While being aware of what's going on in the broader capital markets and economy—i.e., developing a top-down view of the world—is important, points out Fidelity’s David Jenkins, falling back on quality amid challenging conditions is almost always a worthwhile endeavor.
“For example, it's clear that the global economy is losing steam,” says Jenkins, co-manager of Fidelity® International Small Cap Fund (FISMX), along with Sam Chamovitz. “At this point, the million-dollar question becomes whether we will experience a global recession in either 2023 or perhaps 2024.”
Jenkins acknowledges he and Chamovitz don’t have an answer to that question, but he is certain they won’t be paralyzed by the possibility of a recession.
Instead, the co-managers plan to focus on what they can control as a first line of defense against uncertainty: owning or upgrading to high-quality stocks they believe can survive any market environment, and buying them at a fair price, says Jenkins.
Generally speaking, the co-managers favor two types of investments: high-quality, durable growth stocks that trade at a discount and heavily discounted equities in special situations that can eventually become those high-quality, durable growers.
When evaluating quality, Jenkins and Chamovitz look for robust balance sheets with little to no debt, the ability to return cash to shareholders, competitive advantages that provide a moat against competitors, resilient growth that improves over time, and the financial strength to survive a recession without needing to raise capital.
As an example of a durable grower in the portfolio at the end of February, Jenkins highlights Mayr-Melnhof Karton (MNHFF), an Austrian paper-packaging company that is the market leader for recycled cartonboard in Europe.
“This is a stable business characterized by low earnings volatility, consistently positive free cash flow, and a dividend per share that has trended higher since the company became publicly traded in the 1990s,” says Jenkins.
He also cites what he considers an attractive special situation in Premier Foods, a leading U.K. packaged-food producer to which Jenkins has recently increased exposure.
The company’s legacy pension is in a deficit position, which has depressed its share price, notes Jenkins. He adds that Premier has taken meaningful steps toward a potential buyout of this obligation, which, if successful, would materially enhance the business’s free cash flow.
Overall, Jenkins and Chamovitz believe that owning stocks such as these provide a measure of defense within the portfolio, a factor within the realm of their control, particularly when their top-down view may be clouded by uncertainty and less-than-optimistic sentiment.
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David Jenkins is a portfolio manager and research analyst in the Equity division at Fidelity Investments.
In this role, Mr. Jenkins manages Fidelity Japan Smaller Companies Fund. Additionally, he co-manages the Fidelity and Fidelity Advisor International Small Cap Funds, as well as performs fundamental research on Europe, Australasia, and Far East (EAFE) small cap companies.
Prior to joining Fidelity in 2007, Mr. Jenkins served as a vice president and equity analyst at Eaton Vance Management. Previously, he was a senior investment associate focusing on domestic value equities at Putnam Investments. He has been in the financial industry since 2000.
Mr. Jenkins earned his bachelor of science degree in business finance from Brigham Young University. He is also a CFA® charterholder.