When it comes to the financial markets, it is hard enough to explain what just happened, let alone what may or may not happen next. You may want an accurate prognosis from a doctor but perhaps you should not expect one from a portfolio manager, whose main challenge is to succeed in navigating uncharted waters that are constantly changing.
Against a constantly ‘noisy’ backdrop, I believe it is important to define the right structure and types of investments a fund should have in order to generate sustainable long-term performance.
Finding the businesses I like
Instead of focusing the Fidelity Global Special Situations Fund solely on one kind of investment category, I feel I can improve the breadth of opportunities by looking at three specific categories of companies: ‘companies undergoing corporate change’, ‘exceptional value stocks’ and ‘unique businesses’. These three categories effectively define what I mean by ‘special situations’.
1. Companies undergoing corporate change are those undergoing major restructuring or subject to merger and acquisition (M&A) activity. These businesses offer the potential for a fundamental shift in value over a 12 to 18 month time horizon, and among these I always look for those companies which I think have relatively limited downside risk.
2. Exceptional value stocks are those whose true value is being materially underestimated by the market in my view. As such, I expect these stocks to have significant upside potential over a three-year time horizon.
3. Unique businesses typically have some specific characteristics that enable them to develop dominant positions in their industries. While these types of companies are unlikely to have low valuations, I look for those companies that can generate strong cash flows and earnings growth that can support sustained market outperformance.
In terms of identifying these three types of companies, the access I have to Fidelity’s outstanding fundamental proprietary research is invaluable. A key advantage of Fidelity’s extensive in-house resources is that effort can be deployed in specific areas of interest. The other point worth noting about the three categories of companies is that I aim to combine them in such a way that ensures both growth and value characteristics – this helps to limit overall sensitivity to economic conditions and can improve the prospects for a smoother performance throughout the cycle.
At this stage, the portfolio appears reasonably well placed, and the stock holdings on average are more cheaply rated than the market but have somewhat faster expected earnings and sales growth and relatively strong balance sheets. But as ever, flexibility is key, and the fund’s three categories of investment have helped it navigate highly changeable market conditions over the last five years.
Above all, the approach the fund takes is one of active management. The intention is to focus on finding the best individual investments and not to introduce big bets on macroeconomic factors that are hard to forecast and could overwhelm the value being added at stock level. But at all times the “active weight” (measuring the difference between the portfolio and the market benchmark at a stock level) will be high.
The fund’s process is built on the strong conviction in the benefits for investors of a well-executed active strategy and we look forward to discussing this further with our investors in the coming months. The fund’s stock selection framework has served it well so far and there is no intention to change the plan over the coming years.
The value of investments and the income from them can go down as well as up, so you may not get back what you invest. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment. The Select 50 is not a recommendation to buy or sell a fund. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. Fidelity Personal Investing does not give personal recommendations. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.