This month I attended a two-day investment symposium sponsored by Fidelity® Investments, Inc. We use several Fidelity® mutual funds in client portfolios, and the managers of the funds we most often use—Contrafund®, Strategic Advisers® Core Income Fund, and Real Estate Income Fund—were on hand to discuss not only their market views but also how they are positioning portfolios to meet the opportunities and challenges that each fund faces.
At the meeting, legendary manager Will Danoff, who has led Contrafund® for over 25 years, repeated his mantra that stock prices follow earnings. In an optimistic discussion, he stressed the benefits of owning companies that grow earnings by 20% or more per year, and cautioned that in years when earnings growth is strongest across the entire Standard & Poor’s 500, the Index tends to decline, making individual stock selection more important. Danoff does not limit himself to the largest stocks in the market and has no constraints on what size or types of companies he can own. He meets with hundreds of companies every year to find those that he believes can grow quickly, and prefers founder-led firms, using Amazon and Facebook as examples.
Ford O’Neil of Fidelity Strategic Advisers® Core Income Fund focused on the bond market, noting that the economy may grow faster than anticipated, which could cause the Federal Reserve to increase interest rates faster than the market currently expects. There has been very little dispersion of returns among the different classes of bonds this year, with Treasuries, agency securities, and high-yield bonds all down slightly in the first quarter, making security selection and active management a more important driver of performance. The fund is now slightly overweight its target in floating rate bonds, whose coupons rise with interest rates and will get paid first before other types of bonds. While he believes bonds with more credit risk such as high-yield will be fine, we are entering into the late part of the economic cycle, meaning returns may not be as attractive as last year.
Fidelity® Real Estate Income Fund has a unique strategy that can invest in the common stock, preferred stock, and bonds of real estate firms and commercial mortgage-backed securities. Portfolio Manager Mark Snyderman looks at each different type of security a firm has issued to determine which is the most attractive to hold at any given time. He emphasized that the fund offers a higher yield and is much less volatile than a typical real estate investment trust (REIT) that only invests in common stocks. He noted that commercial property values may have peaked, and that REIT common stocks typically need values to keep rising whereas bonds do not. However, with this year’s selloff in REIT stocks, there may be opportunities to put some of the fund’s cash to work.
Ongoing research and analysis is a vital component of our work at CJM, which is why I attend several of these firm-specific and industry-wide conferences annually to hear from the companies included in client portfolios, as well as to get new ideas for the future. In addition, CJM meets with firms on a regular basis to hear their views on the markets and get updates on their funds. In fact, in the past few months, we’ve met with partners from American Funds, T. Rowe Price, Lord Abbett, J.P. Morgan, BlackRock, Calamos, Eaton Vance, Goldman Sachs, among others, either in person or by phone so that we are fully informed about your investments