Speaking at an investment conference in Hong Kong, Citywire A-rated Nicholls, who is replacing Anthony Bolton (pictured) on the Fidelity China Special Situations investment trust next April and Chanpongsang, who is replacing Allan Liu on the group's South East Asia fund on 1 January, outlined how they are looking forward to taking on their new mandates.
Nicholls brings with him 10 years’ experience of investing in China and of the two has the most similarities with his predecessor, sharing Bolton’s view that China’s economic model will shift more towards private consumption and services. He also has a similar small and mid cap bias, focusing on growth opportunities at an attractive price, with company meetings paying a key role in his process.
‘It is important to have long term perspective. In Asia it is easy to focus on what’s happening one quarter to next but the opportunities lie over the long term,’ Nicholls told the investment conference. ‘We focus on individual stockpicking to drive performance rather than country and sector bets.’
This approach has seen him return 154% on the Fidelity Funds Pacific fund since he assumed control of the vehicle in September 2003 compared to a 117% return in the benchmark over the same period.
Nicholls attributes this outperformance over the long term to his overweight position in China, which despite the dominance of state owned enterprises has benefited from its exposure to private companies.
He believes last week’s Third Plenum, which set the framework for China’s economic evolution over the next few years, will increase the attraction of the private sector.
‘China is my biggest overweight in the Pacific fund because I believe valuations look cheap as fears about a China economic crisis are overdone,' Nicholls said. ‘The Plenum will create a level playing field between private equity and state owned enterprises (SOEs), which will create a level playing field and help private companies continue to drive investments.’
It is this understanding of China which Nicholls believes makes him well-equipped to deal with running a fund focused on the nation.
‘I don’t see running a China-focused fund as a big change for me as it’s the market I spend most time on already.’
He is also excited by the prospect of taking on a closed-end fund.
‘The flexibility to be able to gear up, look at short options and invest in unlisted companies, while not having to worry about flows is a real attraction of running an investment trust.’
While Nicholls says it I too early to discuss what changes he will make to the portfolio, he indicated there may be some areas he may alter should he receive the fund in its current shape.
‘I think there are opportunities in industrials where they are focused on developing good products and have a low cost base. I will also take a look at the valuations of some of the bigger financial holdings in the fund, such as HSBC, and potentially reduce those positions.’
Meanwhile, there are a number of distinguishing features between Chanpongsang’s investment approach and that of Liu.
Chanpongsang is a much more aggressive investor and plan to decrease the number of stocks in the fund from 150-200 stocks to 120-140 stocks. He is also prepared to hold onto his positions for a little longer with average turnover 60-70% versus Liu’s 120%.
Other difference includes Chanpongsang’s higher focus value as oppose to Liu’s growth tilt and his accounting background prompts him to place a stronger onus on a company’s accounting policy.
However, there are also plenty of similarities. The pair find their best ideas within mid and large caps with company meetings forming the foundation of the investment process. They also target firms which can grow earnings faster than the market with high barriers to entry.
This style has seen Chanpongsang outperform since he launched his Fidelity Funds Emerging Asia fund five years ago, returning 17% versus an 8.4% rise in the benchmark. However, the style has struggled more recently in volatile Asian markets, suffering a loss of 8.5% over the last three years versus a benchmark gain of 17%.
However, Chanpongsang’s conviction in his process has not been swayed and he is particularly excited by the prospects for the Philippines where his overweight stance is in contrast to Liu’s underweight.
Chanpongsang believes the Philippines can overcome its fiscal problems and will not drag Asia into a 1997-like crisis as fears grow about the impact tapering will have on the region. ‘The situation today is different to that of 1997 when countries like the Philippines borrowed in dollars at high interest rates. Today they borrow in local currency and leverage is much lower.’
‘We should continue to see positive developments in Indonesia. The Asian economic free trade pact will encourage lots of foreign investment through the creation of a large intraday market and Indonesia with its large consumer base should benefit from this.’
He too is also excited by the prospects for China on the back of the Third Plenum, especially the positive impact it could have on the local government debt problem through the issue of bonds.
‘There has been a lot of talk about a banking crisis in China and while local government debt has been coming down over the last three to four years, the prospect of local governments issuing bonds to help clear this debt should help the banking sector.'