Most managers sort through potential additions to their fund, highlighting the opportunities and striking out the problem companies. The opposite is true for Fidelity’s Angel Agudo, manager of the Fidelity American Special Situations Fund , part of the Fidelity Select 50.
For Agudo, a company going through a difficult time can just be an opportunity in disguise. Where the wider market has written off a company’s chances of turning themselves around, the manager steps in to see if they are right or if they have overlooked a route back to success. If he spots light at the end of the tunnel he begins to consider adding the company to the fund.
This approach isn’t for everyone and, as the manager only tries to look where others wouldn’t dream to, is the hallmark of contrarian investing. Going against the grain has its challenges, not least of which is sticking to your principles when times get tough.
Agudo explains the thinking behind a recent addition to the portfolio, Fairfax Financial: “It is a short cycle insurance company with mediocre numbers at first glance. They came out of a big M&A transaction which depressed numbers, they performed abysmally in their market flotation and their performance over the past four years has been very bad. But I think we have a company here which, in more normal circumstances and without any heroic assumptions, would have better numbers, a better multiple and a better valuation.”
You won’t find the big popular names of the day like Facebook or Amazon in the fund because they don’t fit with the turnaround strategy. Agudo explains: “I concentrate my efforts in the number of names I have in the fund - around 50 or below - and the number of companies that I look at. I have a lot of analysts that help me but I screen a lot as well and I look for depressed fundamentals, depressed valuations and depressed sentiment; where things are not working well. Almost every company in the fund has one of those characteristics.”
From there it’s not just a case of hoping things get better, it’s about identifying where potential change has been underappreciated or overlooked by other investors and examining the risk attached to a company’s recovery.
The manager explains: “Once I find a company that is perceived to be in difficult times I try to imagine a bad scenario, where things really work out badly, and then I try to gauge how much of our clients’ money we would be putting at risk in that name. Then I try to imagine things working out well and how much money we could make for our clients.”
Where the outcome of these deliberations is deemed to be skewed towards a positive outcome for the company, and therefore the clients’ money, Agudo adds the name to his fund. Over time the manager aims to build up a portfolio of companies whose future tips the odds in his favour.
An example of this is the fund’s top holding, Berkshire Hathaway, owned by renowned investor Warren Buffett. The manager explains his decision to include the firm: “Berkshire has an insane balance sheet, with a lot of options to put their cash to work. I would probably make returns equal to the market in a flat or rising environment but when things get really tough, Berkshire can be very defensive. And it’s not just because of the defensive characteristics, if they were to go on the offensive it could be a superb stock.”
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