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Allen: Different Opportunities in a Post-Crisis Market

Holly Cook

Holly Cook: I'm Holly Cook for Morningstar, and I'm joined here at the Morningstar Investment Conference by Tom Allen. He is a Fidelity portfolio manager of the Advisor Mid Cap Fund amongst others.

Tom, thanks very much for joining me.

Tom Allen: My pleasure.

Cook: I attended your panel discussion earlier and one of the key focal points of the Conference so far has understandably been the health--or ill-health rather--of the U.S. economy. Is that hindering your ability to find opportunity within U.S. mid-cap or is it actually kind of presenting more opportunities?

Allen: Well, I think it's fair to say that the collapse may have changed behavior. People maybe a little bit more likely to save than spend. So, it's just a different sort of opportunity. I think that people may keep their car for a year longer than they did before and maybe the auto retailers get a boost because of that. They will be able to sell more parts to garages, because the age of the fleet in the United States, it gets a little bit older than it does on average. So, it means there is different type of opportunity in the next five years than perhaps the five years leading up to the collapse in '08-'09. So, themes that I have been interested in over the past couple of years have been trade-down stories--the auto retailers might fall into that category--off-price retailers that sort of thing.

And likewise the Internet, even though the valuations have run up a long way, if the pie is not growing that fast, that's an example of an industry that's gaining share, so it might be that the slice in the pie might get bigger even though the pie may not be expanding that much.

Cook: And you actually invest beyond the U.S. shores as well. Are there any particular destinations that you are seeing value at the moment?

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Allen: Absolutely. First of all, the U.S. has been one of the best-performing markets in the world, but as we look out longer term, I always like to bet on the long term. One of my mentors said, get the long-term right and by definition you'll get most of the short- to medium-term right.

So, I am always looking to buy a better-than-average company at an average price, and I try to look out more than just a year or two, and with that in mind, I think there really are a lot of exciting things going on in the world. It's a big world.

India is an area of interest. They have an inflation issue now, like China. The RBI, their equivalent to the Fed, is on their ninth tightening, but here is a country that's been a democracy for half a century and they have an enormous age wave that's taking place, where lots of young people are going to enter their key earnings years in the next decade, and they are just building parts for a super highway system. Everyone in the country is getting the equivalent of a social security number for the first time--just many exciting things going on in a place like that, like in the other BRIC countries.

So, on the one hand, you have these long-term growth countries at the sovereign level that have some problems, and they will probably solve those problems. And on the other hand, you have some deep value markets. The United Kingdom, for example, has some of the highest insider buying in the world, and you know we read about the challenges in the United Kingdom, but they're going to solve those problems, and meanwhile insiders are telling you that stocks are cheap. You have countries like Japan, Korea, that are also cheap, Russia.

So, you have two sides of the coin. The cheap markets that have growth issues, then you have the growth countries that have inflation issues. But I think a lot of these problems will be solved, and if you put that aside and focus on company-specific opportunities, I really think there are good investments around the world.

Cook: I know you have quite a long history of investing in the insurers, and they have been your favorite area within financial services. Is that still the case, and is that U.S.-specific or broader afield?

Allen: Sure, well, Holly, as you may know I was the insurance analyst at Fidelity, and it's very funny, people said, you know, who did you anger to get that assignment when you first started, or were the last one in the door, but truthfully from 1995 to 1998, it was a wonderful assignment. It's a very difficult industry from the point of view of accounting, probably the most convoluted accounting I think of public companies. But if you can do insurance companies, I think you can sort out almost everything else, and I was a CPA for five or six years. So, it was actually a wonderful thing to get assigned.

So, since I know the companies and I have a sense of what the values are, you're right, I have a natural tendency to say, "Gee, I really think this is worth this, and I have a little bit of an edge." So, I do tend to gravitate there.

And also, I think they're in a different business then, say, banks. So if you are worried, for example, that banks pulled forward a lot of demand when money was cheap and we built so many houses [for] people that shouldn't have bought a house, maybe, or built a house.

Insurance companies are a little bit different business. So, they are isolated from some of those severe trends in some cases, AIG aside, which is a much more complicated story. So, yes I have an inclination to go there, because I have some special expertise there, and no, it's not limited to the U.S. I bought a company in China a few years ago. I bought a life insurer there. It appeared to be a fairly simple story, and I bought it at two times book and I sold it at four times book, and then to my amazement, it went to five or six times book, and kept going, but I'm willing to buy insurance companies especially with the help of the great people we have with our global footprint. I'm willing to buy them outside the U.S. as well.

Cook: So, I know that you look for better-than-average companies and clean accounting practices, and I am also aware that you had a position in Longtop Financial Technologies, which has been discovered to have committed fraud. So I'm wondering ... have you changed your position there? But also, how would you actually go about assessing corporate governance for companies you are thinking of investing in?

Allen: That's a great question. First I don't comment on specific trading or holdings, I need to say, but generally I would like to say this, it's the only time in my 16 years I have had this sort of an issue. But it's very disappointing, and it probably happens more with small caps than mid-caps, and yes there are some countries where corporate governance is a bigger issue probably than it is in the United States, but I've had the same process in place for a decade or more, and it has worked.

So what I'll do is I'll probably go back and re-examine everything I own in China and elsewhere, and I will think about how I can enhance my process as I do every year, how can I make my routines better, both for growth and risk management, but at the end of the day I'll probably stick with my process. It's worked OK. And risk is part of the business. I think what I need to underline is diversification. That's why I own a lot of stocks.

Cook: Asbolutely. And let me ask about your cash position. What are your plans for that?

Allen: Yes, I have sold into strength over the past six to 12 months, six to nine months, and my index is one of the best-performing indexes in the world, the S&P 400 Mid Cap, and it's been just terrific, going up. The businesses haven't changed that much, but the prices are up a great deal.

So I've sold into strength. The markets kept going. So, you would have been better off maybe owning the ETF over a short period of time here. But having said that, I'm very excited as I look out over the next three, six, nine months, because there is a chance now particularly with the fight over the debt ceiling in Washington and so forth, that we'll get some market volatility, and I'm very excited. I think that there are a lot of nice businesses, both here as well as overseas, and give a chance to buy some nice companies at lower prices.

Cook: That's great to hear such a optimistic tone. Thanks very much for joining me.

Allen: Thank you, Holly.

Cook: For Morningstar, I'm Holly Cook. Thanks for watching.