despite its recent underperformance in the region, will continue to avoid investment in those areas.
KC Lee, fund manager of Fidelity South East Asia fund, said over the past year two major themes in the area included strong returns by the Korean and Singapore market as well as the rapid growth in the technology, media and telecoms sector. Lee chose to steer clear of both and as such admits he was one of the few fund managers who underperformed.
Lee said: "Obviously my investment style, emphasising track record and value, and my tendency to be critical and to think differently from consensus failed miserably in the last 12 months as investors' risk appetite surged in a low interest rate environment. Hopefully this style will work better when eventually investors have a better understanding or awareness of the risks they face."
When most managers were choosing stocks such as Taiwan Semiconductor, China Telecom, and Samsung Electronics, Lee favoured stocks with steady, but unexciting growth. He said: "A low growth, low risk stock is attractive to me if the valuation is low because there are two positives, low risk and being cheap, versus one negative, which is low return."
Lee said he chose this contrarian approach to the market and stocks as he believes when a consensus reaches an extreme, that consensus is usually proven wrong, if not the majority of investors would consistently get the markets and stocks right. As it was, he said it was unusual that so many fund managers made money in the most favoured markets and stocks. Lee questioned, in this bull market for new economy stocks, whether traditional fund management is converging with venture capital investment. Pressure on fund managers has been building for them to invest in companies, such as internet start ups, which in the past would have only attracted venture capitalists.
He said: "The chance is high that our risk/return analysis on these stocks is wrong. If convergence is the trend, then mutual funds will inevitably invest more in companies that eventually go bankrupt. Do investors want to see a list of bankrupt companies in the funds they invest in?"
Lee remains bearish on the Korean market as he believes its restructuring programme has been talk rather than action and the country has disappointed on the corporate governance level.
Prior to the financial crisis, it was a common practice for Korean chaebols or business groups to channel resources from financially stronger companies within the group to those that required financial assistance.
Lee said: "Early last year when investors chose to believe that such practices were history, companies of a large business group, with supposedly the best corporate governance in Korea, issued convertible bonds with conversion prices set at roughly half the then market prices of the ordinary shares. Those severely underpriced convertible bonds were not offered to fund managers and neither did minority shareholders have the chance. They are believed to have been placed with members of the controlling family or companies within the group that needed financial assistance."
The frAAA rated South East Asia fund is ranked 63 out of 79 funds in the Far East ex Japan sector over the three months to 3 May.
Over one year, on an offer to bid basis, it is ranked 60 out of 77 funds on growth of 8.7%, although over a three year period to 3 May the fund has grown 5.8% and is ranked 12 out of 68 funds in its sector.
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