Hello and welcome to the Morningstar Series
“Why Should I Invest With You?” I’m Emma Wall and I’m joined today by Jeremy Podger, Manager
of the Fidelity Global Special Situations fund.
Hello Jeremy. Hello.
So, you’ve just told me off-air that you are more worried now than you have been in the
past, perhaps some of these reasons are rising debt levels, valuations looking very toppy,
macro threats, political uncertainty. Which of those things are you as a global equities
fund manager concerned about? Well, I think we have to be concerned about
all of them. Now, I mean, the way I think fund managers need to look at macro influences
is more in terms of risk and opportunity, rather than dictating top-down asset allocation.
So, I think to start with the background where we are now middle of 2017. We’ve had nine
months of very, very strong markets and I think part of that is down to the optimism
that came around the U.S. election about tax cuts and possibly infrastructure spending.
So, we saw sentiment levels rise a lot. I think in the background there was another
influence which was Chinese stimulus which has had a good follow-through effect. And
now I think we are at an interesting point, where markets are – have perhaps moved on
from that period and are now trying to digest the significance of normalization of interest
rates. So, I think we need to pay close attention to that. But second guessing the political
situation is very difficult and I am not sure that’s something that fund managers necessarily
do particularly well. You’ve mentioned that we have had these eight
or so months of good markets it’s actually been as a whole eight years of strong market
certainly in developed markets. As a special situations fund manager, you are presumably
looking for stocks that are undervalued by the market. Is that harder to do now since
we’ve had that significant rally? I think it is somewhat harder. I do think
the good news though looking at the markets right now. Is that 2017, potentially 2018
are going to be years of good corporate earnings growth. So that’s kind of the good news
in the background after essentially nearly five years of earnings flat lining. So that’s
definitely a support. But as you may know I essentially look at
all investments in three categories. So, the central category of exceptional value is becoming
more difficult, and the reason for this is not just the valuation levels themselves which
I don’t have a significant problem with. But more to do with the progress of margins
across most industries. With a few exceptions, most industries are enjoying quite high margins
right now. So, you have to be super selective. If you
are being general – if you are generalizing about where those opportunities seem to be
arising. And particularly if I think over the last 12 months or so opportunities to
buy cheap valued stocks with rising margin potential I have tended to find more in Japan
which as a whole is a value market and somewhat in emerging markets, not necessarily in those,
sort of headline growth stocks, but more in things like banking and oil related companies.
And how do you avoid value traps then, because those two things are key, you want to buy
stuff that looks cheap but as you say has that potential to grow it does have quality
to its business. Yes, I mean I think that you do have to have
a quality threshold. One thing that I’m trying to avoid is bombed out situations with no
apparent catalyst for improvement. So, it’s really important, I find that you take a medium
to longer term view of margin – profit margin potential in the companies that you are looking
at. And for that to drive the valuations higher. So that’s the central category of what I
look for, exceptional value. We have another category which is unique businesses
and these are more really growth businesses and here what we look for is really good return
potential from internal growth in companies. And here again after the kind of progress
that we have seen in markets in the last five years. You have to be really careful. There’s
been a huge convergence in sort of safe reliable growth companies.
But if I look at those today they are firstly expensive and secondly the growth potential
in things like staple consumer goods companies is not what it once was. It’s looking a little
bit pressured. So, again you need to be a bit, a bit selective also not going for the
super hyper growth, super highly valued companies and you might end up for example. One addition
to the portfolio earlier this year would have been something like Deutsche Börse. So, financial
services company with good growth potential trading at attractive valuation particularly
on cash flow terms. Jeremy thank you very much.
Thank you. This is Emma Wall from Morningstar. Thank
you for watching.