Fidelity European one of the best offerings in competitive sector

Muna Abu-Habsa, fund analyst at Morningstar: Fidelity veteran Tim McCarron had already been at the firm for 10 years when he took over Fidelity European in 2003 from legendary manager Anthony Bolton. He had a tough act to follow as Bolton had amassed an exceptional record on the fund over his tenure (Nov 1985- Dec 2002). Bolton delivered 19.3% per year in annualised returns while the average fund in the Morningstar Europe Ex-UK Large Cap category returned 10.4%. McCarron was trained by Bolton and has proven his individual worth. He has kept up the fund's strong record and has driven it to be one of the top performers in its Morningstar peer group; it returned 10.7% per year annualised compared with a 6.6% category norm.

McCarron's syle has been consistent throughout his tenure and he has demonstrated robust stock-picking skills. In his search for stocks, he seeks less well-known, under-researched companies over popular index names and his process benefits from access to Fidelity's sizeable European research team. McCarron leverages their analytical resources to screen the Europe ex-UK equity universe and also considers external broker research. However, he still meets with companies himself before investing as further due diligence. McCarron hunts for three types of stocks: those which are undervalued and misunderstood by the market, companies with strong growth prospects and turnaround situations with catalysts for recovery. He is generally less focused on cheap stocks than similar competitor funds and this is reflected in the portfolios valuation metrics and the fund's growth tilt. There is also a top-down overlay to McCarron's process which he uses to control any unintended tilts. For example, his style has typically edged the portfolio towards smaller-cap issues but early in 2007 he cut back small-cap exposure considerably on liquidity concerns in favour of stocks higher up the market-cap scale.

In the current market environment, McCarron has been finding ample turnaround situations, particularly in financials (having trimmed exposure to the sector early in 2007). Holding out-of-favour names and waiting for turnaround situations means the fund will experience spells of relative underperformance and investors need to be able to stomach fluctuations along the way; for example the fund ended 2006 in its categorys bottom quartile. That said, over the long term McCarron has been able to keep volatility in check as the fund s standard deviation (a statistical measure of risk) is 109 basis points lower than the category average. Furthermore he has delivered excellent returns which compensate for rocky times.

McCarron's experience and diligent execution of his strategy over a number of market cycles, coupled with the backup he enjoys from Fidelity's research bench and talented managers on the European front, make it a standout in a competitive sector.

Strategy

McCarron's process is bottom up and he leverages Fidelity's analyst pool to narrow the fund's Europe ex-UK equity universe. The team uses quant screens with value, growth and momentum factors to score and rank stocks for further qualitative evaluation. McCarron is very reliant on internal research, but he meets companies himself before investing and is mindful of external broker research. He hunts for three types of stocks: those that are undervalued and misunderstood by the market, companies with strong growth prospects and turnaround situations with catalysts for recovery. The manager has historically been less focused on cheap stocks than similar competitor funds and this reflects in the portfolio's valuation metrics and the fund's growth tilt.

There is a top-down overlay to McCarron's process, but this has typically been a risk control factor rather than to drive picks. For example, the process has typically edged the portfolio towards smaller-cap issues but in the last year McCarron cut back his small-cap exposure on liquidity concerns and moved higher up the market-cap scale, a move which has been beneficial for the fund.

Management

Tim McCarron joined Fidelity in 1993 as a research analyst in Boston and transferred to London not long after. He took over Fidelity European in 2003 from the legendary Anthony Bolton; not an easy task, given Bolton's exceptional record on the fund, however, he was a Bolton protigie who has demonstrated his own excellence in fund management.

The managers in the European team, of which McCarron is a member, are supported by Fidelity's sizable research team (including a dedicated small-cap team), which has stabilised after experiencing growing pains. The team s expansion contributed to communication inefficiencies and they were struggling to find sufficient ideas given the growing portfolios at Fidelity. Initially, the team was reorganised to a strategy-based structure. But when that failed to produce the desired results, it was reorganised once more upon the arrival of Chief Investment Officer Nicky Richards in mid-2006. She structured the team along economic sector and market-cap lines. A more recent development has seen managers take sector responsibilities on an 18 month rotation to keep each other aware of relevant news flow. This complements the work done by the analyst team.