Underweight positions in Brazil and China prove costly for Price

Underweight positions in Brazil and China prove costly for Price

Fidelity’s emerging markets fund manager Nick Price has been caught out by his decision to hold small positions in Brazil and China compared to his benchmark, as both countries rallied sharply last year.

The manager of the £743m Fidelity Emerging Markets fund lost out thanks to the decision, although he still outperformed slightly last year thanks to a lack of exposure to the oil-price rout.

He holds 4.7 per cent in Brazilian shares, compared to his benchmark’s 8.9 per cent weighting to the country, while his 13.9 per cent Chinese position is significantly less than the 21.8 per cent on the index.

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Brazilian equities rallied 40 per cent from spring lows through to September, as investors speculated that the upcoming elections would bring a favourable politician to power.

Mr Price held on to his underweight position in Brazil, which helped the fund when the Brazilian market plummeted after incumbent Dilma Rousseff was re-elected.

He remains cautious on Brazil and has reduced his exposure to Brazilian financials and education-related companies.

Elsewhere, in spite of slowing economic growth, Chinese equities performed strongly in 2014, with the Shanghai Composite index up by more than 50 per cent to make it the top performing index in 2014.

In November the market got a boost when foreign investors gained greater access to Chinese equities through the launch of the Shanghai-Hong Kong Stock Connect initiative.

Mr Price said he had missed the initial gains in 2014, but upon the launch of the Connect programme he bought SAIC Motor Corporation, the Chinese state-owned automotive manufacturing company, which has made its way into his top 10 positions at 2.4 per cent of his portfolio.

But Mr Price warned: “I think the China A-share market has moved too far too fast and a material pullback wouldn’t be surprising. It will continually re-rate over the next few years, but there are a number of opportunities and it is broadly positive.”

Earlier this month saw the first major pullback in the Chinese equity rally, when the index fell by nearly 8 per cent in one day after the government imposed restrictions on lending.

In spite of these two underweight positions, which hindered his performance during the middle of the year, Mr Price ended 2014 ahead of the index, returning 5.1 per cent compared to 3.7 per cent.

This outperformance came towards the second half of the year when the oil price plummeted. Mr Price’s fund benefited from the falling oil price as he had a low weighting in the energy sector, which makes up 0.7 per cent of the portfolio, compared to 8 per cent for the sector.

Mr Price thinks the oil price, which currently stands at roughly $50 per barrel, will rise to around $60 in the medium term. However, he does not believe this pick up will aid oil-related stocks and so is steering clear of them.