Quality Focus Helps This Foreign-Stock Fund's Defense
Fidelity Overseas manager Vince Montemaggiore discusses his valuation-sensitive, high-quality approach to stock-picking.
Fidelity Overseas manager Vince Montemaggiore discusses his valuation-sensitive, high-quality approach to stock-picking.
Katie Reichart: I'm Katie Reichart with Morningstar. I'm here with Vince Montemaggiore, manager of Fidelity Overseas and a panelist at the Morningstar Investment Conference.
Thanks for being here, Vince.
Vincent Montemaggiore: Thanks for having me.
Reichart: Vince, your fund's held up really well in tough markets, even posting an 8% gain in 2015 when the MSCI EAFE was down. What about your process has given the fund a defensive edge?
Montemaggiore: Well, normally, what I look for in companies to enter the portfolio is I try to buy high-quality businesses when they are trading at attractive valuations. And when you buy better-than-average businesses, they tend to have better balance sheets, there is a recurring element to their cash flows which makes them a bit more resilient in a downturn. So, when people get worried about the market, I have pretty robust business models that tend to outperform in a down market and also, last year there was a decent stock-picking percentage across most sectors and most geographies.
Reichart: The fund had about a quarter of its assets recently in U.K.-based companies. How have you stress-tested those names for a potential Brexit?
Montemaggiore: So, Brexit is becoming more real and very close call at this point. Early in the year I looked at all of my U.K. exposure, and I separated the global companies domiciled in the U.K. and then the domestics, because obviously the impact to the domestics would be much more severe. And when I did that I started to apply a scenario of Brexit to my best--it's part art, part science, but there is a downside scenario in the event this happens both to the currency and the earnings profile. And when I did that there were some marginal ideas or companies that were too exposed to this outcome, and I pared back the exposures. So, I'm still overweight. I do think the odds are likely that they will not exit still, but I did pare back the exposure because I don't want too much of a binary risk exposure in the fund.
Reichart: The fund hasn't invested too much in emerging markets. Why not and what kind of indirect exposure does the fund have?
Montemaggiore: So, emerging markets, having a quality value bias, emerging markets is a difficult place for me to find new ideas because what I find are the best business models in emerging markets tend to be very expensive. People know those business models and they are so much better than the alternative investment that they tend to get bid up and they're a bit crowded. So, I have a lot of stocks in my wish list in emerging markets that I'd love to own, but the valuations just aren't there. And what looks optically cheap are the more commodity-oriented sectors which is not a place I look for new ideas.
Reichart: The fund has been underweight Japan but where have you found some ideas there?
Montemaggiore: So, Japan is a tricky market. What I'm finding is stable growers that have a quality bent are very overpriced. There has been a re-rating of this cohort of stocks to levels that I'm not comfortable with. So, I'm not finding a whole lot of new ideas in general in Japan. But that being said, where I'm finding value is on the small and mid-cap side in Japan. These tend to be underfollowed businesses. They are niche businesses. They tend to be more geared toward the domestic economies, so you don't have to worry what's happening to the yen. And there are some really neat business models in there that compound value at a double-digit rate and their corporate governance and shareholder return policies are starting to improve. So, the fund has a big skew towards small- and mid-caps within Japan but remains underweight relative to the index.
Reichart Great. Vince, thanks for being here.
Montemaggiore: Yeah. Thanks for having me.
Reichart: I'm Katie Reichart with Morningstar.
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