"The market dislocations due to the coronavirus outbreak have presented a complicated challenge for investors, partly because we haven't seen a comparable pandemic in our lifetimes and also because there's no way to know exactly how the crisis will unfold," says Chuck Culp, portfolio manager of Fidelity® Select Consumer Finance Portfolio (FSVLX).
Culp believes that few businesses will be immune to the virus's impact. Consumer finance companies may not suffer revenue declines as quickly as travel-related businesses, for example, but he expects that a slowdown in consumer spending could pressure payment networks, increase losses on outstanding loans, and slow future loan growth.
"This is why I'm favoring higher-quality companies with better balance sheets and recurring revenue streams," he says. "They seem better positioned to weather this unprecedented storm."
Culp cites card processors as companies he believes to be relatively well positioned to endure the crisis and thrive on the other side. Visa (V) and Mastercard (MA), for example, were among the fund's largest holdings as of March 31.
Spending on cross-border travel and discretionary items will remain challenged in the near term, he acknowledges, but major card companies have recurring revenue streams and generally strong balance sheets.
Culp also likes that payment processors enjoy relatively stable demand for their services. The fund held 2 of the biggest names in this space, Global Payments (GPN) and Fidelity National Information Services (FIS) (unaffiliated with Fidelity Investments), at quarter end. Conversely, he's also keeping an eye on certain financial stocks he thinks have been punished, in the event there's reason to believe the US could avoid a severely adverse virus-related economic scenario.
"If we see evidence that large economies have contained the virus, I could become less risk-averse," Culp says.
Fidelity® Select Consumer Finance Portfolio held securities mentioned in this article on March 31, 2020. As of this date, Visa composed 9.36% of fund assets; Mastercard composed 9.01% of fund assets; Global Payments composed 1.87% of fund assets and Fidelity National Information Services composed 2.00% of fund assets.
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