New to the Select 50 - Fidelity Sustainable Emerging Markets Equity Fund

The emerging markets are home to some of the largest and fastest-growing economies in the world. It is a diverse group of countries, but many of them benefit from important long-term trends such as improving demographics, consumer lifestyle changes and an abundance of natural resources.¹

This type of backdrop provides an opportunity for investors. One option to consider would be the Fidelity Sustainable Emerging Markets Equity Fund, which has recently been added to the Select 50 list of handpicked funds as part of the latest quarterly update.

Objective and approach

It provides exposure to the global emerging markets via a concentrated quality-growth portfolio of 30-50 companies. The fund benefits from an experienced lead manager in Amit Goel and he is backed up by one of the largest teams operating in the region.²

Fidelity Sustainable Emerging Markets Equity Fund focuses on stocks with strong or improving sustainability practices that are well-placed to benefit from structural growth or changes within their industries. These sorts of companies are normally able to generate attractive returns from their existing operations and future reinvestment opportunities.³

Investment philosophy

The fund is run on a bottom-up basis, with detailed research carried out to identify stocks with the desired characteristics. The three main traits that they look for are: the quality of the management; its market leadership potential; and the structural reinvestment opportunity.

Goel and his team try to find stocks with good corporate governance that offer a superior return on capital via effective barriers to entry and sustainable competitive advantages. Ideally these should operate in underpenetrated sectors where there is the potential to increase their market share.

ESG is at the heart of the process

Emerging market companies are often behind the curve in terms of appropriate environmental, social and governance (ESG) disclosures. In order to rectify this the fund managers actively engage with the businesses in an attempt to influence corporate behaviour and investment outcomes.

In July 2022 the mandate was amended to include more explicit ESG-related characteristics in the stock selection process. This resulted in a strengthening of the negative screen and more sustainability targets being added to the positive side of the ledger. The fund must now have at least 70% of the net assets invested in stocks displaying 'favourable ESG characteristics.' ⁴

The underlying portfolio

At the end of July the portfolio contained just 37 stocks with the ten largest positions accounting for around half of the assets. It is built on an absolute basis from the bottom up, with little reference to the MSCI Emerging Markets benchmark.

Fidelity Sustainable Emerging Markets Equity Fund - top 10 holdings

1. Taiwan Semiconductors (Taiwan)
2. Samsung Electronics (South Korea)
3. HDFC Bank (India
4. ICICI Bank (India)
5. Infosys (India)
6. Naspers (South Africa)
7. Axis Bank (India)
8. AIA Group (Hong Kong)
9. PT Bank Central Asia (Indonesia)
10. B3 - Brasil Bolsa Balcao (Brazil)

Source: Fidelity International, 31.7.24

The largest country allocations are China, India and Taiwan that make up 57.2% of the fund. When it comes to the different sectors, it is financials, information technology and consumer discretionary that dominate with 75.1% of the assets.⁶

Performance and costs

Fidelity’s fund selection partner, Fundhouse, says that the strategy has delivered strong returns for the initial SICAV version of the fund since inception in 2014, however over the shorter term it has not done as well since mid-2023⁷ (The OEIC version of this fund which features in the Select 50 was launched in March 2023). This is because some of the higher quality areas where the fund invests have been out of favour and there has been some significant weakness in the Chinese consumer names held in the portfolio.

The ongoing charges figure is 0.9%, which is pretty much what you would expect from an actively managed emerging markets fund. According to analysis by Fundhouse, the figure is comparable to its sector peers.

Who is it suitable for?

Many emerging market economies are growing at faster rates than the more developed alternatives, which could result in higher returns, although this can’t be guaranteed. Investors who are comfortable with the volatility should take a long-term view of ten years or more to enable the potential gains to come through from the above-average-risk nature of the exposure.

More on Fidelity Sustainable Emerging Markets Equity Fund

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Before investing, please read the key information document which contains important information about the fund. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. This fund invests in a relatively small number of companies and so may carry more risk than funds that are more diversified. This fund uses financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.