Bronze-rated Fidelity Emerging Markets manager Sammy Simnegar is simultaneously index-aware and index-defiant.
The following is our latest Fund Analyst Report for Fidelity Emerging Markets Fund FEMKX.
Fidelity Emerging Markets has an accomplished manager, low costs, and an impressive record during its leader's tenure. It retains its Morningstar Analyst Rating of Bronze.
This fund takes an unusual slant on the emerging-markets field. If manager Sammy Simnegar, who has run this fund since October 2012, likes a company in the MSCI Emerging Markets Index, he will weight the stock at the index weighting plus 50 basis points (half a percentage point). When he doesn't like a company, he usually won't own it at all. (In a recent tweak, he says in rare cases he'll now own half-weightings of the biggest index components because the risk of having 0% has become too great, as the index weightings of some tech-sector giants have surged above 4%.)
He also will own companies that aren't in the index at all; the fund typically has 10%-15% of assets in firms based in developed markets that have much exposure to emerging markets. He wants companies that show strong, sustainable growth without requiring much borrowing and also looks for traits such as strong free cash flow and price momentum to varying degrees. This approach isn't without its risks; in its most recent portfolio the fund had roughly 30% of its assets in the technology sector--even more than the index's stake--and tends to have high valuations in general.
This strategy has paid off. During Simnegar's tenure, from Oct. 15, 2012, through Sept. 30, 2017, the fund's 7.3% annualized return is far ahead of the index and the average for the diversified emerging-markets Morningstar Category, which posted gains of 4.1% and 3.9%, respectively. The fund accomplished this while suffering milder losses during downturns than its average rival. A low expense ratio has helped. (Simnegar also has posted a strong record in nine years at Fidelity International Capital Appreciation FIVFX using a similar strategy.) However, this fund's huge stake in high-flying Internet and tech firms and general willingness to carry above-average valuations means its moderate-volatility past shouldn't be taken as a guarantee that it will provide a cushion against rough spots in the future.
Process Pillar: Neutral | Gregg Wolper 10/16/2017
Sammy Simnegar, this fund's manager since Oct. 15, 2012, has an unusual approach. When he owns companies in the MSCI Emerging Markets Index, he will overweight them by about 50 basis points. But if he doesn't like a company, he won't own it at all, except in rare cases when the stock takes up such a large weighting in the index--around 5% or more--that he'll own a half-weighting rather than nothing. He looks for firms poised to benefit from "mega-trends" such as “digitization” and increasing middle-class consumption. He looks for firms with traits such as rising earnings per share and dominant positions in their field, along with quality metrics, such as return on invested capital and strong balance sheets. He rebalances once a week to maintain desired allocation levels, resulting in an above-average turnover rate. But that rate has fallen as he's reduced the frequency of his rebalancing. The fund's country and sector weightings can vary greatly from those of the index or peers.
He often has a significant chunk of assets in developed markets-domiciled companies that have substantial emerging-markets exposure. Simnegar favors steady-growth sectors such as consumer staples and healthcare; he treads lightly in utilities and energy, especially big state-owned firms. The eclectic nature of the strategy and its aim of limiting losses are admirable but require exceptional ability to succeed. Thus, the fund gets a Neutral Process rating.
Manager Sammy Simnegar's portfolio looks like the MSCI Emerging Markets Index when one looks at the weightings of many specific holdings, for no matter how much he likes a company, he'll overweight it by no more than 50 basis points (half a percentage point). But because (with rare exceptions) he will avoid owning an index name at all if he doesn't feel very positive about it, and will also own plenty of out-of-index companies--including many domiciled in developed markets--the overall portfolio has many differences with the index. For example, in the latest portfolio (Aug. 31, 2017), the fund had only about half the index weightings for Taiwan and South Korea. It had about 15% of assets in the United States and developed European markets. And the stake in Morningstar's consumer defensive sector was roughly double the index's weighting, because Simnegar has been concerned about the prospects for global economic growth. That sector also is a typical favorite hunting ground for him, because of the chances to find strong, stable growth companies. Conversely, he dislikes the energy sector because it requires so much capital spending and is less reliable, and that is deeply underweight now. As usual, the fund's valuation metrics, such as price/earnings and price/book, are substantially higher than the diversified emerging-markets category average. But so are the portfolio's growth figures--which captures a key element of Simnegar's approach.