Fidelity launches first active ETF in EM “honeypot”

Fidelity International is set to launch its first active ETF, the Fidelity Active ETF Global Emerging Markets Fund, on the Australian Stock Exchange at the end of the month, giving investors access to 30 to 50 emerging markets stocks.

The active ETF would be managed by portfolio manager Alex Duffy, who aims to identify companies that are well positioned to generate returns through market cycles, and also have strong corporate governance.

While he noted that oftentimes governance is a little hard to reconcile with emerging markets (EMs) companies, he said there’s a fairly strict screening process in place that takes advantage of a large team of forensic researchers to ensure governance structures are up to scratch.

Alva Devoy, managing director of Fidelity International’s Aussie arm said EMs were an ideal asset class for Fidelity to launch its first active ETF, calling the asset class a “honeypot of growth and investment returns”.

But, Devoy noted EM equities are not without risk, which is why actively choosing the right stocks to mirror benchmark returns was important.

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Duffy said EMs had always been important to the global economy due to their size, with GDP going from 30 to 40 per cent of global output to almost 60 per cent.

“In my view, this makes them too big to ignore,” he said.

And, while Duffy noted some EMs had faced some pretty tough times in recent months, Fidelity continued to find opportunities to invest in good quality businesses exposed to themes like growth of consumption.

Duffy told Money Management that a massive 22 per cent of the fund rested in Asian stocks, with 7.5 per cent of those stocks in Chinese local A-shares (Chinese companies only listed in China), and the balance of that 22 per cent in Hong Kong.

The portfolio was primarily constructed of consumer discretionary stocks, with the fund owning the largest soy sauce production company in the world and other confectionary companies.

“My focus is on those companies with strong corporate governance, strong balance sheet structures and good quality return profiles, all at a valuation that provides margin of safety,” he said.

In terms of other regions, Duffy said he wasn’t opposed to Brazil despite the political unrest, but thought Turkey was in dangerous waters with the central bank losing its independence.

Despite the clear risks in emerging markets, Duffy and Devoy were adamant that breadth and diversity were critical in portfolios and could be easily found in emerging market stocks.