Finding quality and value in emerging Asia

Each week, a professional investor tells us where he’d put his money. This week: Nitin Bajaj of Fidelity Asian Values investment trust selects three favourites.

I have a very simple investment philosophy: buy good businesses run by competent and honest people, and buy them at a valuation that leaves enough of a margin of safety for mistakes or bad luck. This process tends to lead me away from big stocks. I try to buy companies that other people neglect. That’s where I find bargains and hence the required margin of safety. I also seek out firms that are so well established in their markets that it would be hard for potential rivals to develop a presence.

As a result, Fidelity Asian Values has the majority of its capital deployed in very small companies in emerging Asia (between £100m and £1bn market cap). Mega-cap stocks, which comprise roughly 75% of the regional index, only make up about 20% of the trust’s holdings.

The investment-trust structure means I am less concerned about small caps’ liquidity than a unit trust manager would be. I am not required to meet daily flows into or out of the trust.

Beating the crowd to a bargain

BOC Aviation (Singapore: BOCA) is an aircraft-leasing business that I started buying before most investors were aware of it. Many airlines don’t own their planes, but lease them for seven to 15 years. BOC Aviation is the sixth-largest aircraft lessor in the world. Originally spun out of Singapore Airlines and then sold to Bank of China, 25% of the company was listed on the stock exchange in 2016.

I started buying the stock when it was on a price-to-book ratio of one, a price-to-earnings ratio of six and offering a 7% dividend yield. The business has a major competitive advantage: because it is owned by a bank, it can borrow money at very low rates. As luck would have it, other people started noticing it soon after I bought in, so the trust made a reasonable return on its investment.

A tasty food group

Fufeng Group (Hong Kong: 0546) is a Chinese company with a 50% global market share in monosodium glutamate, a widely used food-flavouring compound; it also produces other corn starches and animal-feed additives. Fufeng Group is a very low-cost producer. It is broadening its product range and, importantly, has a clean balance sheet.

Despite these positive attributes, the stock is cheap for a global leader. It has been misunderstood by investors, who have missed the consolidation taking place in the market: the company should see better pricing power and margins throughout the next cycle.

Indian mortgages on the cheap

LIC Housing Finance (Mumbai: LICHF) is India’s second-largest housing finance company with a real competitive advantage because of its low cost of borrowing (it has the highest credit rating in the sector) and low cost of operations: it shares a distribution network with Life Insurance Corporation, its parent company and India’s largest insurer.

Its assets (mortgages) react to interest rates faster than the company’s liabilities, so throughout the falling-rate environment over recent years, the company saw its net interest margins shrink, putting many potential investors off. With rates now beginning to rise, this trend will reverse, so I have been able to buy a long-term growth business for a mere ten times earnings.