The new fund includes China, India, Indonesia, Thailand, Vietnam, the Philippines, and other markets, but excludes South Korea and Taiwan
Fidelity Investments Management Hong Kong has launched an emerging Asia fund that it boldly calls the only "true" fund of its kind in the market today.
The Fidelity Funds Emerging Asia Fund, which has a start date of April 21, includes as its investment universe the emerging markets of China, India, Malaysia, Indonesia, Thailand, and the Philippines as well as the frontier markets of Pakistan, Vietnam, Bangladesh, and Sri Lanka. True, there appears to be no competition in that specific combination of markets but there are global emerging market funds that seek to invest in any emerging market worldwide depending on the opportunities.
Teera Chanpongsang, who will manage the fund, expects to initially invest the bulk of the portfolio's assets in the emerging rather than the frontier markets, where he sees "limited opportunities" at the moment. Fidelity hasn't set a target size for the fund. Two other funds that Chanponsang has managed for Fidelity, the Global Telecommunication portfolio launched in September 2004 and the Thailand portfolio launched in July 1998, now have $900 million and $1 billion in assets, respectively.
This latest fund excludes South Korea and Taiwan, which are already considered developing markets economically but are still trapped in the emerging markets category due to reasons related to their capital markets. South Korea will likely join Asian stockmarkets such as Hong Kong and Singapore in FTSE Group's developed market classification at the index provider's next review in September 2008, while Taiwan may have to wait longer before it achieves that coveted status. There is currently no formal review or consultations by MSCI Barra regarding a possible change in the status of any MSCI country index in its Emerging Markets Index series.
"We exclude South Korea and Taiwan because we believe they will be classified as developed markets, and we are looking to the future," says Chanpongsang. He expects that Vietnam, Bangladesh, Sri Lanka, and Cambodia will be part of the MSCI Emerging Asia Index in three to five years.
Excluding South Korea and Taiwan, Asian emerging markets are expected to post a GDP growth of 8.6% this year and 8.5% next year, according to Morgan Stanley research. That's better than the expected GDP growth of 7.8% this year and the next for Asia ex-Japan.
"The outlook for Asia is positive as the region continues to experience healthy growth. In particular, emerging Asian markets are transforming rapidly. With higher economic growth and strong earnings outlook, emerging Asia provides potentially higher and undiluted returns with relatively higher risk than developed markets," says Chanpongsang, who has been a fund manager for 14 years and has extensive experience in emerging markets in Asia.
Chanpongsang also counts demographics as one of the opportunities presented by emerging and frontier markets in Asia. In Pakistan, Bangladesh, the Philippines, Malaysia, India, Vietnam, and Indonesia, more than 50% of the population are below the age of 25. This is an important statistic because the majority population in these markets will constitute their labour force in the coming years and will be the ones supporting consumer growth.
The fund will be looking for stocks that fit four investment themes: domestic consumption, exposure to China and India growth, infrastructure spending, and new frontier markets.
In Pakistan, Bangladesh, the Philippines, Sri Lanka, Vietnam, and Indonesia, more than 60% of GDP is driven by domestic consumption and this is a trend that Chanpongsang expects to continue. He notes, for example, that the mobile phone market in emerging and frontier markets in Asia presents a huge opportunity, with six in every 10 new subscriptions worldwide coming from Asia. There are around 1.1 billion mobile phone subscribers in emerging and frontier markets in Asia, and he expects this figure to double in five years.
An example of a stock that fits the domestic consumption theme is Parkson Holdings, a Malaysian-listed company that operates 39 stores in China, 30 stores in Malaysia and 3 stores in Vietnam. Department store growth in the region is expected to stay strong, with same store sales growth now at 20% in China and 25% in Vietnam. Chanpongsang likes this company because it has been a first mover in China and Vietnam, generates huge cash flow, and has a management team with a good track record.
An example of a stock that fits the infrastructure spending theme is Larsen & Toubro, the largest engineering and construction company in India. It's a play on infrastructure construction and industrial capital expenditure. The company holds exclusive pricing power because it is the only one that is able to accept very large-scale projects, Chanpongsang says, plus it is also expanding into new areas such as defence, aerospace and power for future growth.
The fund will use a customised benchmark with a weighting of 33% China, 33% India and Pakistan, and 33% Southeast Asian markets.
From an investment universe of around 17,000 stocks in emerging and frontier markets in Asia, Chanpongsang will focus on 988 stocks that have a market capitalisation of at least $500 million. Ultimately, the fund will invest in 80 to 120 stocks. Company visits will play a key part in the investment process.
Because politics is a major factor in emerging and frontier markets in Asia, Chanpongsang will be consulting with political analysts as part of his risk management process. The fund has a subscription fee of 5.25% and an annual management fee of 1.5%.