Guess Who's the Year's Top Stock Picker. Guess Again.
The No. 1 stock picker in America in 2015 is no alpha-male. She's Deena Friedman, manager of the Fidelity Select Retailing Portfolio, which is giving investors a bonanza using an old-fashioned strategy that's a bit of a rebuke to a lot of her swashbuckling peers.
Top 10 Mutual Funds of 2015
Her secret is no secret at all: faith in retail companies and the time-tested principles of value investing. Anyone wondering about the strength of the American economy so far this year need look no further than consumer discretionary firms. They outperformed the 10 industry groups of the Standard & Poor's 500 Index with a return of 10.5 percent (healthcare gained 7.5 percent while the S&P 500 was up only 2.2 percent).
2015 Return, 10 Industry Groups
Friedman did much better. Among the 563 actively managed equity mutual funds with a minimum of $1 billion and at least 80 percent invested in the U.S., Boston-based Fidelity Retailing returned 19 percent, a superior outcome determined as much by the specific shares Friedman selected as the stocks she avoided, according to data compiled by Bloomberg. The closest competitor to Friedman's Select Retail is the Fidelity Select IT Services fund with a return of 14 percent.
Friedman got her start in the human resources department at Goldman Sachs after getting her bachelor's degree in sociology from Columbia University in 1990. Assigned to the internal 401(k) plan, she was captivated by the thinking driving its performance and went back to Columbia to get her MBA. She landed at Fidelity a decade ago after stints at Morgan Stanley and Piper Jaffrey and has been following companies catering to consumers for 13 years. "I have the luxury of getting to know companies really well -- 24/7 -- and I found the way to generate alpha is by thinking very long-term," she says.
Unlike so many money managers today who chase big Betas, acquiring assets with the most historical volatility and hoping for the largest returns to compensate for the risk, Fidelity Retailing is rooted in the valuation model extolled in the 1930s by Columbia University finance professors Benjamin Graham and David Dodd. They helped inspire Warren Buffett, whose holding company Berkshire Hathaway beat the S&P 500 annually by 4.5 percent since 1999, according to data compiled by Bloomberg. These investors focus on events that reveal the state of the economy and its potential, such as earnings, dividends, cash flow and book value, which is why value investors try to buy companies trading at less than their net worth.
Fidelity Retailing is conceived to benefit from a growing economy by holding 46 companies (according to the most recent filing) whose fortunes depend on the American consumer. And it increased substantially its stake during the year in six of the best known of that group, companies that reveal Friedman's prescience about the strength of the expansion: Amazon.com, Priceline, Netflix, AutoZone, Home Depot and O'Reilly Automotive, according to Bloomberg data.
Within the S&P 500, Netflix is No. 1 this year with a total return (appreciation and income) of 140 percent, followed by Amazon returning 114 percent. Compared to its U.S.-based peers with a market capitalization greater than $1 billion, Netflix is growing faster than all but Wayfair in annual revenues, a trend shareholders don't see abating anytime soon.
That helps explain why Fidelity Retailing increased its Netflix stake in June and July to 756,000 shares from 6,600. The stock had a 7-for-1 split in July, so after the adjustment, Fidelity's Netflix holding increased 16 times from its position at the start of the year. Amazon became one-fifth of the fund in 2015 while Home Depot amounted to 17 percent.
Friedman says Netflix is an appropriate choice in her search for "long-term winners with strong content, international opportunities and the ability to leverage e-commerce." She called Amazon "a key disrupter, creating an endless aisle where the assortments are infinite."
Such stock-picking easily outperformed comparable index-driven strategies as Fidelity Retailing's return this year is almost twice the 10.4 percent provided by the exchange traded fund investing in consumer discretionary shares worth more than $500 million.
As the U.S. approaches its seventh year of expansion after the financial crisis, when so many hedge funds are apologizing for losses on big bets gone awry and the Dow Jones Industrial Average and S&P 500 are little changed on the year, the American consumer, like Friedman, "is increasingly value-conscious in an economy that is slow and steady, grinding upwards," she says.
"It doesn't matter where you start, it matters where you end up," she said.
(With assistance from Shin Pei)
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