Interview with a Fidelity Favorite

08/12/2005 12:00 am EST

Focus:

Jim Lowell

Senior Partner & Chief Investment Strategist, Adviser Investments

Only one growth & income fund earns a buy rating from Fidelity fund expert Jim Lowell, who notes, "We're in a slow growth environment where returns will be hard won and good yields will be hard to find." Here, he interviews the manager of Strategic Dividend & Income.

"Fidelity Strategic Dividend & Income (FSDIX ) has been buy-rated by us since its inception on 12/23/03, and over that time we've built it into the core holding in each of our four model portfolios. The fund's manager, Bill Eigen, kindly set aside a few moments of the ever-hectic end-of quarter markets, to update us about his fund's positioning and market outlook.

"This fund is unique not only by virtue of Eigen's management style, but also by virtue of its objective and structure. Because of its unique construction (typically 50% in common stocks, mainly financials, but also healthcare, energy, and industrial stocks, all of which throw off dividends, 15% in REITs and other real estate investments, 15% in convertible securities, and 20% in preferred stocks), it could likely add value to any investor's portfolio.

EIGEN: This fund is a pretty unique product in that it actively allocates across four distinctly different areas of the equity income universe. That includes straight equities, preferred stocks including convertible preferred stocks, convertible bonds, as well as real estate investment trusts. The nice thingabout this fund is that all the security selection within each of those sub-portfolios is delegated to a respective dedicated manager. In the case of equities, it's Brian Hogan, for instance, who also runs Blue Chip Value. Here, he runs this sub-portfolio separately from that one, and a little bit differently, to tell you the truth.

JIM: Let's cover your bases.

EIGEN: When I last spoke with you in April, I didn't like Treasuries then. I still don't like them. I really don't like them now, from a fundamental perspective. There's no fundamental basis for investing in them. But, technically, I'd never seen short interest as high as it was in the Treasury market, and essentially every advisor, strategist, you name it, was making the short call on Treasuries. So I held my nose and I brought up Treasuries. The same held true for REITs, valuations stunk, but I held my nose and brought REITs. Now they have rallied really hard to the point now where both fundamentals and technicals are telling me that my next move there in Strategic Dividend Income is to start to bring them down again.

JIM: What's your view of these Treasury and other interest-sensitive markets from here on out?

EIGEN: I don't see Treasuries, preferreds, interest-sensitive instruments, and REITs rallying a heck of a lot from here. The bottom line, as far as I'm concerned, is that when you weigh out the fundamentals versus the technicals, they go in favor of equities, hence my slight overweight in equities at about close to 55% relative to 50%.

JIM: Let's talk stocks. I noted a month back to my members that Rich Fenton, manager of Value fund, and traditionally and historically a pure value player, now is significantly overweight in technology stocks. Does Brian have the ability to add tech stocks to Strategic Dividend & Income?

EIGEN: Absolutely. In fact, when you look at his bigger weightings now, they're capital goods and software and services. He and I talk every day and I really like his style. Let's put it this way: He's not afraid to add a $5 stock to the portfolio. My only requirement of Brian is just keep the dividend yield on that portion of the fund at or above the S&P 500.

JIM: What about energy stocks?

EIGEN: It's been a great ride, but oil has gone from being a reasonable gauge of the economy to really just a speculative trading vehicle. That's going to stop atsome point. We're right in the middle of just craziness in the oil patch. And the stocks have been well rewarded. I know a lot of the oil bulls will say, well, they're still trading at record low p/e ratios. Yeah, well, they also were back in the '70s before they went straight down.

JIM: Where are you finding opportunity?

EIGEN: We're finding a lot of opportunities among a lot of the diversified capital goods companies; software services, tech, healthcare, to a lesser extent, some of the pretty cheap healthcare and pharma names.

JIM: Parting words?

EIGEN: I want people to be cognizant of interest rate risk. I see a lot of money flowing into interest sensitive products. Rates can't go any lower than zero. And at zero, your total return forever is zero. I see a lot of long-duration products being hawked. Let's say rates on the ten-year goes to the two's, which I don't think could ever happen with inflation in the three's, then you'll make a little bit of money. But if rates go up just to where they were six months ago, the three-year cumulative return will be -2%. People aren't used to seeing negative signs in front of conservative bond funds.

JIM: No, they're not. I still think that inflation protected bond funds are among the most at risk.

EIGEN: There's such a misalignment of expectation around TIPS. These are long-duration instruments, and the only way you could possibly make money in a rising interest rate environment in TIPS, is if CPI level inflation is exceeding the rise in interest rates. Which, you know what? Just ain't going to happen. Anyone managing a TIPS fund will be the first one to tell you that.

JIM: Thanks for catching us up Bill.

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