‘Go-anywhere’ plan breaks boundaries

Fidelity Investments’ recently launched Global Focus fund is geared neither to the uninitiated nor the risk-averse, but to those high net worth investors willing to veer off the benchmark-beaten path. Yuri Bender writes Fidelity has reported strong initial interest from private banks and portfolio managers for its newly-launched Global Focus fund currently being marketed across Europe. This sub-fund of the Fidelity Funds open-ended E22bn Sicav range has appealed to those distributors who, “after three consecutive years of negative stock market returns are taking a less benchmark-driven approach to selecting funds and constructing portfolios,” as the fund literature reads. This is a product for high net worth investors and old hands rather than equity market novices. The fund offers potentially high returns for a higher degree of risk. It concentrates exposure to global stock-picking opportunities through a “go-anywhere”, roaming investment mandate that is not bound by geographical or regional constraints. It looks at a combination of global sector and stock-specific factors. Risk is monitored through fundamental stock analysis and holdings diversification. But the fund literature warns: “It is well suited to investors who wish to capture the best investment opportunities, but are willing to forgo rigid risk controls.” According to Fidelity, it is riskier than the group’s pre-existing international funds, due to the concentrated number of holdings. Barbell approach Fidelity International currently runs E94bn, split almost evenly between retail and institutional investors. The new fund’s portfolio is tilted towards mid-cap stocks. The “barbell” approach will balance growth-oriented companies on one side against value/special situations on the other. Backed by Fidelity’s global network of 219 equity research analysts, fund manager Brenda Reed will run a portfolio of between 100 and 150 stocks. The benchmark is the MSCI World Index, although performance is expected to deviate significantly from this, reflecting a different mix of stocks. Ms Reed was previously instrumental in developing the group’s Sector Fund range. In previous roles as an analyst she covered textiles, autos, airlines, office equipment, ship building and retailing. She has previously managed several outperforming Japanese funds, including the Japan Fund, which gained 146 per cent over one year to December 1999 against 76 per cent for the Topix index. But her Japan Blue Chip Fund lost 31 per cent over one year to 20 April 2001, against a 29 per cent loss for the Topix. She says the sector-based approach to global equities is a result of specific market trends: “Globalisation among companies, industries and people is already a reality and this fund will be structured to take advantage of this.” Ms Reed believes the avoidance of TMT sectors since the market peak of two years ago has marked a return to investing on the basis of fundamentals. Two typical stocks Synthes-Stratec: Swiss-listed US healthcare company active in North America and Latin America, as well as parts of Europe, manufacturing orthopaedic equipment including hip replacements and bone cement. According to Fidelity Research, it trades at a valuation slightly below average, but with comparable earnings growth prospects relative to peers as a result of new product launches. Fidelity expects growth at a reasonable price. Yukos: much talked-about Russian oil exploration and production company described by Fidelity as a “special situation, deserving to be rated as a growth stock”. Also trades in New York. Yukos, claims Fidelity, is benefiting from Russia’s huge untapped reserves and is able to currently increase production by 50 per cent a year. This compares with single-digit growth at BP, Total Fina and Exxon Mobil, according to Fidelity’s research. It is also trading at a discount valuation. Minimum investment: $2500 or equivalent in any major currency. Top-up minimum of $1000. Distributors can buy the funds through Fidelity’s fund supermarket, www.fundsnetwork.co.uk.

An independent fund selector’s view There are many benefits of a “focus” approach in European markets where one stock can otherwise account for 10 per cent of performance. The focus approach ignores the index and concentrates on choosing the best stocks in the market. Fidelity has a track record in many areas. They have stock selections coming out of their teams of analysts in Europe, Boston and Asia, which have provided good returns in recent years. Therefore they have a good chance of doing well. We would prefer to target regional specialists to create our own global portfolios in a more diversified approach, but if you need a single fund from a single investment house, then Fidelity is the one on form. The fund manager needs to concentrate fully on the portfolio, as there is no hiding place behind any index. This reduces the risk of getting things wrong, but statistically, there is a chance of higher risk, as the fund is less diversified. A less aware, less knowledgeable investor might be caught out by the attractions without understanding the risks. Robert Burdett, head of fund selection, Credit Suisse Asset Management

The investment process This is what the manager will be required to do (see also Chart 1):

• Identify relative attractiveness of each sector. Consider factors including: number of highly-rated stocks in sector; potential value added from selecting best stocks in sector; specific trends leading to investment opportunities.
• Use stock-picking skills in sectors offering the best opportunities. If there are more and better opportunities in certain sectors, investments will be made accordingly, regardless of the sector’s benchmark weighting. But exposure must be maintained to all major sector groupings.
• Select stocks on their potential to generate share price appreciation. Be more concerned about absolute rather than relative performance. Factors indicative of a good stock include strong or improving competitive positioning; the ability of company to raise prices; attractive valuation; changes in management or environment that will improve share valuation.
• Construct portfolio after running “sanity check” against benchmark’s geographical exposure. Analyse geographical bets to ensure sufficient diversification.