Speaker 1: Welcome to the inaugural episode of Inside Active, a podcast
Speaker 1: about active managers that goes beyond sound bites and headlines
Speaker 1: and looks deeper into the processes, challenges, and philosophies and
Speaker 1: security selection. I'm David khne, I, lead mutual fund and
Speaker 1: active Research at Bloomberg Intelligence. I'm joined by Gina Martin Adams,
Speaker 1: chief equity strategist at Bloomberg Intelligence. Who'll be my co
Speaker 1: host today. Gina, thanks for joining me.
Speaker 2: Thank you for having me.
Speaker 3: David.
Speaker 1: Well, you wrote a really interesting note about global equity valuations.
Speaker 1: I think it really ties into our discussion today. Do
Speaker 1: you maybe give us a quick overview of where global
Speaker 1: equity valuations are today?
Speaker 3: Yeah?
Speaker 2: Absolutely, and thank you. It's been a really interesting ride
Speaker 2: in twenty twenty four. I think that the popular conception
Speaker 2: is that stocks are quote unquote expensive, and that is
Speaker 2: really derived through the observation that index level valuations have
Speaker 2: expanded so far this year, and at least in the
Speaker 2: US have expanded to levels we last saw back in
Speaker 2: twenty twenty one. But when you dissect the indices and
Speaker 2: you look at the individual moving parts, the components of
Speaker 2: the indusices, you actually find that the median stock globally
Speaker 2: has not seen any valuation expansion. As a matter of fact,
Speaker 2: most of the valuation expansion, in particular in the US
Speaker 2: has really just come from the top ten stocks, and
Speaker 2: globally it's come from AI theme stocks. So I'm really
Speaker 2: excited to dig in today with our guests on valuations,
Speaker 2: on growth prospects, what's really driving markets, and where are
Speaker 2: we going to see, you know, trend shift going into
Speaker 2: the future.
Speaker 1: Great, So I think it's a great time now to
Speaker 1: bring in our guest, Sonu Kara, who manages the Fidelity
Speaker 1: Blue Chip Growth Fund or fbjyr X. So, now, thank
Speaker 1: you so much for joining us.
Speaker 3: Thanks David, Thanks Gena, thanks for having me this morning.
Speaker 1: So before we get into you know, nitty gritty of
Speaker 1: stock analysis, maybe you could tell us how you got
Speaker 1: your start in investing.
Speaker 4: Yeah, I grew up in a household which was very
Speaker 4: i would say, math and numbers oriented growing up. I
Speaker 4: moved to the United States at the age of six
Speaker 4: from India, and you know, my dad, at an early
Speaker 4: stage when we moved to this country, I used to
Speaker 4: come through the Wall Street Journal and just look at
Speaker 4: stock prices of different names. That's kind of where I
Speaker 4: really learned about the stock market and developed an interest
Speaker 4: in the stock market.
Speaker 3: Funny thing is is, you know.
Speaker 4: He would focus on the fifty two week low list
Speaker 4: as potential ideas. Over time, I've learned that's usually not
Speaker 4: a good place to be searching for new ideas.
Speaker 3: But it was really a lesson in.
Speaker 4: Investing, and we'd sit down on Saturday mornings and just
Speaker 4: go through what happened. And developed an interest early on.
Speaker 4: And you know, in college, I was a finance major.
Speaker 4: You know, I was kind of the nerd in our
Speaker 4: in our apartment where I would watch CNBC and watch
Speaker 4: financial news. And I remember there was a brokerage house
Speaker 4: down on Main Street and they had a ticker that
Speaker 4: would go by, because at that point in time, you'd
Speaker 4: have to in order to get real live tickers, you
Speaker 4: either have to be watching TV or you'd have to
Speaker 4: dial the numbers on your phone and the letters, et
Speaker 4: cetera and take forever. So I'd sit by the brokerage
Speaker 4: house it was a TV waterhouse brokerage, I remember, and
Speaker 4: just watched watch the tickers. So just developed a love
Speaker 4: of the markets.
Speaker 3: Uh.
Speaker 4: You know, my first job out of college was a
Speaker 4: g capital I was in a rotational program there, and uh,
Speaker 4: you know, at that point in time, I never knew
Speaker 4: that you could actually, you know, have a career in investing.
Speaker 3: For me, it was more of a hobby.
Speaker 4: But at G Capital they managed a portion of their
Speaker 4: pension fund assets. Internally, I had a six month rotation there,
Speaker 4: did some equity research analysis and just really fell in
Speaker 4: love with it and went back and got my MBA
Speaker 4: and did my summer internship and Fidelity in the Hong
Speaker 4: Kong office. Spent three months in Hong Kong covering Chinese
Speaker 4: toll roads and utilities. Counted cars, you know, on the
Speaker 4: side of a highway at that time. That's how a
Speaker 4: few cars there were in China in.
Speaker 3: The late nineties.
Speaker 4: This was the summer of nineteen ninety seven. And then,
Speaker 4: as I say, the rest is history. Joined Fidelity in
Speaker 4: ninety eight as an analyst here in Boston and have
Speaker 4: been looking at growth stocks for most of my career.
Speaker 1: That's a great start. It's really interesting to hear people
Speaker 1: giving their overview of how they got their you know,
Speaker 1: their start in the business, and you know, it kind
Speaker 1: of brings us to where you are now. I think
Speaker 1: we'd really love to hear about your investment process. Could
Speaker 1: you kind of give us an overview of it.
Speaker 4: Yeah, So I managed the blue Chip Growth strategy here
Speaker 4: the core mutual fund you mentioned FPGR, but also in
Speaker 4: addition to that, I also manage FBCG, which is the
Speaker 4: ETF version of the strategy, and I've been running this
Speaker 4: strategy since two thousand and nine. What I primarily look
Speaker 4: for are companies that are participating in large addressable markets
Speaker 4: that are underpenetrated, where markets are not only mispricing the
Speaker 4: absolute rate of growth, but more importantly the durability or
Speaker 4: sustainability of that growth. And that's really the core essence
Speaker 4: of our investment philosophy. You know, if you look back
Speaker 4: at the great growth companies of our lifetimes, companies like
Speaker 4: in Amazon and Apple, you know they've been able to
Speaker 4: compound growth rates and healthy growth rates for long periods
Speaker 4: of time. And that's really what I strive to look for.
Speaker 4: And one of the things that I look for is
Speaker 4: these large underpenetrated markets, because if the size of the
Speaker 4: pie is big, you have room to grow for long
Speaker 4: periods of time. And the other thing I look for
Speaker 4: is adjacent markets. Do companies have adjacent market opportunities that
Speaker 4: they can go after over time, and Amazon's a great
Speaker 4: example of that. I was fortunate enough to be the
Speaker 4: analyst covering Amazon in the late nineties early two thousands.
Speaker 4: I covered Apple during the early two thousands, so these
Speaker 4: are really my formative years as a growth investor, and
Speaker 4: you know, one of the things I learned was just
Speaker 4: when you have these companies, it's really important for them
Speaker 4: to continue to expand and have opportunity to expand. And
Speaker 4: when you think about Amazon, they started out and you know, books, music, video,
Speaker 4: e commerce categories, continued to expand, and then in the
Speaker 4: mid two thousands launched their web services business, which is
Speaker 4: now one of their largest businesses and most profitable business.
Speaker 4: More recently, they've added advertising and prime video, et cetera.
Speaker 4: You know, Apple got it start as a PC maker,
Speaker 4: and I still remember when they introduced the iPod in
Speaker 4: the early two thousands. That was really their first venture
Speaker 4: outside the PC market, and there's a lot of skepticism.
Speaker 3: At the time. And then they introduced the.
Speaker 4: iPhone, the iPad, the ecosystem, apps, et cetera. So it's
Speaker 4: really important for these companies to have these adjacent markets
Speaker 4: that they can capture over time, and ideally, if.
Speaker 3: We're doing our work well.
Speaker 4: We can hold on to these companies for long periods
Speaker 4: of time. I tend to look for companies that can
Speaker 4: grow their earnings double digits. And the reason I focus
Speaker 4: on that double digit hurdle is, when you think about it,
Speaker 4: take a step back. The S and P historically has
Speaker 4: returned seven to eight percent over time, and stocks typically
Speaker 4: follow earning. So in order to helpperform the market, you
Speaker 4: need to find companies and own companies that can outgrow
Speaker 4: the market. So for me, that ten percent hurdle rate
Speaker 4: becomes a nice bogie that I look for. And and
Speaker 4: we've done some internal research here that shows if you
Speaker 4: own a portfolio of companies that continues to you know,
Speaker 4: compound at ten percent, there's about twelve hundred basis points
Speaker 4: of outperformance to be found on in any given year.
Speaker 4: And so it's really trying to you know, fish in
Speaker 4: a pond where there's a lot of fish. You know,
Speaker 4: I spend a lot of time with our analyst team, uh,
Speaker 4: you know, focused on organic revenue growth. You know, to me,
Speaker 4: that's like puts every company on a level playing field.
Speaker 4: And I try to find companies you know that are
Speaker 4: gaining market share. To me, market share is a very
Speaker 4: important metric that I focus on. It gives me a
Speaker 4: quick snap shot of the industry dynamics as well as
Speaker 4: you know, our companies gaining share, losing share. It can
Speaker 4: be warning signs associated with that. So those are those
Speaker 4: are the things I look for On the growth side,
Speaker 4: you know, I break it out into three buckets, secular growers,
Speaker 4: cyclical growers, and then opportunistic growers. The majority of the
Speaker 4: fund is what I would consider in the secular bucket.
Speaker 4: I've worked very closely with our you know, global research
Speaker 4: team identifying themes that we think can provide secular tailwinds.
Speaker 3: Uh.
Speaker 4: You know, some themes that we've incorporated over the last
Speaker 4: decade include, you know, e commerce penetration AI is a
Speaker 4: buzzword today, but we've identified it over a decade ago.
Speaker 4: Health and wellness. We're all trying to eat better, exercise more.
Speaker 4: It's led to the casualization of the workplace as well
Speaker 4: the rise of the middle middle class. So those are
Speaker 4: all things you know, you know that kind of have
Speaker 4: a secular tailwind to it. And then on the cyclical side,
Speaker 4: depending where we are on the business cycle, consensus usually
Speaker 4: tends to overestimate or UNDERESTI to mat where things can
Speaker 4: go COVID.
Speaker 3: You know, oil prices when negative for a day.
Speaker 4: Best cure for oil prices is low oil prices as
Speaker 4: cap back sticks required. So we'll put a small portion
Speaker 4: of the fund in some of the more signal industries.
Speaker 4: And then the last bucket is what I call self
Speaker 4: help stories. It can be industry consolidation, a new management team,
Speaker 4: you know, something, some catalysts that can propel a company.
Speaker 4: So hopefully that gives you a flavor for kind of
Speaker 4: how I approach the growth aspect of the strategy.
Speaker 2: That was great, Thank you, Sony. I'm curious, you know,
Speaker 2: kind of going back to your initial remarks and back
Speaker 2: to our work on valuations. You talked about your father's
Speaker 2: investment strategy really being more of a value screen, so
Speaker 2: to speak, looking for those fifty two week lows, and
Speaker 2: then here you end up in a growth style. But nonetheless,
Speaker 2: you know, I do think that growth managers do pay
Speaker 2: attention to valuations, despite popular contention. I'm curious what you
Speaker 2: use from a valuation perspective. Are there specific metrics that
Speaker 2: are really relevant for you as a growth manager, and
Speaker 2: how you're handling valuations in this current context when you
Speaker 2: have the top ten stocks really commanding so much attention
Speaker 2: and so much expansion in their valuation levels relative to
Speaker 2: the rest of stocks. Talk us through your process on
Speaker 2: you know, kind of handling multiples and handling valuations at large.
Speaker 4: Yeah, it's a great question and something you know, it's
Speaker 4: it's more of an art than a science as kind
Speaker 4: of how I would characterize it.
Speaker 3: And what I've learned over my career has been.
Speaker 4: That I need to be flexible on valuation, that the market.
Speaker 4: I always believe the market is a lot smarter than me,
Speaker 4: and and so I'm sensitive to valuation. But what I
Speaker 4: try to do is, you know, work with our analysts
Speaker 4: and can up three to five year outlooks on our
Speaker 4: companies and just we're trying to predict the future. And
Speaker 4: sometimes it's easy to predict the future, and sometimes it's hard.
Speaker 4: We don't know what it's looked like, what it's going
Speaker 4: to look like, and so we'll try to use.
Speaker 3: A variety of valuation metrics.
Speaker 4: You know, PE is probably the most common, but I
Speaker 4: think of PE ratios as being shorthand for you know,
Speaker 4: discounted cash flows and we'll look at discounted cash flows
Speaker 4: and long term earnings power, but it really depends on
Speaker 4: the opportunity.
Speaker 3: A great example, you know, in the twenty tens.
Speaker 4: You know, we were big owners of Tesla during that timeframe,
Speaker 4: and it looked very expensive on traditional valuation metrics for
Speaker 4: for most of the decade. But you know, I think
Speaker 4: the power of the research platform here gave us conviction
Speaker 4: that they had developed a competitive advantage. And the great
Speaker 4: thing about the automobile market is it's very large, and
Speaker 4: it was a market that had undergone very little.
Speaker 3: Innovation over the.
Speaker 4: Last forty years outside of the automatic transmission. And here
Speaker 4: was Tesla trying to disrupt the market. And once they
Speaker 4: launched the model les, they were capturing about twenty percent
Speaker 4: market share in the California market of the high end
Speaker 4: luxury vehicles. And we could then do analysis on if
Speaker 4: they're successful getting into the mass market, what type of
Speaker 4: market share could they capture.
Speaker 3: And they were going with a direct model.
Speaker 4: And we had seen an analogy to that before in
Speaker 4: the PC industry when Dell went direct in the nineties
Speaker 4: and what sort of.
Speaker 3: Benefit that had.
Speaker 4: And you know, Tesla was able to take out the
Speaker 4: dealer take some margins. There no advertising, so they had
Speaker 4: about a thousand basis points of margin advantage versus a
Speaker 4: traditional automaker. And so you know, we were able to
Speaker 4: project out what sort of market share they would need
Speaker 4: to capture to justify evaluation. And you know, those are
Speaker 4: the type of things that we look at and you know,
Speaker 4: depending on the opportunity, the size of the pie. You know,
Speaker 4: like I said, I'm a big believer that the market,
Speaker 4: you know, is a forward looking discounting mechanism.
Speaker 3: So I have a lot of respect for what the
Speaker 3: market says.
Speaker 4: And sometimes stocks look very expensive on the surface but
Speaker 4: end up looking very inexpensive. Another great example is when
Speaker 4: Google went public in the mid two thousands. They ran
Speaker 4: a very unique reverse auction method in terms of how
Speaker 4: they went public and the stock at the time it
Speaker 4: looked like was trading over thirty times earnings, but when
Speaker 4: they finished their first year of being a public company,
Speaker 4: the stock actually was trading at fifteen times you.
Speaker 3: Know, earnings.
Speaker 4: And our job is analysts and portfolio managers. You know,
Speaker 4: what I think of is we need to get the
Speaker 4: earnings right, and if we can project the earnings well,
Speaker 4: the multiple kind of takes care of itself.
Speaker 2: Can you talk to us a little bit then on
Speaker 2: you know, do you ever use valuations as a trigger
Speaker 2: point for an exit strategy or do you to use
Speaker 2: valuations in combination with some sort of fundamental outlook change.
Speaker 2: I know, you know, at certain points in times, certainly
Speaker 2: we see valuations expand to such extreme levels and then
Speaker 2: usually you need some kind of catalyst. It seems to
Speaker 2: actually see those valuations become an impediment in particular and growth.
Speaker 2: So I'd love to hear kind of your risk management
Speaker 2: strategy and if you actually use valuations to mitigate risk,
Speaker 2: or if there's some other metrics that you really follow
Speaker 2: more closely.
Speaker 4: Yeah, no, we'll use I'll trim winners on excessive valuation
Speaker 4: just as a risk mitigation strategy. We're very mindful that,
Speaker 4: especially in the growth bucket, there is more risk associated
Speaker 4: with some of these names, and having lived through several
Speaker 4: of these cycles, sometimes valuations do become excessive. The question
Speaker 4: is is you know what's the trigger point. Usually it's
Speaker 4: a change in fundamentals, or sometimes it's a change in macro.
Speaker 4: You know, in twenty one and twenty two we saw
Speaker 4: the interest rate environment flip, and that was a big
Speaker 4: change for valuations.
Speaker 3: But generally, you.
Speaker 4: Know, I won't exit a position solely on valuation. I'll
Speaker 4: look at valuation and conjunction with something fundamental as a
Speaker 4: trigger point. But I'll certainly trim positions based on valuation
Speaker 4: just given. You know, if a stock is appreciated X amount,
Speaker 4: we'll monitor it and look at the opportunity risk reward.
Speaker 3: I keep a spreadsheet.
Speaker 4: Of all our stocks and what we think the upside
Speaker 4: downside is, and when that equation starts to get out
Speaker 4: of balance, well we'll start trimming. But like I said,
Speaker 4: it's more of an art than a science. I don't
Speaker 4: have a specific you know, hey, if the stock's trading
Speaker 4: over XPE ratio or XPE to growth, I'm going to
Speaker 4: sell it. You know, it really depends on what the
Speaker 4: market opportunity we think is for that particular company.
Speaker 1: Okay, I do want to kind of go back to valuation,
Speaker 1: you know, one more time. You know, do you think
Speaker 1: there are any overrated or underrated metrics when looking at valuations?
Speaker 4: You know, I think I wouldn't say they're overrated or underrated.
Speaker 4: I think depending on the industry you're talking about.
Speaker 3: Depending on, uh, you know, the type of company.
Speaker 4: It is, you know, Like I said that, I think
Speaker 4: of PE ratios as being a shorthand for you know,
Speaker 4: basically discounted cash flows. I spend a lot of time
Speaker 4: looking at margin, you know, and the margin trends the
Speaker 4: one metric, you know, It's maybe not a pure evaluation metric,
Speaker 4: but return on equity is something that I think is
Speaker 4: a little overrated, you know, And being a blue chip
Speaker 4: growth I spend a lot of time looking at return
Speaker 4: on equity and to me, the absolute level gives me
Speaker 4: a very quick snapshot of how the quality of the business,
Speaker 4: how good of a business. This is what ro O
Speaker 4: we doesn't tell you is whether the business or the
Speaker 4: stock will perform well moving forward. And for me, the
Speaker 4: direction of that ro OI is actually more important is
Speaker 4: are we going up.
Speaker 3: Or are we going down?
Speaker 4: And as our job as folio managers and analysts is
Speaker 4: to predict that. So I don't mind buying companies that
Speaker 4: have low ROS. And I own some companies that don't
Speaker 4: make any money, so they have a negative ROI by definition,
Speaker 4: but if we think they can be.
Speaker 3: Better companies down the road, we'll own them.
Speaker 4: And so that's a metric that I think gets overused
Speaker 4: quite a bit that you know, investors like their own
Speaker 4: high Roe companies, but what you really want to do
Speaker 4: is you want to own improving Roe companies rather.
Speaker 3: Than just hire companies.
Speaker 2: I'm curious, so new how do you integrate these big
Speaker 2: macro events into your analysis or your strategy. So you
Speaker 2: talked a little bit about twenty twenty two, right, and
Speaker 2: I hate to bring up painful years, but nonetheless, twenty
Speaker 2: twenty two or maybe the second half of twenty eighteen
Speaker 2: sort of these small but painful bouts of growth stock underperformance,
Speaker 2: and twenty twenty two you mentioned the FED as a
Speaker 2: big part of that story. Do you react during these periods?
Speaker 2: How do you manage through these periods of major kind
Speaker 2: of risk off.
Speaker 4: Yeah, it's a great question, and truthfully, it's an area
Speaker 4: where I can improve. You know, I tend to have
Speaker 4: a long time horizon, so I give most of my
Speaker 4: companies a pretty long leash. And if I think of,
Speaker 4: you know, some of my top holdings. You know, if
Speaker 4: you were to look at my top holdings, I've owned
Speaker 4: them for a long period of time.
Speaker 3: And but I mean long period of time, I mean
Speaker 3: like pretty.
Speaker 4: Much you know, either since I've been managing the funder
Speaker 4: since they've gone public, and so you know, I tend
Speaker 4: to you know, own businesses that I think will do
Speaker 4: well over long periods of time, and so I tend
Speaker 4: to have a longer leash with some of these companies,
Speaker 4: and that's hurt me in downdrafts that we've seen, like
Speaker 4: in the second half of twenty eighteen and twenty two.
Speaker 4: So that's an area that I'm trying to improve upon,
Speaker 4: is trying to you know, manage the risk at the
Speaker 4: top of my fund and cut back on positions. When
Speaker 4: you have a change in the macro, sometimes that can
Speaker 4: overwhelm company fundamentals and sometimes the macro can actually shape
Speaker 4: company fundamentals as well.
Speaker 3: You know, a higher interest rate environment.
Speaker 4: Clearly made you know, some of the returns we were
Speaker 4: seeing on the investments that these companies were making, you know,
Speaker 4: change the equation, and we saw revenue growth slow down, uh,
Speaker 4: you know, coming out of COVID as well. So the
Speaker 4: fundamentals changed as the interest rate environment changed.
Speaker 3: So that that that's.
Speaker 4: An area for me that I can definitely improve upon
Speaker 4: as a portfolio manager. But I tend to, you know,
Speaker 4: think of myself as being macro aware, but i'm.
Speaker 3: I'm.
Speaker 4: I've learned over time that I'm not very good at
Speaker 4: predicting the macro, and so what I try to focus
Speaker 4: on is company fundamentals and finding companies that we think
Speaker 4: will be able to show adorable growth regardless of the macro.
Speaker 1: Actually, it's a good point you mentioned fundamentals, and also
Speaker 1: earlier you mentioned you know, management changes. There are specific
Speaker 1: types of qualitative factors you look at, you know, such
Speaker 1: as management teams or maybe even corporate culture, you know,
Speaker 1: in addition to kind of the numbers.
Speaker 4: Yeah, absolutely, for me, it's very important to learn to
Speaker 4: you know, get to know the management team. I pay
Speaker 4: very close attention to when people leave, whether it's a
Speaker 4: CEO or CFO, where they're leaving to, or you know,
Speaker 4: trying to get understand why.
Speaker 3: Why they may leave.
Speaker 4: I'll follow managers that I've had success with because you
Speaker 4: trust them, and if they've been successful at one company,
Speaker 4: there's probably greater likelihood that they'll be successful somewhere else
Speaker 4: as well. And part of our research process here is
Speaker 4: not to not to just get to know the C
Speaker 4: level suite managers, but also for me, it's meeting the
Speaker 4: business unit level managers. I spend a lot of time
Speaker 4: on the road meeting company managements with our analysts and
Speaker 4: understanding how the strategy filters down the organization. You know,
Speaker 4: one of the questions that I always like to ask is,
Speaker 4: you know, you know, what are the key metrics that
Speaker 4: these business unit level managers are being measured on. How
Speaker 4: are they going to earn their bonus at the end
Speaker 4: of the year, and compare that to what we're hearing
Speaker 4: on the conference calls and uh, you know, reading on the.
Speaker 3: Transcripts, et cetera.
Speaker 4: So it's very important part of the process is you know,
Speaker 4: getting to know management, understanding you know, what the strategy is,
Speaker 4: and more importantly, understanding how how it filters through the organization.
Speaker 1: Okay, great, we talked a little bit about some of
Speaker 1: the holdings. Obviously, Navidia, how do you handle or I know,
Speaker 1: Gina wants to talk about this non tech sectors. In
Speaker 1: times like this.
Speaker 4: I spend a lot of time looking at companies across
Speaker 4: different sectors.
Speaker 3: You know, I'm benchmarked against the.
Speaker 4: Rustle one thousand growth, so a big part of it
Speaker 4: the benchmark is in tech and communications services, which is
Speaker 4: very similar, but there's also you know, parts of the
Speaker 4: market like consumer has been an area, you know, with
Speaker 4: ripe innovation over the years.
Speaker 3: Healthcare is another area.
Speaker 4: So those are probably the three sectors that I spend
Speaker 4: most of my time on. And the great thing about
Speaker 4: the market in general is that there's growth opportunities in
Speaker 4: every sector.
Speaker 3: So even when I'm looking at more of.
Speaker 4: A cyclical sector like energy, I'll try to find companies
Speaker 4: that are growing faster, you know, than the average company
Speaker 4: in in that sector, or you know, even in consumer staples.
Speaker 4: You know, it's traditionally you know more you know, stable industry,
Speaker 4: but I'll try to find companies that maybe have a
Speaker 4: new product or you know, something that will catalyze growth
Speaker 4: over time. So to me, you know, it doesn't really
Speaker 4: matter what sector that an idea you know, uh, you
Speaker 4: know plays in.
Speaker 3: The key is is is it a good idea.
Speaker 4: And can we own it for a long period of
Speaker 4: time and doesn't fit the characteristics that we look for
Speaker 4: in a potential blue chip company.
Speaker 2: You mentioned Son who bent the benchmark, and your benchmark
Speaker 2: being the Russell growth, I'm curious how much time you
Speaker 2: spend really thinking about the benchmark. You're tracking your relative
Speaker 2: to the benchmark, your sector allocation relative to the benchmark,
Speaker 2: even your stock selection relative to the benchmark, and how
Speaker 2: much those constraints ultimately become a pretty big poor of
Speaker 2: your strategy when you think about managing the fund.
Speaker 4: Yeah, I think of myself as being benchmark aware. It's
Speaker 4: important because that is what investors are counting on you
Speaker 4: to beat, and my incentives are aligned with beating the benchmark,
Speaker 4: and so I do focus on it, but I would
Speaker 4: say I wouldn't overly focus on it. I'm willing to
Speaker 4: go outside the benchmark. I'll own names that aren't in
Speaker 4: the benchmark. The Russell one thousand growth benchmark, it has
Speaker 4: a rebalance every year, and so the weights change once
Speaker 4: a year in June. And there's been times where, you know,
Speaker 4: a great example is actually a Meta or Facebook which
Speaker 4: came out of the benchmark, or it went down a
Speaker 4: lot in the benchmark, can completely come out in twenty two,
Speaker 4: you know, after it had fallen quite a bit, and
Speaker 4: then in twenty three, after a hit were covered quite
Speaker 4: a bit, it went way back up in the benchmark.
Speaker 4: And so you can get whipsod by just following the benchmark.
Speaker 4: And so what we want to try to do is
Speaker 4: own names that we think can deliver those double digit
Speaker 4: earning sustainably over long periods of time, and if we're
Speaker 4: doing our job correctly, you know, we should outperform the
Speaker 4: benchmark over time. And the metrics you mentioned tracking error,
Speaker 4: you know, I monitor all those metrics. They're important, you know,
Speaker 4: for clients, and you know, understanding how the fund is positioned.
Speaker 4: There's ways where as a portfolio manager you can manipulate
Speaker 4: those metrics if you want to, so I don't get
Speaker 4: overly focused on them.
Speaker 3: I make sure I understand them.
Speaker 4: You know, there's an easy way to take your tracking
Speaker 4: error up or bring your tracking error down your active
Speaker 4: share as well.
Speaker 3: So I watch all those ratios. But for me, it's
Speaker 3: really just.
Speaker 4: Understanding how I think the fund is going to perform
Speaker 4: on a day to day basis and long term be able.
Speaker 3: To deliver the type of results that we'd like to deliver.
Speaker 2: And do you ever think about capitalization strategy, especially right now,
Speaker 2: It just strikes me that so much of our optimism
Speaker 2: seems to be concentrated in the biggest and the best
Speaker 2: of the megacap names, and it feels to me like
Speaker 2: maybe that leaves an opportunity for some of these smaller
Speaker 2: stocks to start to catch up. Even within a big
Speaker 2: rustle one thousand index you have, you know, pretty big
Speaker 2: distribution of market cap. Do you think about that in
Speaker 2: context or is it really If it's a great growth
Speaker 2: idea and it's at a reasonable price, we're all in it.
Speaker 4: You know. I think I'd be kidding anyone if I
Speaker 4: said I wasn't paying attention to it. It's been a
Speaker 4: big topic of conversation here internally over the last several
Speaker 4: months in terms of what we've seen the gap between
Speaker 4: the megacaps and the rest of the market. And you know,
Speaker 4: we've seen all the statistics out there, and so you know,
Speaker 4: the great thing about the strategy here and I think
Speaker 4: what the breadth and depth of Fidelity's research staff has
Speaker 4: allowed me to do is keep a long tail in
Speaker 4: the fund. And so we own about three hundred names
Speaker 4: in the portfolio. And the great thing about Fidelity is
Speaker 4: that we have research analysts that are following each and
Speaker 4: every one of these companies, and I think of them
Speaker 4: as kind of my eyes and ears and feet on
Speaker 4: the street. So we're talking to these companies on a
Speaker 4: regular basis for conducting the due diligence, and it enables
Speaker 4: me to have a portfolio. You know, right now, it's
Speaker 4: very heavily concentrated at the top of the fund, with
Speaker 4: the top twenty names making you know, up over sixty
Speaker 4: percent of the fund. But it also allows me to
Speaker 4: have a long tail and identify what I consider my
Speaker 4: emerging growth names.
Speaker 3: These are smaller companies nature.
Speaker 4: That we've identified and we think have the characteristics that
Speaker 4: could make them blue chips down the road, and if
Speaker 4: we can identify them early on, that will benefit our shareholders.
Speaker 4: You know, there's an interesting piece of research that a professor,
Speaker 4: Hendrik Bessenbinder did from Arizona State University where he looked
Speaker 4: at stock performance from nineteen twenty six onwards, and he
Speaker 4: found that ninety percent of the value created by the
Speaker 4: stock market since since nineteen twenty six has been created
Speaker 4: by just two percent of the stocks. But you never
Speaker 4: know where that two percent is going to come from.
Speaker 4: And so having that long tail helps me work with
Speaker 4: our analysts and identifying potential names that we think can
Speaker 4: be much bigger over time. And I think it's a
Speaker 4: big differentiator, you know, versus some of our peers out there.
Speaker 2: And one last question for me is I could you
Speaker 2: mentioned you know, you have this just pool of incredible
Speaker 2: resources internally in the analyst community. Do you ever look
Speaker 2: at external research? You know, David and I have an
Speaker 2: incentive to to provide great ideas ourselves as well. I'm
Speaker 2: curious if you ever get some great ideas from cell
Speaker 2: side research, whether it be bottom up or top down,
Speaker 2: how you might think about integrating other research sources in
Speaker 2: addition to your very valuable internal partners.
Speaker 3: Oh.
Speaker 4: Absolutely, I have no bias in terms of where an
Speaker 4: idea is going to come from. I want to my
Speaker 4: funnel is as wide as possible, and so if you
Speaker 4: want to give me an idea, I'm all ears, Tina,
Speaker 4: you know, whether it comes from the cell side other
Speaker 4: by side, you know, peers of mine. You know, I
Speaker 4: read a lot my kids. My kids have been great
Speaker 4: sources of ideas. You know, I have three teens in
Speaker 4: the house, so they've been great sources of ideas over
Speaker 4: the years. For me. I'm always peppering them questions in
Speaker 4: terms of what they're doing, where they're going, where they're shopping,
Speaker 4: et cetera. So absolutely, that's you know, I'm kind of
Speaker 4: came out of the old Peter Lynch school, where you know,
Speaker 4: look around you and you never know where an idea
Speaker 4: comes from. So you know, I do read external research,
Speaker 4: I do talk to the cell side, and you know,
Speaker 4: they're an important part of what we do here, and
Speaker 4: it's part of the mosaic that we're building. You know,
Speaker 4: the market is very big, and you need to understand
Speaker 4: how others are thinking and you know why stock places
Speaker 4: are moving the way they are, So it's really important
Speaker 4: to understand, you know, what other views may be as well.
Speaker 3: That's great to hear.
Speaker 1: Thank you. That definitely brings up another question I had,
Speaker 1: you know, in terms of what you're doing now, what
Speaker 1: do you think has changed the most since you started
Speaker 1: in the industry.
Speaker 4: Yeah, it's a great question as well. I think the
Speaker 4: thing that's changed the most is how quickly information travels,
Speaker 4: you know, and you know, information gets incorporated into stock
Speaker 4: prices much quicker today than I think it did twenty
Speaker 4: five thirty years ago. You know, when I first started
Speaker 4: in this industry, and you know, we used to get
Speaker 4: information through fax machines and telephone calls and now everything's
Speaker 4: online instantaneously.
Speaker 3: All the you know, quant firms out there.
Speaker 4: Are you know, trading the news before it even comes
Speaker 4: out there, you know, so that's probably the biggest change
Speaker 4: in the industry is just how efficient mark you know,
Speaker 4: relatively efficient.
Speaker 3: They're not fully efficient.
Speaker 4: And I think that's an advantage that fidelity has is
Speaker 4: our time horizon. I've really tried to incorporate a longer
Speaker 4: time horizon into my investment process and philosophy.
Speaker 3: And uh, you know.
Speaker 4: I was actually looking back at Apple recently. So over
Speaker 4: the last since two thousand and five, so almost twenty years,
Speaker 4: Apple has had around twenty instances where the stock has
Speaker 4: dipped twenty percent in any given year, and so you
Speaker 4: can have, you know, a great company like Apple even
Speaker 4: go through, you know, lots of periods of time where
Speaker 4: the stock is down twenty percent, but over time, you've
Speaker 4: wanted to own the stock given how well they've done,
Speaker 4: and so we try to use volatility to our advantage.
Speaker 3: But you know, I would.
Speaker 4: Say, you know, the biggest change for me is just
Speaker 4: how much information is available at your fingertips and how
Speaker 4: quickly it gets incorporated into stock crisis.
Speaker 1: No, that definitely makes sense. And I've got just one
Speaker 1: more reflective question. What advice would you give your younger
Speaker 1: self if you were able to go back in time,
Speaker 1: just for in this yeah.
Speaker 4: I tell you know, our interns and our young analysts,
Speaker 4: is just go out there and talk to as many
Speaker 4: people as you can, network, learn, and find something that
Speaker 4: you love.
Speaker 3: I think that's really important in life.
Speaker 4: You know, when you're picking your career, make sure you
Speaker 4: love it because you're going to be doing it every
Speaker 4: day for you know, at least eight hours a day,
Speaker 4: if not more. I tell my kids that is just
Speaker 4: you know, find something you're passionate about and go go
Speaker 4: after that and figure out if you can make a
Speaker 4: career out of it. To me, you know, I've always
Speaker 4: been passionate about stocks, and you know, fortunately I've been
Speaker 4: able to make a career out of it. That's kind
Speaker 4: of what I tell younger folks. I always say it's
Speaker 4: better to be lucky than good, and luck has a
Speaker 4: lot to do with, you know, where we all end
Speaker 4: up in life.
Speaker 1: Well, that's definitely great advice. I think we're running out
Speaker 1: of time, but this is a great discussion. Gina Sonu,
Speaker 1: I wanted to thank you both again for joining me today.
Speaker 2: Thank you for having us, and thank you so new
Speaker 2: for your frank response to all of our questions. I
Speaker 2: think we all learned a lot.
Speaker 3: Thank you very much. It's a pleasure to be here.
Speaker 1: Well until our next episode. This is David Cohne with
Speaker 1: inside act