Investors who have been keeping tabs of our annual Recommended Funds will find this fund familiar. The Fidelity America Fund (USD) has been a Recommended Fund for two consecutive years in 2010 and 2011 and was picked for its consistent outperformance and superior risk management. We take a closer look at how the fund is managed and review its long-term performance record.

Management Style

The fund is managed by Adrian Brass who has over 15 years of investment experience. Brass joined Fidelity in 2006 and took over the management of Fidelity America Fund in January 2008.

Brass classifies himself as a “bottom-up stock picker”, and this translates to an investment process that is highly focused on a company’s valuation upside, as well as catalysts to realise the upside potential. Brass seeks these catalysts from three broad areas: macro-economic factors, industry-specific drivers, and company-specific characteristics. The fund only enters into positions only where the upside potential of the company is at least 30 to 50% and its downside potential is minimal or limited.

The fund’s portfolio typically holds between 80 to 120 stocks and the weighting of each positioned is managed relatively closely to the benchmark S&P 500 Index. In addition, a strong belief in the high-conviction investment ideas of the fund tends to result in Brass adding to existing positions on price weakness. He admits this may pit the fund’s positioning against the consensus, which may cause the fund to underperform temporarily before the stock re-rates.

Despite being a US equity fund, Brass adopts a global approach in his management. He thinks this is appropriate given the international exposure of most US-listed companies. To facilitate this, he relies on the global research team based in London as well as the buy-side research team in US. This is complementary to the fund’s investment strategy as its mandate allows up to 20% of the fund’s portfolio to be invested in non-US stocks. As of the fund’s latest factsheet dated 31 December 2011, the fund has 5.2% of its portfolio invested in non-US listed companies.

Investment Themes

The fund also incorporates running investment themes in its portfolio which will be changed over time and represents a 5% overweight in the portfolio. As of June 2011, the fund was actively seeking opportunities in the following three investment themes which are still relevant in 2012:

1. Mid to late cyclical sectors

Brass thinks that the US economy is entering the late stages of recovery and cyclical sectors will be able to benefit more, specifically those in the infrastructure and housing sectors. (For more information on the US housing sector, see How This Overlooked Sector Can Double US GDP Growth (Part 1) and How This Overlooked Sector Can Double US GDP Growth (Part 2)) An example of a company that falls within this theme is Stanley Black and Decker, a leading manufacturer of tools and hardware and provider of security products and locks.

2. Independent cycles

Companies that belong in this theme have earnings that are not correlated with economic growth or recovery. An example cited by Brass was the increase in the popularity of generic drugs, which he believes will benefit pharmacies and drug distributors such as leading pharmacist Walgreen.

3. Special situations

This theme pertains to companies with misunderstood risk/reward potential. Brass explains this theme using oil exploration companies, whose stock prices are often based on their current assets and do not take into account future projects. He thinks such a pricing essentially gives investors a free option on any new programmes and presents large upside potential.

Performance Review: Consistent Outperformance and Risk Management Capabilities

The Fidelity America Fund (USD) was launched on 1 October 1990 (the corresponding SGD share class which has the same underlying exposure was launched on 15 May 2006). Since then, the fund has been consistently outperforming its benchmark, the S&P 500 Index. As of 6 February 2012, the Fidelity America Fund (USD) recorded cumulative returns of more than 280% (in SGD terms, dividends reinvested) against 202% returned by the index. The fund’s long-term historical performance record over different time periods is presented in Table 1 below:

Out of the eight time periods examined, the fund managed to outperform in all but the most recent two periods. This strong performance is further underscored by moderate volatility in the fund’s returns. Over the last three years, the fund’s returns recorded an annualised volatility of 23%, marginally higher than that of the S&P 500 Index at 22%. The fund also measured well in terms of maximum drawdown; during the Global Financial Crisis that started in 2008, the fund experienced a drawdown of -53.6% against -55.7% of the index.

This highlights the fund’s ability to deliver superior returns without forsaking stability in its performance. In Part II of the review, we will examine in greater detail how specific sector allocations helped boost the fund’s performance, especially in 2009 when it posted gains of 37.1% against 20.7% returned by the index. Stay tuned!

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