Seeing opportunities where others may not

Our managers find opportunities in some overlooked corners of the market.

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Key takeaways

  • Opportunities still exist in stocks and bonds even as the current economic expansion and equity bull market matures.
  • Fidelity portfolio managers currently see opportunities in areas ranging from natural gas production to mergers and acquisitions to leveraged loans.

Both the ongoing stock market rally and economic expansion that began nearly a decade ago have benefited investors greatly. But now some might be wondering if most of the opportunities for return have already come and gone.

Not according to the 4 Fidelity fund managers interviewed by Viewpoints recently. Here they share some investment themes that others may be overlooking.

Daniel Dittler, Fidelity® Select Brokerage and Investment Management Portfolio (FSLBX)
I like boutique mergers-and-acquisition advisors.

I'm bullish on the prospects for merger-and-acquisition (M&A) advisors because of the potential for more M&A activity in 2018 and 2019. Companies that assist with mergers and acquisitions could benefit in the years ahead from readily available credit, interest rates that remain relatively low, and increasing amounts of cash, partly as a result of US corporate tax reform. All of these things help create a constructive environment for M&A activity. Company CEOs also continue to report that their confidence is high, and I believe that most industries have visibility into both legislative and regulatory changes that could affect the M&A climate.

All these circumstances should help catalyze M&A activity, which is why I've boosted the fund’s stake in companies that advise on mergers and acquisitions. As of June 29, the fund has an overweight in M&A advisor PJT Partners (PJT) as well as notable stakes in advisors Lazard (LAZ) and Moelis & Co (MC).

Ford O'Neil, Fidelity Advisor® Total Bond Fund (FTBFX)
While I've become more cautious overall, I still like leveraged loans.

I've been approaching the bond market with increased caution, but I still like the leveraged loan sector a lot. Leveraged loans are issued by many of the same companies that tend to have below-investment-grade credit ratings and that also issue high-yield bonds. That means they typically have higher default rates than investment-grade issuers, but also pay higher rates of interest. While leveraged loans are a category of below-investment-grade debt, they also hold "senior" and "secured" status in the capital structure. This means that if a company were to default, loan investors' claims on the company's assets would be given highest priority. The senior and secured status of leveraged loans mitigates potential risk for investors in leveraged loans and loan investors have historically enjoyed higher recovery rates in cases of default than high-yield bondholders have.

Another reason to like leveraged loans is the fact that they have floating-rate coupons. That means the amount of interest they pay changes as market rates, such as LIBOR (London Inter-bank Offered Rate), change. This makes them particularly attractive as the US Federal Reserve continues to raise the fed funds rate. As of June 29, leveraged loans represented about 5% of the fund and leveraged loans have added notable value to the fund over the past few years.

Ben Shuleva, Fidelity® Select Energy Service Portfolio (FSESX) and Fidelity® Select Natural Gas Portfolio (FSNGX)
LNG-related investments may be overlooked by the market.

I think business prospects for the liquefied natural gas (LNG) market are a lot better than the broader market realizes. LNG has been the world’s fastest-growing conventional fuel source in recent years with annual demand growth 2 to 3 times that of crude oil. The global market will need additional LNG capacity in 2022 and beyond and building a new LNG plant takes about 3 years on average, so LNG supply could be tight.

The growth of LNG use could help certain services companies, notably Baker Hughes (BHGE), which makes turbo machinery used in LNG plants. Baker Hughes is a major holding within both funds as of June 29. Canada-based Trinidad Drilling (TDGCF) may be another beneficiary of the growing use of LNG. Trinidad builds oil-and-gas rigs that production companies use to drill for natural gas, including in the Liard Basin in British Columbia. Trinidad is an overweighted position in the Select Energy Service Portfolio as of the end of June.

Will Danoff, Fidelity Contrafund (FCNTX)
Founder-led companies remain attractive.

Founders develop new ideas and work passionately to build meaningful businesses. According to a study published in the Harvard Business Review in 2016, founder-led companies appreciated 42-fold over a 24-year study period. That's triple the 14-fold total return for the S&P 500® Index over the same time.

These results are consistent with the empirical experience that my team and I have had over the years. I believe that founders attract and retain outstanding executives, delight their customers, are passionate about their businesses, and quickly adjust to changing market dynamics. Over the past few years, we've found most of our investment ideas in founder-led companies in the technology or life sciences categories, but we've also seen founder-led firms build significant businesses in virtually every industry over my 27 years managing Contrafund.

Founder-led companies in the fund's year-end top-10 holdings as of June 29 include Facebook (FB), Amazon (AMZN), Alphabet (GOOG), (CRM) and Netflix (NFLX). Entrepreneurial spirit is alive and well throughout the world.

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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.

Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities. The views and opinions expressed by the Fidelity speaker are his or her own as of the date of the recording and do not necessarily represent the views of Fidelity Investments or its affiliates. Any such views are subject to change at any time based on market or other conditions, and Fidelity disclaims any responsibility to update such views. These views should not be relied on as investment advice and, because investment decisions are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Fidelity product. Neither Fidelity nor the Fidelity speaker can be held responsible for any direct or incidental loss incurred by applying any of the information offered. Please consult your tax or financial advisor for additional information concerning your specific situation.

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.

Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.

Daniel Dittler manages Fidelity® Select Brokerage and Investment Management Portfolio, which held some of the securities mentioned in this article. As of June 29 2018, the fund held PJT Partners (3.04% of fund assets), Lazard (1.01% of fund assets), and Moelis & Co. (2.63%) are among the fund’s holdings.
Ben Shuleva manages Fidelity Select Energy Service Portfolio and Fidelity Select Natural Gas Portfolio, which held some of the securities mentioned in this article. As of June 29 2018, the fund held Baker Hughes (6.1% of fund assets) and Trinidad Drilling (4.9%) are among the fund's holdings.
Will Danoff manages Fidelity Contrafund, which held some of the securities mentioned in this article. As of June 29 2018, the fund held Facebook (7.3% of fund assets), Amazon (6.6% of fund assets), Alphabet (3.1% of fund assets), Salesforce (2.9% of fund assets) and Netflix (2.9% of fund assets) are among the fund’s holdings.
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