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Fidelity: Seeking to dodge market downside

The math behind how investing to lose less than the market in a downturn can pay off.

This article was originally published on by Sean Gavin.

High inflation, rising rates, and a slowing economy in China all have weighed on investor sentiment recently, says Fidelity’s Sean Gavin, who has responded by increasing his focus on avoiding permanent loss of capital, as opposed to seeking the next big opportunity.

“In volatile markets, I think the most important thing I can do is focus on winning by not losing,” says Gavin, portfolio manager of Fidelity® Blue Chip Value Fund (FBCVX).

The fund normally invests at least 80% of assets in value stocks—securities of companies seen as undervalued relative to such factors as assets, earnings, growth, growth potential, or cash flow, or relative to securities of other companies in the same industry.

As Gavin explains, a portfolio loss of 25% requires a 33% gain to get back to breakeven, and a loss of 50% requires a 100% stock recovery. For these reasons, he considers avoiding excessive losses in a bear market one of the most important ways to top the fund’s benchmark over the long term.

Gavin prioritizes companies with characteristics he thinks make their stocks resilient, such as strong business models and the ability to generate steady cash flow.

He’s also seeking to own companies with business models and competitive positions that he says provide flexibility to adjust pricing to maintain profit margins.

Health care and utilities are two sectors in which Gavin has found many stocks that meet his ideal characteristics.

In health care, he’s favored managed care companies Centene (CNC) and Cigna (CI). Both offer yearly contracts to their health care employees and end customers, which he believes allows the firms to adjust their pricing and maintain their margins. He adds that demand for health care services tends to remain stable, even in an economic downturn.

Gavin also cites the fund’s exposure to regulated utilities, such as Exelon (EXC) and Southern (SO), which he says face limited competition and can adjust their prices when energy costs rise.

“I believe stocks with pricing power are more likely to maintain more of their value during difficult markets, and I think this could be one of the ways I can add value in the current environment.”

For specific fund information, including full holdings, please click on the fund trading symbol above. Securities mentioned were fund holdings as of May 31.

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