A veteran Fidelity portfolio manager visited the HBS campus on February 24 to give students a snapshot of the company’s research operations. Jeff Feingold, (HBS ’87), serves as Co-Director of Research for Analysts within Fidelity Management & Research (FMR), a position he accepted just four months ago. Formerly, he managed the firm’s Select Aerospace and Defense Fund, the Select Home Finance Fund, the Select Financials Fund, and the Select Air Transportation Fund.
“There really isn’t a formula” for picking stocks, Feingold says. Portfolio managers with a 60 percent success rate are considered quite good. Fidelity “brings in bright people” and switches analysts around every two to three years to generate fresh ideas, he said.
The privately held mutual fund giant must be doing something right; their earnings jumped 12 percent in 2003 to $908 million.
Feingold described how a Fidelity analyst goes about finding undervalued companies. There are two drivers of stock price: earnings growth and price/earnings (PE) expansion. Of those, earnings growth is far easier to analyze, so analysts delve deeply into those numbers. They may take a top-down approach – deciding whether the industry is an attractive one or not – or a bottoms-up view, trying to figure out who the winners and losers will be 20 years from now in a particular industry.
Since stock picking is both an art and a science, analysts approach the task differently. Feingold leans toward scientific methods, while others comb magazines looking for hot consumer trends, new ideas, cultural changes, and breakthrough technology. The best analysts, says Feingold, are able to anticipate changes before they happen by talking to customers, suppliers, and other company sources.
Students peppered Feingold with questions. Given how difficult it is to beat the market over the long term, how could he make the case for actively managed mutual funds? Feingold replied that it’s his job to find those portfolio managers who can beat the market over the long term, “and we hope we get more than our fair share.”
One reason Fidelity employs so many analysts, between 50 and 60, said Feingold, is to try to find those unusual companies that will beat the stock market’s growth of 6-8% over the past 100 years. He pointed out that the “consensus is often wrong” and that companies meet their estimates just 20 percent of the time. Analysts should build their model without checking the consensus, said Feingold.
One of Feingold’s few failures as an analyst took place when he was following a footwear and women’s fashion company. Despite his extensive analysis of their numbers, the stock market proved him wrong. “It was probably not a good idea to have a guy who likes to wear sweatpants” follow such a company, he deadpanned.
One student wondered how a Fidelity analyst recommends purchasing a stock if the purchase will move the market. “The best analysts think in terms of liquidity,” sai Feingold. It doesn’t help to recommend a great stock if the portfolio manager can’t get hold of it – “you’ve got to be early” in order to purchase the large blocks that Fidelity requires, he emphasized.
Do these economic times make Feingold nervous? “No question,” he said, “What I get most nervous about are fundamentals.” Although the past 18 months have been tough, the fundamentals were far worse in the early ’90s when the fallout from the S & L crisis was taking place. At the beginning of that decade there were “hundreds” of bankruptcies, while in the past two years “only a few” banks have gone belly up. The difference, according to Feingold, is the availability of credit today.
Students wanted to know why Fidelity doesn’t offer hedge funds as viable alternatives to mutual funds. While Feingold acknowledged the popularity and high returns of some hedge funds, he pointed out that they are cyclical – just like venture capital – and they are currently undergoing a shakeout. He advised healthy caution. (A number of Fidelity’s portfolio managers have jumped to hedge funds, most notably during the stock market “bubble.”)
Feingold also advocates persistence and tenaciousness as analysts form relationships with industry experts, customers and suppliers, searching for that one-in-a-million home run.
After all, says Feingold, “you never know when these companies are going to pop up.”