With U.S. inflation persistently high, stock valuations up, interest rates on the rise since March 2022, and more stress on consumers, Fidelity Portfolio Manager Mark Notkin has been focusing on companies that he believes can consistently grow throughout a full business cycle.
“Since we are concerned the economy may soften later this year or in 2024, we are favoring the stocks of companies and even industries that are less sensitive to the economic cycle because they are supported by other factors that we think will carry them beyond any change in gross domestic product,” says Notkin, co-portfolio manager of Fidelity® Leveraged Company Stock Fund (FLVCX), along with Brian Chang.
The fund is a domestic equity strategy focused on companies with high outstanding debt. While the co-managers have recently sharpened their focus on companies with secular growth drivers—meaning those that are unaffected by short-term, seasonal, or cyclical trends—they continue to follow a long-term investment approach that relies on bottom-up research to choose firms with strong competitive positioning and a management team that can prudently use free cash flow to grow shareholder value and reduce leverage.
Notkin cites the emergence of artificial intelligence as a secular growth driver that has led he and Chang to some new or increased investments in the information technology sector, with chipmaker Nvidia (NVDA) standing out for its dominance of the market for advanced graphics processing units that are the lifeblood of new generative AI systems.
“With demand for data capacity exploding due to AI, Nvidia is well-positioned amid strong demand for new data centers,” Notkin explains. “On top of that, the firm has gained market share within data centers because GPUs are taking share from central processing units.”
To further capitalize on AI as a secular growth driver, in March Notkin and Chang established a position in Arista Networks (ANET), which makes network switches for large data centers and, in their view, is poised to grow along with demand for data capacity.
As Notkin’s co-manager since 2019, Chang has had a keen eye on secular growth within the industrials sector, including the electrification of autos, factories, and industrial automation; the strengthening of the nation’s energy and communications infrastructure; and what he and Notkin call the reshoring of America—bringing overseas manufacturing back to this country.
Within the capital goods industry, Eaton (ETN), Parker Hannifin (PH), Wesco International (WCC), and WillScot Mobile Mini Holdings (WSC) are all recently established fund holdings Chang believes will achieve growth that exceeds GDP, boosted by secular drivers, a high profit margin, a healthy return on capital, and an attractive free-cash-conversion ratio.
“We consider these attributes even more important now, given our cautious near-term outlook and expectation that the investment backdrop will remain dynamic and volatile,” says Notkin.
For specific fund information, including full holdings, please click on the fund trading symbol above. Securities mentioned were fund holdings as of July 31.
Mark Notkin s a portfolio manager in the High Income and Alternatives division at Fidelity Investments.
In this role, Mr. Notkin co-manages Fidelity Capital & Income Fund, Fidelity Advisor High Income Advantage Fund, Fidelity and Fidelity Advisor Leveraged Company Stock Funds, and the U.S. high-yield sub-portfolios of Fidelity and Fidelity Advisor Strategic Income Funds and Fidelity VIP Strategic Income Portfolio.
Prior to assuming his current management responsibilities, Mr. Notkin managed Fidelity VIP High Income Portfolio as well as other high-yield portfolios beginning in 1996.
Before joining Fidelity in 1994 as a high-yield analyst, Mr. Notkin was an assistant to the chief financial officer at Sunbeam-Oster Company, Inc. Previously, he worked as an assistant vice president of corporate finance at Bank of Boston and as a credit analyst at Fleet Financial Group. He has been in the financial industry since 1988.
Mr. Notkin earned his bachelor of science degree in mechanical engineering from the University of Massachusetts at Amherst and his master of business administration degree from Boston University.