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Owning the Companies That Invent the Future

Susan Wasserman

Susan Wasserman: I'm Susan Wasserman with Morningstar. I'm here with Gavin Baker from Fidelity OTC (FOCPX).

Gavin, thanks for being here.

Gavin Baker: Thank you, Susan. And thank you, Morningstar.

Wasserman: We're closing out 2015, which has seen ups and downs across the market, particularly within healthcare and tech, which are two of the biggest sectors within your portfolio. Can you talk about some themes that you look to this year and give your thoughts on them?

Baker: Sure. The OTC fund invests in great companies that are at the epicenter of powerful multidecade secular trends, like artificial intelligence, cloud computing, and personalized medicine. Big picture: It's a great time to be alive and a great time to invest, as I think the world is likely to change more over the next 20 years than it's changed over the last 50 years. We're all going to live longer and work less. Fears of global warming may seem like a distant memory because of solar power and improved battery technology, and I think these changes are going to create massive opportunities for growth funds with a very long-term time horizon.

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Wasserman: Great. Within those themes, can you pick out maybe one or two and talk about specific holdings that play into those themes?

Baker: Sure. Google (GOOGL) comes to mind. Larry Page quoted Alan Kay, a computing pioneer, who said, "The best way I know to predict the future is to invent the future." I want the OTC fund to own the companies that are inventing the future. I look for companies with very sustainable competitive advantages, managers who act like owners, and where the stock is trading at a discount to what I believe the intrinsic value to be. I think Google ticks all of those boxes.

Wasserman: Can you talk about your position in Tesla (TSLA) and how that's played out within these themes?

Baker: Sure. Tesla is the world's dominant manufacturer of electric cars, and electric cars are superior to internal-combustion-engine cars in every measurable way. They are more reliable because they have 90% fewer moving parts. They are higher performing. They are safer because they have front and rear crumple zones. They have more storage space because, in addition to a trunk, they have a frunk. So, while Tesla makes the world's two best electric cars, I also believe it makes the world's two best cars--period. And I think that, in general, if you have the best product, you do well. Their battery technology, I believe, is significantly ahead of competitors, which I think creates a very defensible and sustainable barrier to entry. I think Elon Musk may eventually be regarded as this generation's Steve Jobs. He has done an amazing job building Tesla, and I'm excited to see what the future holds.

Wasserman: Great. Taking it from the other side, what are some themes that you haven't been as constructive on?

Baker: Energy has not been a big focus for the fund, which has helped performance in 2015. Within healthcare, my holdings have been more concentrated in more-innovative biotechnology companies that are developing treatments for very severe diseases as opposed to specialty pharma companies that, in some cases, are significantly raising the prices of older medications and not bringing real innovation. So, I've avoided the specialty-pharma space and really focused on the biotechnology space within healthcare.

Wasserman: Great. Gavin, thank you so much for being here.

Baker: Thank you, Susan.

Wasserman: I'm Susan Wasserman with Morningstar.