Oak Ridge Dynamic Small Cap I (ORSIX) — launched in September 2015 — seeks to capitalize...
Unique Opportunity at Event Driven Fund
05/19/2015 9:00 am EST
We’re making a statement by including this fund—which is just 17 months old—in our Unique Opportunities model portfolio: we believe in its investment strategy and the 32-year-old manager who conceived and is implementing it, explains John Bonnanzio, editor of Fidelity Monitor & Insight.
Arvind Navaratnam—manager of Event Driven Opportunities (EDO) (FARNX)—is only the second Fidelity manager to incubate his investment thesis there before launching it as a retail stock fund. (The first was Joel Tillinghast who, in 1989, launched Low-Priced Stock.)
Inside Fidelity, expectations are high for EDO. But no one is more determined to see the fund succeed than the manager himself, who told us during a meeting last month that he and his wife have all of their personal wealth in this unique portfolio.
Indeed, EDO stands apart from its peers in many ways. Among them, it’s the only Fidelity offering benchmarked against the broad Russell 3000, which Arvind admits to ignoring with respect to portfolio composition. (The index accounts for 98% of the stock market’s capitalization.)
What Arvind does pay particular attention to is one-off opportunities (events), especially spinoffs and other corporate restructurings.
For example, when large companies are forced to sell-off smaller divisions (especially those whose shares are chased by passive capital through indexing), he says there can be mispricing because the sale is often misunderstood by the market. (This process leads to the fund’s small-cap value orientation.)
Second, there’s “unleashed entrepreneurism” by the spun-off managers. Arvind calls this a “dual value proposition,” though he cautions that it can take years (“not even one year is a good metric”) for the stock to <em>fully</em> outperform. He goes on to say that “patience is the largest challenge…to let the story unfold.”
To that end, the fund’s official turnover rate is 109%, though he says that his average holding period will be closer to two years.
Arvind, who believes that the fund will prosper over the long-term amid the mispricing that’s inherent to the S&P 500 indexing craze, summarized his investment strategy to us this way: “I like to shop where the action is.”
And so do we. Granted, Arvind’s record is modest so far. But we believe his approach will play out over time. And so we’ve increased our exposure to EDO in the Unique Opportunity model portfolio.
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