Fidelity European Opportunities
Muna Abu-Habsa, fund analyst at Morningstar: We believe Fidelity European Opportunities remains a solid choice in its Morningstar category, but its recent losses make clear the risks of its approach.This fund has performed poorly in 2008, losing 38.8%--a 570 basis point larger drop than its average peer in the Morningstar Europe ex UK Large-Cap equity category. A smaller-cap tilt has worked against it as has its exposure to financials. An earlier bet on industrials could have nicked the fund, but Stone appears to have trimmed it back in reasonably good time.
Nevertheless, we think there's more to the fund than its recent plunge would suggest. First, manager Colin Stone is highly experienced: He took over this fund in early 2003 when Thierry Serero stepped down after seven years at the helm. At that time, he had already been at Fidelity for 16 years. Stone has also shown a clear ability to execute since taking the helm: In every year save 2008 since he took the helm, Stone has guided the fund to top a top quartile return versus its Morningstar peer group.
Stone has built that record by maintaining a clear focus on growth oriented companies. He favours undiscovered businesses with high growth prospects or leaders in niche markets and seeks growing companies with strong cash flows and which are run by high quality management. To find his picks, Stone searches across all points of the market-cap spectrum for under-researched companies and also gathers information on a company's competitors and its wider market rather than keeping to a narrow assessment of the company itself. Indeed, the portfolio is heavy in Europe's largest companies, but Stone also invests in mid, small and even micro caps to a greater extent than his peers, given his liking for growth stories. He has sought to make the fund more defensive this year by moving up the cap scale, and also bolstered its stake in healthcare and cut back on industrials in the third quarter of 2008, but it still retains a growth orientation.
That emphasis can and will hurt the fund at times: In addition to his penchant for smaller-cap issues, Stone is not afraid to hold off-index names and invest in stocks outside the developed European equities universe. The portfolio had a small exposure to Russian equities which witnessed a sharp fall in the third quarter of 2008; positions in a handful of Egyptian issues have also hurt (Stone liked the story of the country's strong economy and under-leveraged consumer). Such risks can pay handsomely in more ebullient markets, but in a difficult environment, they can badly hurt the fund. The fund's elevated risk can also be seen in its standard deviation and Morningstar Risk scores, which are above average relative to its category peers under Stone.
Stone has the backing of one of the better resourced research staffs in the market and has shown a knack for making his bets pay over time. We think Tim McCarron's Fidelity Europe is a better choice, but one off year doesn't make this a bad fund. For investors who are cognizant of its risks and willing to endure the fund's down spells in exchange for the possibility of a bigger upside, it remains a good option for Europe ex UK exposure.
Strategy
Stone's process is bottom-up driven. He works closely with Fidelity's European research team, and specifically a dedicated small-cap team, to find ideas. He favours little-known businesses with high growth prospects (which drives the smaller cap portion of the portfolio) or leaders in niche markets and seeks cash-generative companies that are run by able management and can grow revenues organically. To construct his 80-100 stock portfolio, Stone looks across all aspects of the market-cap spectrum for under-researched companies. The manager also gathers information on a company's competitors and its wider market rather than keeping to a narrow assessment of the company itself. Stock positions are then a result of Stone's conviction in his picks. He will sell a holding if a target price is reached, the fundamentals for buying erode or he finds a more attractive opportunity.
The fund is not constrained by any stock or sector limits (although Stone is conscious of extreme sector bets against the index) but the manager is willing to hold off-index names and invest in holdings outside the European equities universe.
Management
Colin Stone joined Fidelity in 1987 as a research analyst. In 1995, he took charge of the offshore UK Smaller Companies fund at launch and outperformed its peers in the Morningstar Europe Small Cap equity category throughout his tenure (December 1995- present). Stone was then handed Fidelity European Opportunities when its manager Thierry Serero left the firm in January 2003.
The managers in the European team, of which Stone is a member, are supported by Fidelity's sizable research team, including a dedicated small-cap team that Stone makes good use of. That team has stabilised after experiencing growing pains. Its 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.