Fidelity Managers: Best of the Best

09/13/2013 11:00 am EST


Jim Lowell

Partner & Chief Investment Officer, Adviser Investments

Fidelity fund specialist Jim Lowell looks at a several favorite funds—covering diverse areas from low price stocks to mega caps—run by exceptional fund managers, with top long-term records.

Steve Halpern: We are here today with Jim Lowell, the advisory industry's leading authority on Fidelity funds. How are you doing today, Jim?

Jim Lowell: I'm doing just fine.

Steve Halpern: Could you tell us a little about Fidelity Investor, your flagship newsletter?

Jim Lowell: Absolutely. It's been around for many, many years and the portfolios, of which there are four, ranging from aggressive growth to income, and then a fifth, which is a rules-based, rankings-based quantitative portfolio or independently tracked and ranked by Mark Hulbert (Hulbert Financial Digest).

The focus on Fidelity is clear and distinct in my mind, because they are the largest, most diversified mutual fund company out there, and they grow their own talent from within, which is mission critical for me, because I believe you buy the manager, not the fund.

I spend a lot of time studying, tracking, and ranking the career track records of every single manager inside of Fidelity, so that I'm sure that when I'm making a buy or a sell recommendation, it's based, not just on market fundamentals, but also on manager strengths or weaknesses.

Steve Halpern: As you mentioned, a significant focus of your research is on the fund managers themselves. Could you expand a little on the importance of the fund managers and their track records in your analysis?

Jim Lowell: Absolutely. One of the things that we know is that there are good, mid lane, and poor stock pickers, not just at Fidelity, but across the broad universe. In fact, Jack Bogle at Vanguard, made some significant marketing hay out of claiming that 80% of active managers underperform their market benchmark.

Well, there has never been an actual academic study to back up that claim. Even if you grant it, that still means that, in the broader universe, there are about 1,800 managers, the 20% that outperform their benchmark. At Fidelity, the numbers are a little bit better.

Typically, it's about seven out of ten diversified fund managers at Fidelity beat their benchmark and when you go into their sector funds, it's even better. That's usually ten out of ten, and when you go into their international or their bond, their income group, it's about eight to nine out of ten, depending upon the rolling time period.

At Fidelity, they really do seem to have a singularly spectacular track record of growing talented managers, and then the question, of course, is who are the best of the best, how do we take singular advantage of them inside of our portfolios?

Steve Halpern: Well, let's look at some of the best of the best at Fidelity. One that you speak very highly of is Will Danoff at Contra Fund (FCNTX). Could you tell us about that?

Jim Lowell: Well, he's a remarkable manager, not just by virtue of the fact that he's been running this fund since September of 1990 and outperforming the S&P 500 over every meaningful time period, with a slightly lower risk profile, but he is also remarkable in that he's a contrarian thinker.

He tends to want to own things that are unloved, overlooked, or undervalued by the general investing population. But unlike some contrarians, when those stocks become beloved, he doesn't necessarily sell them as if the fundamentals are strong.

If you look at the kinds of holdings he has now—Google (GOOG), Apple (AAPL), Disney (DIS), Coca Cola (KO); these are hardly overlooked or unloved names, but when he bought them, he bought them on the cheap and they have certainly contributed handsomely to his significant outperformance.

Right now, he is, and has been consistently over his career, underweight the international markets. That has obviously helped him over the last few years where the EAFE has trailed the S&P 500 by a wide margin, but really, in his portfolio, the performance is directly attributable to consistently sell or stock picking. Yes, a good large-cap, growth-oriented manager to populate a portfolio with.

Steve Halpern: Now, what could you tell us about Joel Tillinghast? I know he manages the Fidelity Low-Priced Stock Fund (FLPSX) and he's been on your favorite list for awhile.

Jim Lowell: Yeah, and he's actually been running that fund a little bit longer than Will Danoff at Contra Fund. The fund low-price stock was Joel Tillinghast's idea, and it launched back in 1989, with a sense that he wanted to put some sort of governor on his own, maybe, inability to resist the temptation of stocks that were going higher and higher in price.

Back then, any stock that was $15 or higher, he couldn't buy. That's gone through an evolution, today it's $35 or higher, he will not buy into the portfolio. What that tends to mean is that when the markets correct mightily, he's in there buying up, even blue chip stocks, that will have crashed and corrected their stocks to that under $35 limit assess.

Then he can hold them for a long duration, so Joel is almost always the manager to own going into a recession. Absolutely, the manager to own climbing out of a recession and through the first three-fourths of a recovery.

As you get to the tail-end of a recovery, and the market narrows, and only large-cap growth stocks go up and they're all overpriced, he tends to trail, but he's got a great risk adjusted and absolute return track record, really second to none.

In my mind, he is the manager at the water cooler that every other manager at Fidelity, including Will Danoff, still bounce ideas off of.

Right now, he's making big outside sector bets, on the consumer discretionary names, in particular. I think he's read exactly right, but this low-growth, not no-growth, recovery here at home is driven by a surprisingly strong consumer to some, but not to him and certainly benefiting the shareholders in the fund well.

Steve Halpern: Well, quite different from a low-price fund, you also look at Fidelity Mega Cap Stock Fund (FGRTX), which is managed by Matthew Fruhan. What do you like about that one?

Jim Lowell: Matt is a consistent member of our top-ranking core, so, twice a year we run complete quantitative rankings on every manager. Matt's almost always in the top five to ten. What I like about that fund is the battleship balance sheet story.

He owns names that have global imprint, but pretty much, are domestically based, so his international equity stake is under 8% of the overall portfolio, but the companies that he owns—Apple (AAPL), GE (GE), Wells Fargo (WFC), Microsoft (MSFT), Google (GOOG), he also owns Merck (MRK), JP Morgan (JPM)—they've got a global footprint, so I like the safety in numbers.

I also continue to love the fact that the names that he owns have tremendous amounts of cash on their corporate coffers, so they can either, acquire companies if they're in growth mode, or hunker down and defend well against any down draft.

He plays a fairly big role in our model portfolios in the newsletter, and then also in the real world, where he's the chief investment officer at Advisor Investments, a big role over there as well.

Steve Halpern: In addition to your Fidelity Investor newsletter, you also publish a newsletter that focuses specifically on Fidelity Select sector funds. Could you tell us a little about that?

Jim Lowell: Fidelity Sector Investor has been around, again, for more than a decade, and also tracked and ranked by Mark Hulbert. It was the number one performing newsletter of all of Mark's newsletters in 2009.

Born of the fact that Fidelity Select funds are managed by their up and coming managers who need to be able to demonstrate, not only that they can beat market benchmark, which is what every sector ETF will be based on, so they beat those bogeys hand over fist.

They have to beat peer group, but they also have to beat the peer group around their own water cooler. It's a hidden gem inside of Fidelity—41 ways to slice and dice the marketplace, and that newsletter's Market Masters portfolio, which owns seven positions at any given time, is up 24.7% through Wednesday night's close.

In a year when the S&P 500 is basically trouncing almost everyone, it still isn't able to catch the gifted hands of the select funds of Fidelity Sector Investor investments.

Steve Halpern: Now, within all of those select sectors, one that stands out for you has been Fidelity Select Health Care (FSPHX) and the manager there is Eddie Yoon. Could you tell us a little about that fund?

Jim Lowell: What I like about health care is both the necessary demographic story that we all know here at home—we're aging, so are populations in Japan and Europe—but there's also a self long-term growth story born of the emerging markets growth of the consumer class.

As that continues to grow, they're going to continue to demand, not just better food on the table, better car in the driveway, better roof over their head, they're going to want better health care services. Near and long-term, I love the risk—adjusted profile of health care, overall, as a sector.

Eddie Yoon is a very gifted stock picker inside that sector. He tilts a little bit more towards growth, compared to say, the team over at Hartford Global, which also runs Vanguards Health Care fund, but I like that growth tilt. He's definitely been able to capitalize on the fact that biotechnology—inside of the overall health care sector—has been the real barnburner this year.

You'll find Gilead (GILD) and Amgen (AMGN), for example, in his top ten, but he also has some major pharma, some medical equipment and systems, maybe some HMO sprinkled in there in his 101 holdings.

He's a manager in a sector that I believe, and I practice what I preach, it represents a significant overweight in our newsletter model portfolios and also a significant overweight in our real world portfolios for clients.

Health care is the sector overall—and in the newsletter, Fidelity Select Health Care—has been a core driver of our ability to be able to outperform near and long term.

Steve Halpern: Well, thank you so much for joining us. We really appreciate your insights.

Jim Lowell: Thank you.

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