Rough sailing

As Bob Haber, chief investment officer and portfolio manager with Fidelity Investments kindly put it, we were flying along so smoothly and suddenly hit an air pocket. What happened in the global financial markets, and why did investors start dumping all the high-flying stocks that have been their bread and butter for the past year or more? A recent invitation-only conference call with some top Fidelity fund managers reveals some answers and strategies for going forward.

The conference call took place on Friday, the end of one of the most volatile weeks in the Nasdaq stock market, and featured Bob Haber, manager of the Fidelity Disciplined Equity, Canadian Balanced and Capital Builder funds, and Rick Mace, manager of the Fidelity Overseas fund. We listened in as they revealed their thoughts and their expectations.

Bob Haber recapped the reasons why investors have been bidding up these high-flyers. "The underlying factors were supportive," he said. "Especially in Canada, we had tremendous corporate earnings growth, low inflation and enormous amounts of corporate merger and acquisition activity." The key notion is to understand that the stocks were overbought. A strong fourth quarter in 1999 and a strong first two months in 2000 created a situation where some stocks came along very quickly. Then came some catalysts to get people worried. "The economy was quite strong, and the Federal Reserve raised rates further, now having done so five straight times. Sprinkle anything out of the ordinary into this mix and you’ll get volatility," he claimed.

"Historically," he said, "when a market is overbought we get a correction." This is what happened now, and Bob expects the market to re-test the lows again soon. "We have to shake some more stocks loose," he said.

Rick Mace, who manages an international portfolio, added that this volatility presents an incredible buying opportunity for him and other portfolio managers at Fidelity. "Most people are concerned, he said, but the fear and frenzy create opportunities." Rick knows which companies he wants to own, because of their fundamentals. "At Fidelity we are fundamentally driven and we have enormous research capabilities. If someone wants to sell me a stock at $60 and I have a target for it at $120, I will be buying." A quick analysis can show whether the fundamentals have changed or if the drop in price is because of overreaction in the market. "People were throwing stocks out because of fear, and I was buying. There was a huge imbalance of stocks for sale, and it was mostly the ones that have the fundamentals to reach as high as they did before the panic." Rick said that this happened in Japan, Europe and especially in the emerging markets.

Natural resources, which represent 17% of the TSE, are Bob Haber’s best value opportunities right now. "Resources, except gold, have excellent fundamentals, great 1-3 year outlook and incredibly low valuations," he said. "They have a great potential to close the valuation gap." Also, Canadian tech companies are high on his list. "We have great tech companies that deliver exceptional earnings growth." His only concern is with the emerging companies that have no fundamentals, no product, or no earnings yet. "Pure concept stocks have great potential but there is no way to get a handle on them using fundamental analysis," he added.

For parting thoughts, we turn to Fidelity spokesman and former star manager Peter Lynch. In a recent interview he stated that "the stock market is a volatile animal, you’re bound to hit some turbulence along the way." He advised to sit tight with your investments and to remember why you bought them in the first place. "It shouldn’t cloud investors’ judgements about thinking long term. I have no idea whether the next 1,000 points for the Dow will be up or down, but I would argue that the next 10,000 points will be up." In other words, volatility is just another bump in the road. Just put your seatbelts on.

Levi Folk, Richard Webb and Peter Diplaros are Investment.com mutual fund specialists and editors of the Fund Counsel newsletter. They can be reached by e-mail at peterd@hqinvestment.com.