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Why Fidelity Magellan Likes Financials

Katie Rushkewicz Reichart, CFA

Katie Reichart: I'm Katie Reichart with Morningstar. I'm here with Jeff Feingold of Fidelity Magellan. Thanks for being here.

Jeff Feingold: Thank you, Katie.

Reichart: Jeff, you've increased the fund's financial exposure this year, and it's one of the fund's biggest sector bets versus the S&P 500. What has driven that positioning?

Feingold: Thank you, Katie. And thank you, Morningstar. I think if you look over the four years that I have managed Magellan, I've generally been overweight financials. I generally believe that the sector is cheap, and there is a prospect for improving fundamentals. At the same time, if you look at the total exposure of the financials, which is overweight by about 350 to 400 basis points, there are different types of companies that drive that overweight. For instance, one of my largest overweights is American Tower (AMT)--more of a REIT than a plain-vanilla financial. It has different characteristics--more of a higher-quality, longer-term, stable play. In addition to that, I own a lot of the insurance companies like Chubb (CB) and Ace (ACE) and Berkshire (BRK.B). But at the same time, I am overweight some of the more plain-vanilla big diversified banks.

I think that they remain cheap in general, and I think the prospects for improving fundamentals are also hopefully on the horizon. This extends, of course, to if there is a rate hike--financials will benefit in both valuation and earnings. So, I think there are a couple of things that can work for you. You have cheap valuations and the prospects for stable-to-improving fundamentals. Therefore, the risk/reward overall looks attractive. I think if things don't work out as planned, then perhaps there's a 10% to 20% downside; if they do, I think you could have a more meaningful 25% to 35% plus upside.

Reichart: The fund has been underweight energy, which has helped performance. Are there any pockets of opportunity in the sector?

Feingold: I think there are, and I think it's also another opportunity for potentially a contrarian play--like financials. So, I am looking closely at energy, which is about a 250- to 300-basis-point underweight. But at the same time, I look at some of the energy-exposed names that I own like LyondellBasell (LYB), which has been a big overweight in the fund for a long time. It's about a 150-basis-point position and certainly driven by some of the energy fundamentals. And so I look at that as also an energy bet. I have continued to look for names. I have tended to own some of the higher-quality, more-stable energy companies like Schlumberger (SLB) and Cameron (CAM), which was recently taken out. I also think that with oil prices most likely lower than they will be over a longer period of time, it's time to roll up the sleeves and do a lot of work to make sure that the fund is positioned for the next 12, 18, and 24 months. So, I am certainly not reducing the energy underweight.

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Reichart: The fund owns a handful of private companies including Uber. How do those fit into your strategy and what are the risks there?

Feingold: In general, my philosophy is to own different types of stocks--companies where earnings are growing faster than the market and where fundamentals are accelerating. I look at three buckets of stocks: what I call scarce-growth stocks, quality stocks, and cheap with improving fundamentals. So, I really view the private companies in the context of that first bucket, scarce growth. Those are companies where there are secular stories, where there are market-penetration stories, or where sales are growing faster than the market or the industry. Those private companies really are a sliver of that total scarce-growth bucket, which I tend to think about as a third of the fund.

Overall, the private weightings of the fund in Magellan are less than 1%, and I'll keep that position at less than 1%. I think there are some potential big winners; but I'm also cognizant that if you're wrong and if the market doesn't pan out, there is meaningful downside. So, I think overall the fund has benefitted from some of the private names. But it's not ever going to be a meaningful driver of the overall performance of the fund over time.

Reichart: Great. Jeff, thanks so much for being here.

Feingold: Thank you, Katie. And thank you, Morningstar.

Reichart: I'm Katie Reichart with Morningstar.