An Event-Driven Opportunity

10/01/2015 9:00 am EST

Focus: FUNDS

Jack Bowers

Editor, Fidelity Monitor & Insight

Despite having been in a performance rut, we continue to recommend this specialized mutual fund in our Unique Opportunities model portfolio, explains Jack Bowers, editor of Fidelity Monitor & Insight.

Even before the August sell-off, Event Driven Opportunities (EDO) had been in a rut.

While benchmarked against the Russell 3000, EDO has few attributes in common with that index. In fact, 98% of EDO’s assets lay outside that mid-cap barometer.

And that’s no accident, because Manager Arvind Navaratnam has positioned EDO to have a low correlation to the most widely followed indexes.

The current space for this go anywhere fund: small-cap blend, which is where we expect it to remain while assets are still small.

Not only will this positioning keep its returns out-of-step with the S&P 500 (SPX) (SPY), Arvind’s strategy includes his buying Wall Street’s lesser-followed stocks.

Within this information vacuum, Arvind expects to identify exploitable pricing inefficiencies.

And, true to EDO’s name, Arvind is drawn to unique events such as spin-offs or being dropped from an index.

His curiosity is also piqued when an outside investor takes a 5%- plus stake in a company.

Still, EDO's 2015 performance suggests that Arvind’s strategy isn’t easily implemented.

Not only does it help to have the wind to one’s back (like a favorable environment for small-caps), quite frankly, he’s also bought some lemons.

But, in defense, he’s clearly stated that his investment process may require a full market cycle in order to bear fruit. Patience is a necessity.

With that in mind, we’ve reviewed some of the more troublesome holdings in the fund and the manager’s reasons for purchasing them makes sense to us.

Of course, our patience is not unlimited and we continue to monitor the Buy rated EDO closely. In the meantime, this unique fund still makes sense for our Unique Opportunities model portfolio.

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