On August 1, Fidelity took direct aim at index fund competitors Vanguard, Blackrock’s iShares ...
Event Driven Opportunities: An "Eclectic Portfolio"
10/18/2017 5:00 am EST
It’s virtually impossible to categorize Event Driven Opportunities (FARNX) — a “go-anywhere” fund with thousands of stocks from which to choose, reports John Bonnanzio, editor of Fidelity Monitor & Insight.
It’s benchmarked against the extremely broad Russell 3000 index. However, manager Arvind Navaratnam pays scant attention to the benchmark; indeed, the fund holds only 41 stocks.
So, comparing its sector breakout against the Russell 3000 reveals nothing about the manager’s investment strategy, nor the fund’s true character.
Likewise, the fund’s most basic investment characteristics deviate dramatically from the Russell 3000 and the much-followed S&P 500. (Its active share score of 99% indicates that there’s essentially no overlap with its benchmark.)
As the name “Event Driven” makes clear, Arvind hunts for special situations that materially affect a company’s business model and/or balance sheet. These include reorganizations and restructurings such as mergers, spinoffs and bankruptcies.
Even a stock’s removal from an index will trigger Arvind’s deep-dive, academically-driven research. For the past seven years, Arvind, a 34-year-old Harvard Business School graduate, has taught a class on value investing at nearby Boston College.
While all actively run funds have managers who employ fundamental analysis, a more typical approach is to identify, for example, stocks whose earnings or sales may beat “the street’s” expectations.
But that’s just one of hundreds of data points that would interest Arvind. In fact, he prefers to shop for smaller stocks that are more likely to be overlooked by other institutional investors.
Ultimately, Arvind wants stocks with unrecognized asset values. But unless others come to recognize the value he’s found, his inexpensive stock could be in a “value trap,” meaning that its valuation will remain cheap.
So here’s where Arvind’s event driven approach may part ways from deep-value investors: post-event, the company’s improved fundamentals, especially earnings growth, will be the catalyst for its share price to outperform expectations.
This strategy, which can sometimes take years to play out, drives him to make large, more meaningful bets in his fund. Notably, more than half the fund’s assets (53%) are in its top-10 stocks.
With its relative volatility of 1.46, Event Driven is 46% more risky than the S&P 500, and is similarly more risky than its own benchmark. Ultimately, however, the reason for owning any stock fund is for its potential to appreciate in value.
Over the past three years (through August), its 10.3% average annual return places it among the top 10% of all small-cap funds, and over the past year it ranks #1 among 64 of its “alternative event” peers.
To that end, it’s our longer-term view that the index mania that has enthralled investors for so many years will ultimately meet a lackluster end, whereas fund managers who turn over a lot of rocks in the pursuit of intrinsic share value will prevail.
With its high risk and low correlation to other stocks funds, an investor must be comfortable that Event Driven moves to the beat of its own drummer. So while not for everyone, we believe that Arvind’s eclectic portfolio will continue to reward the patient investor; we rate the fund buy.
Related Articles on FUNDS
Investors often ask me how to build a portfolio that holds its own in down times but hands them soli...
Real estate investment trusts (REITs) have been in a trading range the last couple of months, but th...
What a great few days at MoneyShow San Francisco! The show was larger than it had been in several ye...