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Investing in America’s turnarounds

Rob Morgan
With investors seemingly growing wary of expensive tech stocks could Fidelity American Special Situations Fund have a chance to shine? (Source: Shutterstock)

The US equity market has a reputation for being difficult for fund managers to beat. This has particularly been the case in recent years as the share price performance of some of the world’s largest companies such as Apple and Amazon, at least until very recently, have risen strongly. The market, as well as passive or ‘index-tracking’ funds which aim to follow its performance, have consequently performed well and many actively managed funds have struggled to keep up.

Yet with markets significantly weaker so far during 2018 this trend may have started to reverse. Fears over heightened regulation have tested investors’ risk appetite towards the so-called FAANG (Facebook, Apple, Amazon, Netflix, and Alphabet’s Google) stocks. In addition, the threat of reprisals from other major global economies to President Trump’s tariffs on imports has meant many larger, internationally-orientated businesses are under fresh scrutiny.

Fidelity American Special Situations Fund, managed by Angel Agudo, is one fund that might benefit versus its peers from any sustained change of market mood. Mr Agudo has avoided tech behemoths Apple, Microsoft, Alphabet, Amazon and Facebook, instead prioritising companies that have gone through a period of underperformance and where he believes little value is ascribed to their recovery potential.

This contrarian, value-based investment style is based on his belief that the stock market is poor at pricing companies that have gone through a troubled time and are unloved or out of favour; inefficiencies he aims to exploit as he seeks to identify those that can spring a positive surprise and whose share prices rise as a consequence.

According to the manager, key to this process is not trying to predict what will happen, just what could happen, while being careful to pay the right price for a business and positioning the portfolio for a range of outcomes. Not every business he backs is likely to improve its fortunes, but by identifying a large enough number with sufficient upside potential (and limited downside) he aims to stack the odds in his favour. In screening potential stocks he looks for companies with problems, or operating at below their potential, but with sound enough fundamentals that their issues can be fixed.

The approach has been an impediment in a market dominated by the strong momentum of large, high-growth businesses in recent years. However, his active and contrarian approach could offer something entirely different to investors looking to diversify their US equity exposure, or simply target cheaper areas of the world’s largest market in the belief this could lead to superior performance than the broader market going forward.

Currently the portfolio is skewed towards stocks the manager believes have strong balance sheets, which he describes as ‘boring and forgotten’, including insurance companies such as Berkshire Hathaway and healthcare firms such as Abbott Laboratories. There is also some technology exposure where the manager believes there is underappreciated potential such as Oracle. While Mr Agudo is wary of owning too much energy and mining due to the economic sensitivity of these industries, he does have some exposure given that valuations are low.

Our view

Since Mr Agudo took over as lead manager in 2012 the fund has performed well overall, outperforming the vast majority of its Investment Association sector peer group – despite much of this period being a relatively difficult one for managers adopting a ‘value’-orientated approach; past performance is not a guide to the future. However, a particularly torrid year in 2017 undid prior outperformance versus the fund’s benchmark, the S&P 500 as the returns from large technology companies accelerated further away from other sectors.

We like the manager's contrarian style and active approach of constructing a focused 40 to 50 stock portfolio that bears little resemblance to the index. Presently he characterises it as ’anti-momentum’ given the aversion to stocks that have performed best lately. Investors should bear in mind that a concentrated portfolio can add to risk as each position has a larger impact on fund performance.

We believe this fund offers something genuinely different from cheaper passive alternatives or ‘rules-based’ funds. Should value style continue have a sustained revival it could be a fertile hunting ground for Mr Agudo, and we retain the fund as part of our Foundation Fundlist of preferred investments across the major sectors.

This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investors should be aware that past performance is not a reliable indicator of future results and that the price of shares and other investments, and the income derived from them, may fall as well as rise and the amount realised may be less than the original sum invested. Investment decisions in collectives should only be made after reading the Key Investor Information Document, Supplemental Information Document and/or Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

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