One of the areas of the investment world that has been gaining in popularity in the last five years ...
Event Driven: A Unique Opportunity
12/03/2015 9:00 am EST
We continue to recommend this fund, which specializes in events such as M&As, spin-offs, share buybacks, index additions and deletions, and even bankruptcy workouts, notes John Bonnanzio, editor of Fidelity Monitor & Insight.
Up 13.5% last month, Event Driven Opportunities (FARNX) was Fidelity’s top-performing fund.
Benefiting from both surging small-cap stocks and one particular portfolio holding, it’s suddenly in the black for the year (up 1.9%).
We ran this headline in September: “Event Driven Hits Pothole.” Whether its returns were measured at that time on a monthly, quarterly, or year-to-date basis, it was pretty much at the bottom of the performance pack.
In short, it certainly wasn’t helping our Unique Opportunities model portfolio. One problem for manager Arvind was that small-cap stocks were taking a drubbing.
Another was the fund’s exposure to energy and commodities. As we somewhat indelicately decried at the time, Arvind had “bought some lemons.”
But unbeknownst to anyone, he was about to make some lemonade. In October, Journal Media Group was the fund’s second-biggest position at 10% of assets.
Then, in an all-cash deal, it was suddenly acquired by Gannett (GCI) for $280 million or $12 a share. That was a 45% premium over its $8.30 market valuation.
As a consequence, the fund’s NAV jumped 6.2% overnight, further enhancing its already-improving fortunes.
The fund continues to roam broadly in search of corporate events. So with roughly 250 corporate actions presently unfolding, but only 90 or so fund positions, what’s Arvind actually looking for from a stock?
Event Driven’s investment process is considered “post-event,” because it’s less risky relative to a strategy that tries to anticipate events. Navaratnam looks for “Several ways to win,” while a “significant” margin of safety helps, too.
In our view, the fund holds the promise of delivering excess returns over time with the added bonus of less volatility.
As Arvind puts it (and as we’ve recently experienced), the fund “does not offer a linear return stream over the short-term.” Put in more pedestrian terms, the fund may zig while the rest of the market zags.
For all these reasons we continue to hold the fund in our Unique Opportunities Model.
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