Shannon Zimmerman: For Morningstar, I’m Shannon Zimmerman here today with Steve Wymer, manager of Fidelity Growth Company. We’re at the Morningstar Investment Conference circa 2013, the Silver Jubilee. This is our 25th conference.
Thank you very much for joining us today, Steve.
Steve Wymer: Glad to be here.
Zimmerman: Steve, I want to bear on the distinctions between value and growth, and whether or not that might be a distinction without a difference increasingly. You see portfolio managers like [Oakmark's] Bill Nygren, who have growth companies in their lineup, and there are some value companies that people would typically think of as more value-leaning, at least, in your portfolio. One of the names I wanted to ask you about is Wal-Mart, which is not a huge position, but it is in your portfolio. And at a glance at least a typical growth investor might ask, "What’s a company like Wal-Mart doing in a portfolio like yours?"
Wymer: So, I invest across the spectrum of growth. So if we start off at one end of the spectrum, there are blue-chip growth stocks that are growing their revenues in the single digits, traditional growth stocks that are growing their revenues somewhere in the teens percentage-wise, and then faster or emerging growth companies that are growing their revenues over 20% over long periods of time. Wal-Mart is a growth company; it’s growing, but more toward the right end of that spectrum. They’re growing not only in the U.S., but also internationally, and with a good capital discipline by focusing on returns and returning capital to shareholders, the company provides a nice stable amount of growth for a shareholder and to have a position in the fund.
Zimmerman: So it’s really safe to say that you kind of invest across the spectrum of growth, and so you will capture a company like Wal-Mart, but then also a company like Apple, which at least at the end of the first quarter, I believe, is your top holding and you are underweight, or maybe neutral relative to the benchmark. But it’s still your top holding with more than 4% of assets in a rather large fund of about $47 billion, the last time I looked. Right now, Apple is very much in the news. They have a new version of the operating system coming out this fall. But then the stock has tumbled pretty hard over the last year-to-date period. What is the case from a growth investor’s perspective now for a company like Apple, which some would argue is moving more toward a Microsoft model when Microsoft moved to being a dividend payer?
Wymer: So, right now Apple’s growth has slowed down into this quarter to be relatively flat on a year-over-year basis, and the key focus on Apple tends to be now the iPhone or the phone. The phone is 50% of revenue in roughly 70%-75% of gross profits. So, how goes the phone is how goes Apple. And the case for Apple, that’s hurt it to date, is the smartphone business in the developed world has slowed down or started to mature a little bit. And competition is now getting to be good enough, for the most part maybe not better, but good enough. So people are making some choices, and people think the story for Apple is that the same thing that happened to Nokia in the phone business, the same thing that happened to Research in Motion or the BlackBerry, is going to happen to Apple and that Apple's strength and position in the smartphone business is going to deteriorate relatively rapidly.
Zimmerman: Because Samsung will have something that would leapfrog the iPhone?
Wymer: Samsung or others, the whole Android community, would have something that would be good enough, and it would put pressure on Apple’s sales and profitability in the phone business.
So the growth case is that Apple is still going to build good phones and people are going to want what Apple does, whether it’s from the hardware or the software or the combination of that with services going forward.
Zimmerman: Have you had a chance to preview the new version of the iOS operating system?
Wymer: It looks pretty good, and it’s a nice improvement. So we’ve looked on it online and our analyst was at [Apple's Worldwide Developers Conference]. And so far so good. It’s a good step forward.
Zimmerman: So let me ask you about Google. You mentioned that about 50% of revenue for Apple comes from the iPhone. About 98% of revenue, last time I looked, for Google comes from ad sales. It’s really an ad-sales company with this massive innovative technological arm, but yet they have not found a way to monetize that. From a growth investor’s perspective, how much do you give Google to say, "Oh, here this part of our company that is such a large part of our company--yet is sort of neutral to our revenue--that is going to take off." How long do you give them before that happens?
Wymer: A majority of their revenue is from ad-support businesses, and that includes paid search, that includes display business, but also now includes ads via YouTube and other properties that Google does have. What Google doesn't have are a lot of subscription-type businesses that generate revenues that maybe they would evolve to over time. But for the most part, they have a very efficient ad mechanism. Their search business is a very attractive business. It provides very good returns for advertisers and still has very good inherent underlying growth in it. One area that they haven’t fully monetized yet, but you don’t see it directly, is their Android ecosystem that they’re building out for phones and tablets or portable devices. But by placing Google services on there, including paid search, they are in effect monetizing it. It’s just that they monetize via the ad model instead of other ways.
Zimmerman: Last question, it’s about capacity. Your fund is in soft-close mode right now, which means that current investors can continue to invest, but new investors cannot, correct?
Zimmerman: At about $47 billion, it's pretty large fund; you target at least in the aggregate larger-cap names. What do you think the capacity constraint is, given your strategy, and how much [in assets do you manage across this strategy]? It's not just in the fund, I presume?
Wymer: Yes. So, I guess when I look at capacity, we put this cap in place in 2006, and for the most part it’s dampened down the inflows. So, most of the appreciation that’s been there has been either performance or the market appreciation.
So, with that, we have a lot more names in our fund than the average fund, so that it has a tail. But I think the key thing when you position a fund, whether it’s large or small, is not to think of yourself as too big. So we still invest in smaller companies. They don’t get to be too big in the fund until they outperform, and a lot of those have a chance to perform over time. Some of them make it; some of them don’t. And we just take a long-term point of view, and we throw maybe more names at the issue than maybe some of the smaller funds out there in the marketplace.
Zimmerman: Because you’re having the fund in a soft-close status, and then having smaller positions that you’re willing to wait to pan out and then investing across the growth spectrum, those are ways that you can kind of control for capacity constraints it sounds like.
Wymer: That’s the way we deal with it, yes.
Zimmerman: All right, great. Steve Wymer, thank you very much for being with us today.
Wymer: Shannon, thank you. I appreciate being here.