Often overshadowed by their larger and generally more familiar developed-market counterparts, these under-the-radar investments, according to Fidelity Portfolio Manager David Jenkins, offer the potential for not just growth, but also resilience and innovation; however, the importance of quality can’t be overstated.
“To that point, I’m not about to buy some EM small-cap stocks just to reduce the fund’s underweight versus the benchmark,” explains Jenkins, who helms Fidelity® International Small Cap Fund (FISMX).
Nonetheless, he highlights that EM small-caps have an impressive long-term track record, historically outperforming not just EM large-caps, but also global small-cap and many developed-market equities. In fact, Jenkins points to the fact that, since 2021, EM small-caps have delivered twice the return of EM large-caps.
Although he is reluctant to own too much EM small-cap exposure for the fund, Jenkins’ rationale is straightforward: any potential investment must measure up to his quality standards. He cites one recent and noteworthy addition to the portfolio: Athens International Airport. The stock is particularly intriguing to Jenkins given that its primary business is operating duty-free shops.
“The initial public offering of a 30% stake in the airport—Greece's largest gateway for tourists—from early this year generated robust demand among investors,” Jenkins says. “Moreover, this marks one of the more successful IPOs in Europe this year.”
Greece, a major tourist destination in Europe, is experiencing a resurgence in inbound tourism as the COVID-19 pandemic recedes into the background. Jenkins believed that the improving tourism landscape, coupled with recent upgrades to Greece's network of 14 regional airports, bodes well for Athens International Airport's future activity.
In addition, the favorable terms of the concession agreement with the Greek government and the stock's reasonable valuation, based on estimated 2025 earnings, make this investment all that much more compelling, he contends.
Elsewhere, he cites a holding that he considers somewhat of a special situation: Pepkor Holdings Limited, a South Africa-based retailer. While this company generates approximately 80% of its profits from non-fashion, staple apparel items, he reveals that its market valuation has been depressed due to its association with the Steinhoff family and the subsequent overhang from the latter's liquidation of its investment.
The estate has already reduced its stake from 78% to roughly 43%, with the expectation that the remaining portion will be divested before the end of 2024, at which time Jenkins believes Pepkor's valuation could see a significant uplift.
“Further adding to the appeal, in my eyes, is the firm's new CEO, who has returned to lead the business for zero compensation, apart from out-of-the-money call options worth 3% of the company,” Jenkins concludes. “This provides a strong incentive to boost the stock price, thereby aligning the CEO's interests with those of shareholders.”
For specific fund information, including full holdings, please click on the fund trading symbol above. Securities mentioned were fund holdings as of July 31.
David Jenkins is a portfolio manager and research analyst in the Equity division at Fidelity Investments.
In this role, Mr. Jenkins manages Fidelity Japan Smaller Companies Fund. Additionally, he co-manages the Fidelity and Fidelity Advisor International Small Cap Funds, as well as performs fundamental research on Europe, Australasia, and Far East (EAFE) small cap companies.
Prior to joining Fidelity in 2007, Mr. Jenkins served as a vice president and equity analyst at Eaton Vance Management. Previously, he was a senior investment associate focusing on domestic value equities at Putnam Investments. He has been in the financial industry since 2000.
Mr. Jenkins earned his bachelor of science degree in business finance from Brigham Young University. He is also a CFA® charterholder.