After exposing some chinks in the armor of the global financial system in early 2023, Fidelity’s Alex Zavratsky points to pockets of opportunity that have arisen among financial firms abroad.
“In my view, after years of highly proactive regulatory oversight, coupled with the failures of smaller regional banks in the U.S. and the collapse of Credit Suisse in Europe, near-term disturbances in the financials sector have presented attractive entry points for opportunistic and risk-aware investors like me,” states Zavratsky, portfolio manager of Fidelity® International Value Fund (FIVLX).
As a result, exposure to financials stocks has risen to more than 32% of the portfolio’s assets as of the end of August, now representing its largest sector overweight.
In managing the fund, Zavratsky targets financially strong companies with solid balance sheets, stable returns on equity, high shareholder remuneration (via dividends and/or share buybacks) and the ability to generate sustainable free cash flows—a key value driver and determinant of intrinsic, or fair value.
In March, Swiss bank Credit Suisse (USOI) was purchased by rival UBS after collapsing due to poor risk management amid rising interest rates and a subsequent loss of confidence by depositors and shareholders alike, Zavratsky explains.
He points out that this event, in conjunction with major setbacks among several U.S. regional banks, resulted in depressed and attractive valuations within the financials sector.
“Still, I remain very risk aware. Governments have reacted quickly, and while the root cause of the problem is not asset quality, but liquidity, more turmoil and unease cannot be ruled out,” contends Zavratsky.
Given that, he has upgraded the portfolio’s exposure by favoring national banks with strong domestic deposit bases and higher inherent profitability, including KBC Groupe (KBCSF), Bank of Ireland (BKRIF), and NatWest Group (RBSPF), as well as financial services firms such as Mediobanca (MDIBF), Macquarie Group (MQBKY), and UBS (UBS).
Elsewhere within the financials sector, insurance remains a major area of focus amid continued strong pricing momentum in the aftermath of the pandemic, elevated natural disasters, and higher interest rates, notes Zavratsky.
Unlike banks, he underscores that property-and-casualty, or P&C, insurance providers have very short asset and liability durations and, as such, can reprice their policies quickly.
“In turn, I believe that insurance companies will be better able to defend their future earnings and, furthermore, while not entirely risk free, most insurers’ balance sheets are less sensitive to capital market movement, allowing for excess funds to be distributed to shareholders, a practice that investors favor,” says Zavratsky.
He cites the long-term track records of deep-value global insurance companies Munich Re (MURGY), AXA (AXAHY), and Tokio Marine Holdings (TKOMF), which were among his top holdings as of August 31.
For specific fund information, including full holdings, please click on the fund trading symbol above.
Alexander Zavratsky is a portfolio manager in the Equity division at Fidelity Investments.
In this role, Mr. Zavratsky is responsible for managing Fidelity and Fidelity Advisor International Value Fund, Fidelity and Fidelity Advisor Total International Equity Fund, and Fidelity Series International Value Fund.
Prior to assuming his current role in September 2011, Mr. Zavratsky was a portfolio assistant on Fidelity Diversified International Fund. Previously, he managed various other Fidelity funds, including a Fidelity International Country Diversified Equity Fund, Fidelity Global Industrials Fund, Fidelity Global Natural Resources Fund, and co-managed Fidelity Global Telecommunications Fund. He has been in the financial industry since joining Fidelity in 1996 as a member of the Fixed Income division.
Mr. Zavratsky earned his bachelor of science degree from Boston College.