Best Global Equity Fund: Winner

We spoke to Lodha and asked him about his strategies. Here is an edited excerpt:

Question: How was the portfolio positioned to navigate the coronavirus-driven market volatility in 2020? What were the themes and holdings that drove the fund’s performance for the year?

Answer: In April 2020, we set out a plan to navigate the COVID-19 cycle. My three-bucket plan focused on companies that would perform well across the various stages of the pandemic:

• Phase I: Virus outbreak/vaccine deployment;
• Phase II: Recession (with limited earnings/cash flow risk);
• Phase III: Recovery (geared to an economic and earnings recovery).

The fund is well-diversified across a range of industries and sectors–our diversified portfolio has performed well even as the cycle appeared to straddle multiple phases simultaneously.

The fund’s performance was driven by a broad mix of themes with positive security selection. Robust execution, beneficiaries of acceleration in online demand owing to stay-at-home trends, gaming and entertainment names, and digital healthcare companies contributed to the fund’s strong performance.

In particular, digitally focused healthcare company 1Life Healthcare rose as it successfully grew its member base during the COVID-19 crisis, in addition to reporting high revenues and witnessing strong demand. Pure-play music streaming company Spotify (now sold) rallied on exclusive deals signed with Warner Bros. and Joe Rogan. Shares in US videogame developer Unity Software rallied following robust quarterly revenues, driven by superior technological innovation and increasing end user engagement. The holding in Nexon, a Korean video game publisher that specialises in online games for PC and mobile, benefited from heightened stay-at-home entertainment demand. UK-based online supermarket major Ocado Group was another key contributor to performance. It reported robust growth in grocery sales, driven by a sharp surge in demand from customer stockpiling and a significant increase in its online customer base. The position was trimmed following its strong performance. LG Chemical, FedEx, and certain metals and mining names, which are plays on economies reopening and provide a hedge against inflation, were other key contributors during the period.

Question: Against the backdrop of (i) the vaccine rollout, (ii) a new US administration, and (iii) ongoing monetary easing globally, what is your outlook for 2021, and how are you expressing these views?

Answer: The demand for technology devices and home improvements that drove product manufacturing and growth throughout the lockdowns will be supported by a rebound in the lagging services sector. Vaccines are providing a shot in the arm to people and also figuratively to equity markets. The speed and effectiveness of vaccine distribution will vary by country, but confidence is rising. Markets are planning for the reopening of society when ”pent-up” buying and travelling may be unleashed, and consumers will swap purchasing gadgets for dining out or holidays. Spending may be fuelled by positive aggregate consumer finances caused by forced savings and ongoing government transfer payments.

A combination of healthy consumer balance sheets, low inflation, low interest rates, and high liquidity provides a robust backdrop for returns. While market sentiment may seem overly optimistic, it should be balanced with the consideration that as economies fully reopen, we could potentially have two of the strongest quarters of GDP growth experienced in developed markets. With the market near record highs and as uncomfortable as it is, the risk for relative return investors is becoming bearish too soon. Beyond tail risks around hyperinflation and deflation, two opposing scenarios could develop in the medium to long term. The first is a path towards conditions similar to the 1920s, and the other is a return to the low-growth era of 2012-18.

The challenge for investors is that these scenarios lead to completely different portfolio allocations. While consumers have been spending (US personal consumption has recovered to 97% of its previous high), companies haven’t been investing in capacity, creating shortages in, for example, personal computers and semiconductor chips. If corporations find the confidence to add to capacity and promised fiscal stimulus filters through, this could create a cycle of earnings and cash flow growth higher than current expectations, mirroring the period after World War I and the Spanish flu pandemic of 1918. This “Roaring 20s” scenario would call for favouring cyclicals over defensives as earnings surprises are more likely, and for allocations to emerging markets and sectors such as financials, industrials, and materials. Potential rises in interest rates would pose a risk to high-growth technology stocks on lofty valuations that have been market leaders for several years, with turbo-charged performance through the coronavirus crisis.

The second scenario is more like the recent experience. High debt, technological disruption, and age demographics could steer the economy back towards a low-growth world in a “Japanification” of developed economies. In this environment, quality, growth, and higher-value stocks would be the cornerstone of an equity portfolio. Given that central banks have committed to letting their economies run “hot,” the second scenario is less likely. The direction of the market will be determined by which central bank is able to keep its nerve through the reopening quarters and continue with monetary and fiscal accommodation. History shows that one of the reasons the United States experienced the Roaring 20s while the United Kingdom struggled through a lost decade was the relative differential in fiscal and monetary support. There is a risk that even if the monetary spigots remain open, higher commodity prices as a result of shortages in supply could start sucking liquidity out of the system and reduce overall demand. We are already seeing shortages with automakers cutting production because of a lack of semiconductor chips and shortages of nickel and cobalt used in batteries for electric vehicles.

Expansions in supply always lag shifts in demand, and any further increases in liquidity could be eaten away by higher commodity prices without any corresponding benefit. We have a flexible approach to navigate different kinds of business environments.

Question: What are the top risk factors that could have an impact on your portfolio, and how are you positioned to mitigate these potential risks?

Answer: The Global Focus strategy, which is fundamentally driven, may struggle in markets that are driven by macro factors rather than stock specific-fundamentals, or when markets move to extreme risk aversion. However, these periods tend to be short-lived, and we tend to see markets return to fundamentals in due course. Also, given the natural growth tilt to the portfolio, we could see underperformance if there is a cheap cyclical rally or when unprofitable companies outperform. These are the periods when low ESG-rated, highly leveraged, and poor-quality companies tend to do well.

Nonetheless, we believe that basing our stock selection on comprehensive research will deliver stronger and, particularly, more consistent performance over the long term and help us mitigate these potential risks. Maintaining investment discipline is crucial when markets approach a juncture. Timing the market at the best of times is risky, but during phase shifts it is extremely difficult. Investors are more likely to be successful by returning to the fundamentals of seeking strong companies that can do well irrespective of the prevailing scenario.

Companies run by experienced and reliable management teams will find ways to outperform their peers in various environments. I look for companies that are focused on sustainability in industries with significant opportunities for growth and that can effectively leverage technology. Biotechnology, renewable energy development, waste reduction, and forward-thinking food consumption and production businesses all have huge growth potential. Companies located in emerging countries with relatively low debt burdens also have a good chance of productive growth in the long term.

Question: How is your investment team organised? Have there been any changes to the investment team or structure over the past year? Do you anticipate adding to the team in the near future?

Answer: Amit Lodha is the sole portfolio manager of the Global Focus Fund and has the ultimate responsibility for selecting the stocks for the portfolio.

In managing the fund, I rely on the expertise of our global sector/thematic portfolio managers, who discuss and debate the best global ideas for their respective sectors. The foundation of our investment team rests on Fidelity’s research platform, which Fidelity has developed into one of the industry’s largest research operations, employing 160-plus locally based equity research professionals globally.

There have been no changes in the investment team or structure over the past year. We do not foresee any major changes in the near future.

Question: Where do you feel that the investment team or the investment process can be improved upon in the future?

Answer: The investment philosophy has not changed since I started managing the strategy almost 10 years ago. The robust short- and long-term performance on the fund has emphasised the importance of staying true to my investment process and philosophy and identifying companies with truly sustainable and durable pricing power that are not fully acknowledged by the market. My focus on entering the investment journey along with quality management teams, constantly counterchecking fundamentals across global value chains, and connecting the dots has resonated through my tenure on the fund.

At Fidelity, we have a culture of seeking continuous improvement in our resources, investment process, and technology tools. We believe that our competitive advantage lies in the information edge and a global research effort that constantly tests and builds on our view of a company by cross-referencing findings and insights from across the ecosystem, enabling us to separate the wheat from the chaff.

Needless to say, there have also been continuous refinements in the investment process with the integration of newer tools and enablers, including our centralised research management system Insight, an integrated desktop database that incorporates both external and internal ESG research (proprietary ESG ratings). Fidelity International also developed a new tool in 2019: Fidelity ARC (Augmented Research Centre), combining behavioural finance, technical analysis, ESG research, artificial intelligence (primary research and external data), quantitative screening, and cross asset signals.