Emma Wall: Hello and welcome to the Morningstar Series "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Jeremy Podger, Manager of the Fidelity Global Special Situations fund.
Hello Jeremy.
Jeremy Podger: Hello.
Wall: So, you've just told me off-air that you are more worried now than you have been in the past, perhaps some of these reasons are rising debt levels, valuations looking very toppy, macro threats, political uncertainty. Which of those things are you as a global equities fund manager concerned about?
Podger: Well, I think we have to be concerned about all of them. Now, I mean, the way I think fund managers need to look at macro influences is more in terms of risk and opportunity, rather than dictating top-down asset allocation. So, I think to start with the background where we are now middle of 2017. We’ve had nine months of very, very strong markets and I think part of that is down to the optimism that came around the U.S. election about tax cuts and possibly infrastructure spending.
So, we saw sentiment levels rise a lot. I think in the background there was another influence which was Chinese stimulus which has had a good follow-through effect. And now I think we are at an interesting point, where markets are – have perhaps moved on from that period and are now trying to digest the significance of normalization of interest rates. So, I think we need to pay close attention to that. But second guessing the political situation is very difficult and I am not sure that's something that fund managers necessarily do particularly well.
Wall: You've mentioned that we have had these eight or so months of good markets it's actually been as a whole eight years of strong market certainly in developed markets. As a special situations fund manager, you are presumably looking for stocks that are undervalued by the market. Is that harder to do now since we've had that significant rally?
Podger: I think it is somewhat harder. I do think the good news though looking at the markets right now. Is that 2017, potentially 2018 are going to be years of good corporate earnings growth. So that’s kind of the good news in the background after essentially nearly five years of earnings flat lining. So that’s definitely a support.
But as you may know I essentially look at all investments in three categories. So, the central category of exceptional value is becoming more difficult, and the reason for this is not just the valuation levels themselves which I don’t have a significant problem with. But more to do with the progress of margins across most industries. With a few exceptions, most industries are enjoying quite high margins right now.
So, you have to be super selective. If you are being general – if you are generalizing about where those opportunities seem to be arising. And particularly if I think over the last 12 months or so opportunities to buy cheap valued stocks with rising margin potential I have tended to find more in Japan which as a whole is a value market and somewhat in emerging markets, not necessarily in those, sort of headline growth stocks, but more in things like banking and oil related companies.
Wall: And how do you avoid value traps then, because those two things are key, you want to buy stuff that looks cheap but as you say has that potential to grow it does have quality to its business.
Podger: Yes, I mean I think that you do have to have a quality threshold. One thing that I'm trying to avoid is bombed out situations with no apparent catalyst for improvement. So, it's really important, I find that you take a medium to longer term view of margin – profit margin potential in the companies that you are looking at. And for that to drive the valuations higher. So that’s the central category of what I look for, exceptional value.
We have another category which is unique businesses and these are more really growth businesses and here what we look for is really good return potential from internal growth in companies. And here again after the kind of progress that we have seen in markets in the last five years. You have to be really careful. There's been a huge convergence in sort of safe reliable growth companies.
But if I look at those today they are firstly expensive and secondly the growth potential in things like staple consumer goods companies is not what it once was. It's looking a little bit pressured. So, again you need to be a bit, a bit selective also not going for the super hyper growth, super highly valued companies and you might end up for example. One addition to the portfolio earlier this year would have been something like Deutsche Börse. So, financial services company with good growth potential trading at attractive valuation particularly on cash flow terms.
Wall: Jeremy thank you very much.
Podger: Thank you.
Wall: This is Emma Wall from Morningstar. Thank you for watching.
