Finding opportunities in volatile markets

Here's where our managers have invested as choppy conditions return.

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Key takeaways

  • Volatility has returned to financial markets after a long period of calm.
  • The recent return of volatility may feel startling because there has been so little of it for so long.
  • Fidelity portfolio managers see investment opportunities that may offer attractive returns even with the return of more historically typical levels of volatility.

Since 2012, financial markets have been remarkably calm by historical standards as central bank policies have kept liquidity abundant and most stock market indexes have marched steadily higher. After that long period of calm conditions and rising stocks, the recent abrupt pullbacks and rebounds in markets may seem startling to some.

But while the return of more historically typical levels of volatility may be unnerving, our portfolio managers have never lost sight of the fact that markets go down as well as up, and they have no shortage of investing ideas that seek to deliver attractive returns despite the return of volatility. With that in mind, Viewpoints asked some of our top managers where they have found underappreciated investing ideas.

Joel Tillinghast, Fidelity® Low-Priced Stock Fund (FLPSX)
I’ve recently found value among energy and utilities.

You need to shop carefully these days, but I still find pockets of value, such as the energy and utilities sectors. The fund is more heavily invested in several other sectors, most notably consumer discretionary, but I have added to the fund’s stakes in both energy and utilities in recent months. My increasing conviction in energy stems from healthy supply-and-demand trends for crude. The fund has a large out-of-benchmark stake in exploration and production company Murphy Oil (MUR), as of August 31, which has shed underperforming assets in recent years and has growth opportunities in the Eagle Ford Shale region, the Gulf of Mexico, and, longer term, in Canada.

One of the fund's larger utilities holdings as of the end of August was PG&E (PCG), which I consider a turnaround story. The stock, a non-benchmark holding, reached a multiyear low in early 2018 and retested that price decline in June before moving a bit higher. The California utility faces continued uncertainty and potential liabilities related to wildfires in the fall of 2017 that caused billions in property damage. I think PG&E could emerge from these challenges over a multiyear period, with the possibility of obtaining support from the state government.

Steve Wymer, Fidelity® Growth Company Fund (FDGRX)
I consider biotechnology an essential growth industry.

Whether markets are calm or volatile, we all care about our family members living long, healthy lives, which is why biotech is such a fundamentally important growth industry with a long-term future. I think it’s equally if not more important than traditional tech sectors. Biotech and life sciences investments carry notable risks because the majority of drugs introduced fail to get regulatory approval. For this reason, biotech stocks tend to have a wide range of potential returns. Yet the idiosyncratic risks tend to make the industry an attractive area for stock picking.

To help manage risk associated with any one holding, I generally take smaller positions in individual biotech stocks, especially in shares of companies that are valued on a single drug’s development. The fund’s largest biotech position as of August 31 was Alnylam Pharmaceuticals (ALNY), a firm focused on genomics-based drug discoveries that target diseases with no known treatments. The company’s market value is primarily derived from its pipeline, not treatments that are currently commercially available.

Arvind Navaratnam, Fidelity® Event-Driven Opportunities Fund (FARNX)
Real estate is a sector where I’ve found value I don’t think is obvious.

I often look for companies backed by valuable assets that don’t fully show up on their balance sheets, which is what I think I’ve found among several real estate securities.” Only the “book value,” or the purchase price, of real estate on a company’s balance sheet, not the current market value, which can be far greater. Companies can monetize this differential when they sell long-held real estate assets, which is part of the strategy of JBG Smith Properties (JBGS), one of the fund’s largest holdings as of August 31. JBG Smith has sold several long-held properties in 2018 in excess of book value.

Joe Wickwire, Fidelity® Select Gold Portfolio (FSAGX)
Here’s why I believe gold stocks may be near a bottom.

By the end of August, the price of gold corrected to a level I think presents one of the most attractive buying opportunities for the metal in more than a decade. Gold and many gold stocks had declined notably since April amid a period of global economic growth and reached an extreme level near the start of the third quarter.

It’s hard for the gold industry to make money when prices dip below $1,200 an ounce, similar to oil dropping below $45 a barrel, as the commodity’s price is lower than its cost of production. When this happens in any commodity-oriented industry, companies typically respond by cutting production until the self-correcting nature of the industry kicks in, demand begins to outstrip supply, and the commodity price rises. Mine supply already is expected to decline slightly in coming years, and I think it could drop even more than expected, possibly accelerating an increase in gold prices.

It’s also important to note that gold and gold stocks tend to do well when financial assets, such as cyclical stocks, do not, in the 1970s and the more recent “lost decade” in the 2000s. As of August 31, I boosted the fund’s exposure to gold bullion and gold stocks I think could outperform in the medium term and plan on using volatility in the space and market as an opportunity.

Next steps to consider

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Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

This information is intended to be educational and is not tailored to the investment needs of any specific investor.

Past performance is no guarantee of future results.

Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.

Investments in smaller companies may involve greater risks than those in larger, more well known companies.
The securities in companies involved in a special situation event can perform differently from the market as a whole and other types of stocks, and can be more volatile than that of other issuers. Fixed income investments entail interest rate risk (as interest rates rise, bond prices usually fall), the risk of issuer default, issuer credit risk and inflation risk. Lower-quality bonds can be more volatile and have greater risk of default than higher-quality bonds. The fund may have additional volatility because it can invest a significant portion of assets in securities of a small number of individual issuers.
The gold industry can be significantly affected by international monetary and political developments such as currency devaluations or revaluations, central bank movements, economic and social conditions within a country, trade imbalances, or trade or currency restrictions between countries.
Fluctuations in the price of gold often dramatically affect the profitability of companies in the gold sector.
Changes in the political or economic climate, especially in gold producing countries such as South Africa and the former Soviet Union, may have a direct impact on the price of gold worldwide.
The gold industry is extremely volatile, and investing directly in physical gold may not be appropriate for most investors.
Bullion and coin investments in FBS accounts are not covered by either the SIPC or insurance "in excess of SIPC" coverage of FBS or NFS.
Joel Tillinghast manages Fidelity Low-Priced Stock Fund which held some of the securities mentioned in this article. As of July 31 2018, the fund held Murphy Oil (0.996% of fund assets) and PG&E (0.384% of fund assets) among the fund’s holdings.
Steve Wymer manages Fidelity Growth Company Fund which held some of the securities mentioned in this article. As of August 31 2018, the fund held Alnylam Pharmaceuticals (1.282% of fund assets) among the fund’s holdings.
Arvind Navaratnam manages Fidelity Event-Driven Opportunities Fund which held some of the securities mentioned in this article. As of August 31 2018, the fund held  JGB Smith (5.8% of fund assets) among the fund’s holdings.
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Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917

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