Fidelity Australian Equities Fund

Australian Shares Manager Review

PRODUCT

Fidelity Australian Equities Fund is a long only core portfolio of Australian companies.

ORGANISATION

Fidelity International is a privately owned investment management group which services a global network spanning the US, Europe, the Middle East, Africa and Asia Pacific. Fidelity International and its subsidiaries manage more than $260 billion for its global investor base which includes major institutions as well as private individuals. It was founded in 1946 by the Johnson family which retains a 50% ownership, with staff owning the remaining share.

Fidelity entered into the Australian market in 1996 providing investment opportunities for institutional clients through a range of local funds. In 1998, it established a retail distribution relationship with Perpetual, where Perpetual Investments co-branded and marketed some of the Fidelity fund range to retail clients. This alliance was terminated in 2004 allowing Fidelity Australia to offer products directly to retail and intermediary clients. As of June 2011, Fidelity Australia manages approximately $5.3 billion on behalf of Australian investors.

INVESTMENT PROCESS

Investment Objective

Provide a total return (before fees) which exceeds the S&P/ASX 300 Accumulation Index by 2% p.a. over rolling three year periods.

Investment Philosophy and Style

As an investment house, Fidelity does not enforce a single style: individual portfolio managers are given the freedom to construct portfolios across the growth/value and capitalisation spectrum. However, the Australian equities fund is built on fundamental research and bottom-up stock selection. The portfolio manager has a preference for earnings growth and increasing returns on capital (due to cyclical or structural improvements).

This has resulted in portfolios which display a mild growth or growth at a reasonable price (GARP) investment style.

Investment Strategy

The Fund invests in companies listed in Australia and may also invest in companies located elsewhere which derive a significant proportion of their earnings from Australia. The strategy is not constrained to tracking benchmark sector weights and the portfolio manager is free to select companies based on their merits, regardless of size or industry.

The manager applies a bottom-up stock picking approach favouring medium to large sized companies. Strategy focuses on companies with superior management, a competitive edge, strong brand name, technological advantage, sound balance sheet, strong cash flow and low gearing.

Investment Process

The research process replicates Fidelity's global approach. Proprietary modelling and extensive, regular company contact (one-on-one meetings, site visits, and conference calls) are the primary inputs into the team's investment process. Ongoing communication with the manager's extensive global network is also a key source of ideas, which is supplemented by external broker research.

Analysts are encouraged to be open-minded in their research efforts, and are supported by a research budget that is effectively unlimited. Analysts are also able to draw on two dedicated Mumbai-based research specialists, who assist with the team's modelling work.

The team initially screens the investment universe (the top 300 stocks by market cap) using a combination of internally and externally sourced research ideas. Companies that pass these screens (approximately 200) are then subject to more detailed fundamental research. Information obtained from company research meetings is the primary input into analyst forecasts. Companies are modelled-out for the next three years, resulting in a price target based on a range of possible valuation methodologies. Analysts rate stocks on a five-point scale that reflects their expectations of outperformance of the benchmark over the coming 12–18 months. This serves as the key communication device between analysts and portfolio managers.

Higher rated stocks will typically exhibit better-than-market growth in earnings or cash flow; will be undervalued relative to historical pricing, global peers, or asset values; or will be undergoing a restructuring process to release unrecognised value or growth potential. Analysts will lower ratings and stocks will generally be sold from the portfolio when there is a negative change in their expectations, the valuation gap has closed, or better opportunities present themselves.

Risk and Compliance

The fund may make use of derivatives, such as futures contracts and swaps, but will only do so for the purposes of reducing risk. Any derivative exposure must be fully covered by cash or assets sufficient to meet any obligation that could arise.

The regional CIO monitors the characteristics of all portfolios as part of a formal quarterly review with each portfolio manager, which provides an additional layer of oversight. Fidelity regularly reviews the portfolio using a mix of qualitative and quantitative measures to ensure the fund remains within risk parameters and investment guidelines.

PERFORMANCE

* Inception – June 2003; ** S&P/ASX 200 Accumulation Index

COMMENT

Fidelity Australian Equities Fund has delivered outperformance relative to peers and its benchmark since inception. The long only Australian equity product is suitable as a core component of an Australian equity allocation. The fund is managed with a mild growth bias and may complement a ‘value’ style Australian equities exposure.

Paul Taylor as portfolio manager has managed the fund's strategy since its inception, and has consistently demonstrated his ability to add value across varying market conditions. The strategy receives support from a large team of analysts with an effectively limitless research budget, which somewhat mitigate key person risk.