The Fidelity Asian Values Trust has slashed its exposure to Chinese stocks after new manager Nitin Bajaj overhauled the portfolio as part of a move to diversify positions.
The £163m investment trust replaced John Lo with Mr Bajaj earlier this year.
Mr Bajaj then sold out of Mr Lo’s 50 large-cap stocks and replaced them with his 125-150 small- and mid-cap stocks, mimicking his open-ended $118m (£79m) Fidelity Asian Smaller Companies fund.
The manager said in spite of obvious market headwinds to his new tenure at the trust, he would try to implement a strategy that offsets China’s importance to Asian equities.
The country’s weighting in the portfolio has been cut to 15.7 per cent, 12.3 percentage points lower than its benchmark weighting. Meanwhile, exposure to India has been increased to 15.2 per cent – a 5.3 percentage point overweight.
Mr Bajaj said: “Asia remains the cheapest region, and if you buy cheap you make the future less relevant. If you buy expensive, then your forecast [had] better be right.
“There is nowhere to hide Asia’s headwinds. The big engine is China and it is slowing down and changing its model. There will be implications across the region and in some industries.”
He added: “You need to understand what has headwinds and what has tailwinds. [But] that does not necessarily mean I will invest in the tailwinds as the market will have priced that in.”
No shareholder vote was held on the trust’s shift to a smaller-cap strategy, but Mr Bajaj explained the portfolio’s new direction at the trust’s annual general meeting last week.
“No one has complained, but the real test comes over time,” he said. “Performance has been okay [since July], but that is only four months.”
The manager added the trust’s “big change in philosophy” should come good over three to five years, allowing it to differentiate itself within the closed-ended sector.
Mr Bajaj said the turnaround in stocks, which took place during May and June, was completed in a shorter time than anticipated. He said the broker costs incurred were minimal, with the main expense potentially arising from the impact on the market while switching capital.
“[Impact costs] are impossible to calculate, but we were selling more liquid stocks and buying less liquid ones,” he said.
“Essentially, we were a provider of liquidity.”
The trust currently trades at a 13 per cent discount and has not been set any hard targets by the board.
But fundraising remains a long-term goal. Matthew Sutherland, head of product management in Asia for Fidelity International, said with this in mind he hoped to see the discount close within the next three years.
