Can Buffettology Succeed at Fidelity?

Last month, I highlighted changes in Fidelity's value lineup. But as Berkshire Hathaway BRK.B chairman and CEO Warren Buffett once noted, growth and value investing are joined at the hip. A company with deteriorating prospects may be no bargain, even with low valuations. Meanwhile, a firm with strong competitive advantages and high earnings growth can be a good value, even if its price tag looks rich at first glance. The Oracle of Omaha doesn't come up too often in my conversations with Fidelity managers, who as a group pay close attention to changes in near- or intermediate-term earnings growth--an approach that is distinctly un-Buffett. Yet the new managers of Fidelity Trend and Fidelity Overseas invoke the legendary investor in describing their own strategies. And their portfolios, which fall either in the blend or growth camps, square with the idea that price and value aren't necessarily the same thing.

Large-growth Fidelity Trend FTRNX certainly won't be landing in the value column anytime soon. The fund's benchmark remains the Russell 1000 Growth Index, and new manager Dan Kelley says he plans on keeping its sector weightings aligned with his bogy's. While that resembles the style of predecessor Jeff Feingold, Kelley's strategy diverges in important ways. Invoking Buffett's valuation consciousness, he seeks stocks trading at a discount to his estimate of their intrinsic values. And, like Buffett, Kelley favors companies run by strong capital allocators with solid balance sheets. As a result, the portfolio will likely take on a more value-oriented, higher-quality look than it did under Feingold, who put earnings growth front and center.

The contrast in strategies may not be as stark under new overseas manager Vincent Montemaggiore. Predecessor Ian Hart employed a growth-at-a-reasonable-price strategy, placing the fund in the foreign large-blend camp, where it's likely to remain. Montemaggiore, like Buffett, is an alum of the Columbia business school and takes cues from Buffett teacher Benjamin Graham, the legendary value investor. In Grahamesque fashion, he looks for stocks cheap enough to give him a large margin of safety in case his earnings expectations prove too optimistic. Whereas Graham looked for "cigar butts"--extremely cheap but often low-quality companies--Montemaggiore screens for firms with high returns on invested capital and low valuations.

While Kelley and Montemaggiore share Buffett's method for evaluating companies, they execute their strategies differently than the Berkshire chairman might. Buffett advocates portfolio concentration: The fewer companies you own, he argues, the better you'll know them. The managers, though, are still cut from Fidelity cloth and, like their counterparts, keep broad portfolios. You can expect them to hold more than 100 stocks, and they're likely to keep even a smaller proportion of their portfolios in their largest holdings. And though Buffett isn't afraid to exclude swaths of the market, the managers' benchmark-conscious styles mean they'll be invested in sectors that may look less attractive on fundamental or valuation grounds than others. 

As promising as the managers' approaches appear, the trick will be in the execution. And that's where my confidence diminishes. Neither has led a diversified fund before. Kelley's pedigree is solid; he worked for well-regarded value investor Scott Black of Delphi Value earlier in his career. But his limited track record at Fidelity Select Construction & Housing FSHOX says little about his prospects at Trend. Montemaggiore navigated the financial crisis with skill at Fidelity Select Banking FSRBX, but it's unclear how well he'll fare on a bigger (and more international) stage. 

Fidelity has long been a place that welcomes a diversity of styles and personalities. While Kelley and Montemaggiore still need to prove themselves, it's encouraging to see signs this tradition hasn't faded.

This article originally ran in Morningstar's Fidelity Fund Family Report.