Welcome to the inaugural episode of Inside Active, a podcast about active managers that goes beyond sound bites and headlines and looks deeper into the processes, challenges, and philosophies and security selection. I'm David khne, I, lead mutual fund and active Research at Bloomberg Intelligence. I'm joined by Gina Martin Adams, chief equity strategist at Bloomberg Intelligence. Who'll be my co host today. Gina, thanks for joining me.
Thank you for having me.
David.
Well, you wrote a really interesting note about global equity valuations. I think it really ties into our discussion today. Do you maybe give us a quick overview of where global equity valuations are today?
Yeah?
Absolutely, and thank you. It's been a really interesting ride in twenty twenty four. I think that the popular conception is that stocks are quote unquote expensive, and that is really derived through the observation that index level valuations have expanded so far this year, and at least in the US have expanded to levels we last saw back in
twenty twenty one. But when you dissect the indices and you look at the individual moving parts, the components of the indusices, you actually find that the median stock globally has not seen any valuation expansion. As a matter of fact, most of the valuation expansion, in particular in the US has really just come from the top ten stocks, and
globally it's come from AI theme stocks. So I'm really excited to dig in today with our guests on valuations, on growth prospects, what's really driving markets, and where are we going to see, you know, trend shift going into the future.
Great, So I think it's a great time now to bring in our guest, Sonu Kara, who manages the Fidelity Blue Chip Growth Fund or fbjyr X. So, now, thank you so much for joining us.
Thanks David, Thanks Gena, thanks for having me this morning.
So before we get into you know, nitty gritty of stock analysis, maybe you could tell us how you got your start in investing.
Yeah, I grew up in a household which was very i would say, math and numbers oriented growing up. I moved to the United States at the age of six from India, and you know, my dad, at an early stage when we moved to this country, I used to come through the Wall Street Journal and just look at stock prices of different names. That's kind of where I really learned about the stock market and developed an interest in the stock market.
Funny thing is is, you know.
He would focus on the fifty two week low list as potential ideas. Over time, I've learned that's usually not a good place to be searching for new ideas.
But it was really a lesson in.
Investing, and we'd sit down on Saturday mornings and just go through what happened. And developed an interest early on. And you know, in college, I was a finance major. You know, I was kind of the nerd in our in our apartment where I would watch CNBC and watch
financial news. And I remember there was a brokerage house down on Main Street and they had a ticker that would go by, because at that point in time, you'd have to in order to get real live tickers, you either have to be watching TV or you'd have to dial the numbers on your phone and the letters, et cetera and take forever. So I'd sit by the brokerage house it was a TV waterhouse brokerage, I remember, and just watched watch the tickers. So just developed a love of the markets.
Uh.
You know, my first job out of college was a g capital I was in a rotational program there, and uh, you know, at that point in time, I never knew that you could actually, you know, have a career in investing.
For me, it was more of a hobby.
But at G Capital they managed a portion of their pension fund assets. Internally, I had a six month rotation there, did some equity research analysis and just really fell in love with it and went back and got my MBA and did my summer internship and Fidelity in the Hong Kong office. Spent three months in Hong Kong covering Chinese toll roads and utilities. Counted cars, you know, on the side of a highway at that time. That's how a few cars there were in China in.
The late nineties.
This was the summer of nineteen ninety seven. And then, as I say, the rest is history. Joined Fidelity in ninety eight as an analyst here in Boston and have been looking at growth stocks for most of my career.
That's a great start. It's really interesting to hear people giving their overview of how they got their you know, their start in the business, and you know, it kind of brings us to where you are now. I think we'd really love to hear about your investment process. Could you kind of give us an overview of it.
Yeah, So I managed the blue Chip Growth strategy here the core mutual fund you mentioned FPGR, but also in addition to that, I also manage FBCG, which is the ETF version of the strategy, and I've been running this strategy since two thousand and nine. What I primarily look for are companies that are participating in large addressable markets that are underpenetrated, where markets are not only mispricing the absolute rate of growth, but more importantly the durability or
sustainability of that growth. And that's really the core essence of our investment philosophy. You know, if you look back at the great growth companies of our lifetimes, companies like in Amazon and Apple, you know they've been able to compound growth rates and healthy growth rates for long periods of time. And that's really what I strive to look for.
And one of the things that I look for is these large underpenetrated markets, because if the size of the pie is big, you have room to grow for long periods of time. And the other thing I look for is adjacent markets. Do companies have adjacent market opportunities that they can go after over time, and Amazon's a great example of that. I was fortunate enough to be the analyst covering Amazon in the late nineties early two thousands.
I covered Apple during the early two thousands, so these are really my formative years as a growth investor, and you know, one of the things I learned was just when you have these companies, it's really important for them
to continue to expand and have opportunity to expand. And when you think about Amazon, they started out and you know, books, music, video, e commerce categories, continued to expand, and then in the mid two thousands launched their web services business, which is now one of their largest businesses and most profitable business. More recently, they've added advertising and prime video, et cetera. You know, Apple got it start as a PC maker, and I still remember when they introduced the iPod in
the early two thousands. That was really their first venture outside the PC market, and there's a lot of skepticism.
At the time. And then they introduced the.
iPhone, the iPad, the ecosystem, apps, et cetera. So it's really important for these companies to have these adjacent markets that they can capture over time, and ideally, if.
We're doing our work well.
We can hold on to these companies for long periods of time. I tend to look for companies that can grow their earnings double digits. And the reason I focus on that double digit hurdle is, when you think about it, take a step back. The S and P historically has returned seven to eight percent over time, and stocks typically follow earning. So in order to helpperform the market, you need to find companies and own companies that can outgrow the market. So for me, that ten percent hurdle rate
becomes a nice bogie that I look for. And and we've done some internal research here that shows if you own a portfolio of companies that continues to you know, compound at ten percent, there's about twelve hundred basis points of outperformance to be found on in any given year. And so it's really trying to you know, fish in a pond where there's a lot of fish. You know, I spend a lot of time with our analyst team, uh,
you know, focused on organic revenue growth. You know, to me, that's like puts every company on a level playing field. And I try to find companies you know that are gaining market share. To me, market share is a very important metric that I focus on. It gives me a quick snap shot of the industry dynamics as well as you know, our companies gaining share, losing share. It can
be warning signs associated with that. So those are those are the things I look for On the growth side, you know, I break it out into three buckets, secular growers, cyclical growers, and then opportunistic growers. The majority of the fund is what I would consider in the secular bucket. I've worked very closely with our you know, global research team identifying themes that we think can provide secular tailwinds.
Uh.
You know, some themes that we've incorporated over the last decade include, you know, e commerce penetration AI is a buzzword today, but we've identified it over a decade ago. Health and wellness. We're all trying to eat better, exercise more. It's led to the casualization of the workplace as well the rise of the middle middle class. So those are all things you know, you know that kind of have
a secular tailwind to it. And then on the cyclical side, depending where we are on the business cycle, consensus usually tends to overestimate or UNDERESTI to mat where things can go COVID.
You know, oil prices when negative for a day.
Best cure for oil prices is low oil prices as cap back sticks required. So we'll put a small portion of the fund in some of the more signal industries. And then the last bucket is what I call self help stories. It can be industry consolidation, a new management team, you know, something, some catalysts that can propel a company. So hopefully that gives you a flavor for kind of how I approach the growth aspect of the strategy.
That was great, Thank you, Sony. I'm curious, you know, kind of going back to your initial remarks and back to our work on valuations. You talked about your father's investment strategy really being more of a value screen, so to speak, looking for those fifty two week lows, and then here you end up in a growth style. But nonetheless, you know, I do think that growth managers do pay attention to valuations, despite popular contention. I'm curious what you
use from a valuation perspective. Are there specific metrics that are really relevant for you as a growth manager, and how you're handling valuations in this current context when you have the top ten stocks really commanding so much attention and so much expansion in their valuation levels relative to the rest of stocks. Talk us through your process on you know, kind of handling multiples and handling valuations at large.
Yeah, it's a great question and something you know, it's it's more of an art than a science as kind of how I would characterize it.
And what I've learned over my career has been.
That I need to be flexible on valuation, that the market. I always believe the market is a lot smarter than me, and and so I'm sensitive to valuation. But what I try to do is, you know, work with our analysts and can up three to five year outlooks on our companies and just we're trying to predict the future. And sometimes it's easy to predict the future, and sometimes it's hard. We don't know what it's looked like, what it's going to look like, and so we'll try to use.
A variety of valuation metrics.
You know, PE is probably the most common, but I think of PE ratios as being shorthand for you know, discounted cash flows and we'll look at discounted cash flows and long term earnings power, but it really depends on the opportunity.
A great example, you know, in the twenty tens.
You know, we were big owners of Tesla during that timeframe, and it looked very expensive on traditional valuation metrics for for most of the decade. But you know, I think the power of the research platform here gave us conviction that they had developed a competitive advantage. And the great thing about the automobile market is it's very large, and it was a market that had undergone very little.
Innovation over the.
Last forty years outside of the automatic transmission. And here was Tesla trying to disrupt the market. And once they launched the model les, they were capturing about twenty percent market share in the California market of the high end luxury vehicles. And we could then do analysis on if they're successful getting into the mass market, what type of market share could they capture.
And they were going with a direct model.
And we had seen an analogy to that before in the PC industry when Dell went direct in the nineties and what sort of.
Benefit that had.
And you know, Tesla was able to take out the dealer take some margins. There no advertising, so they had about a thousand basis points of margin advantage versus a traditional automaker. And so you know, we were able to project out what sort of market share they would need to capture to justify evaluation. And you know, those are the type of things that we look at and you know,
depending on the opportunity, the size of the pie. You know, like I said, I'm a big believer that the market, you know, is a forward looking discounting mechanism.
So I have a lot of respect for what the market says.
And sometimes stocks look very expensive on the surface but end up looking very inexpensive. Another great example is when Google went public in the mid two thousands. They ran a very unique reverse auction method in terms of how they went public and the stock at the time it looked like was trading over thirty times earnings, but when they finished their first year of being a public company, the stock actually was trading at fifteen times you.
Know, earnings.
And our job is analysts and portfolio managers. You know, what I think of is we need to get the earnings right, and if we can project the earnings well, the multiple kind of takes care of itself.
Can you talk to us a little bit then on you know, do you ever use valuations as a trigger point for an exit strategy or do you to use valuations in combination with some sort of fundamental outlook change. I know, you know, at certain points in times, certainly we see valuations expand to such extreme levels and then usually you need some kind of catalyst. It seems to actually see those valuations become an impediment in particular and growth.
So I'd love to hear kind of your risk management strategy and if you actually use valuations to mitigate risk, or if there's some other metrics that you really follow more closely.
Yeah, no, we'll use I'll trim winners on excessive valuation just as a risk mitigation strategy. We're very mindful that, especially in the growth bucket, there is more risk associated with some of these names, and having lived through several of these cycles, sometimes valuations do become excessive. The question is is you know what's the trigger point. Usually it's a change in fundamentals, or sometimes it's a change in macro.
You know, in twenty one and twenty two we saw the interest rate environment flip, and that was a big change for valuations.
But generally, you.
Know, I won't exit a position solely on valuation. I'll look at valuation and conjunction with something fundamental as a trigger point. But I'll certainly trim positions based on valuation just given. You know, if a stock is appreciated X amount, we'll monitor it and look at the opportunity risk reward.
I keep a spreadsheet.
Of all our stocks and what we think the upside downside is, and when that equation starts to get out of balance, well we'll start trimming. But like I said, it's more of an art than a science. I don't have a specific you know, hey, if the stock's trading over XPE ratio or XPE to growth, I'm going to sell it. You know, it really depends on what the market opportunity we think is for that particular company.
Okay, I do want to kind of go back to valuation, you know, one more time. You know, do you think there are any overrated or underrated metrics when looking at valuations?
You know, I think I wouldn't say they're overrated or underrated. I think depending on the industry you're talking about.
Depending on, uh, you know, the type of company.
It is, you know, Like I said that, I think of PE ratios as being a shorthand for you know,
basically discounted cash flows. I spend a lot of time looking at margin, you know, and the margin trends the one metric, you know, It's maybe not a pure evaluation metric, but return on equity is something that I think is a little overrated, you know, And being a blue chip growth I spend a lot of time looking at return on equity and to me, the absolute level gives me a very quick snapshot of how the quality of the business,
how good of a business. This is what ro O we doesn't tell you is whether the business or the stock will perform well moving forward. And for me, the direction of that ro OI is actually more important is are we going up.
Or are we going down?
And as our job as folio managers and analysts is to predict that. So I don't mind buying companies that have low ROS. And I own some companies that don't make any money, so they have a negative ROI by definition, but if we think they can be.
Better companies down the road, we'll own them.
And so that's a metric that I think gets overused quite a bit that you know, investors like their own high Roe companies, but what you really want to do is you want to own improving Roe companies rather.
Than just hire companies.
I'm curious, so new how do you integrate these big macro events into your analysis or your strategy. So you talked a little bit about twenty twenty two, right, and I hate to bring up painful years, but nonetheless, twenty twenty two or maybe the second half of twenty eighteen sort of these small but painful bouts of growth stock underperformance, and twenty twenty two you mentioned the FED as a big part of that story. Do you react during these periods?
How do you manage through these periods of major kind of risk off.
Yeah, it's a great question, and truthfully, it's an area where I can improve. You know, I tend to have a long time horizon, so I give most of my companies a pretty long leash. And if I think of, you know, some of my top holdings. You know, if you were to look at my top holdings, I've owned them for a long period of time.
And but I mean long period of time, I mean like pretty.
Much you know, either since I've been managing the funder since they've gone public, and so you know, I tend to you know, own businesses that I think will do well over long periods of time, and so I tend to have a longer leash with some of these companies, and that's hurt me in downdrafts that we've seen, like in the second half of twenty eighteen and twenty two. So that's an area that I'm trying to improve upon, is trying to you know, manage the risk at the
top of my fund and cut back on positions. When you have a change in the macro, sometimes that can overwhelm company fundamentals and sometimes the macro can actually shape company fundamentals as well.
You know, a higher interest rate environment.
Clearly made you know, some of the returns we were seeing on the investments that these companies were making, you know, change the equation, and we saw revenue growth slow down, uh, you know, coming out of COVID as well. So the fundamentals changed as the interest rate environment changed.
So that that that's.
An area for me that I can definitely improve upon as a portfolio manager. But I tend to, you know, think of myself as being macro aware, but i'm.
I'm.
I've learned over time that I'm not very good at predicting the macro, and so what I try to focus on is company fundamentals and finding companies that we think will be able to show adorable growth regardless of the macro.
Actually, it's a good point you mentioned fundamentals, and also earlier you mentioned you know, management changes. There are specific types of qualitative factors you look at, you know, such as management teams or maybe even corporate culture, you know, in addition to kind of the numbers.
Yeah, absolutely, for me, it's very important to learn to you know, get to know the management team. I pay very close attention to when people leave, whether it's a CEO or CFO, where they're leaving to, or you know, trying to get understand why.
Why they may leave.
I'll follow managers that I've had success with because you trust them, and if they've been successful at one company, there's probably greater likelihood that they'll be successful somewhere else as well. And part of our research process here is not to not to just get to know the C level suite managers, but also for me, it's meeting the business unit level managers. I spend a lot of time on the road meeting company managements with our analysts and
understanding how the strategy filters down the organization. You know, one of the questions that I always like to ask is, you know, you know, what are the key metrics that these business unit level managers are being measured on. How are they going to earn their bonus at the end of the year, and compare that to what we're hearing on the conference calls and uh, you know, reading on the.
Transcripts, et cetera.
So it's very important part of the process is you know, getting to know management, understanding you know, what the strategy is, and more importantly, understanding how how it filters through the organization.
Okay, great, we talked a little bit about some of the holdings. Obviously, Navidia, how do you handle or I know, Gina wants to talk about this non tech sectors. In times like this.
I spend a lot of time looking at companies across different sectors.
You know, I'm benchmarked against the.
Rustle one thousand growth, so a big part of it the benchmark is in tech and communications services, which is very similar, but there's also you know, parts of the market like consumer has been an area, you know, with ripe innovation over the years.
Healthcare is another area.
So those are probably the three sectors that I spend most of my time on. And the great thing about the market in general is that there's growth opportunities in every sector.
So even when I'm looking at more of.
A cyclical sector like energy, I'll try to find companies that are growing faster, you know, than the average company in in that sector, or you know, even in consumer staples. You know, it's traditionally you know more you know, stable industry, but I'll try to find companies that maybe have a new product or you know, something that will catalyze growth over time. So to me, you know, it doesn't really matter what sector that an idea you know, uh, you know plays in.
The key is is is it a good idea.
And can we own it for a long period of time and doesn't fit the characteristics that we look for in a potential blue chip company.
You mentioned Son who bent the benchmark, and your benchmark being the Russell growth, I'm curious how much time you spend really thinking about the benchmark. You're tracking your relative to the benchmark, your sector allocation relative to the benchmark, even your stock selection relative to the benchmark, and how much those constraints ultimately become a pretty big poor of your strategy when you think about managing the fund.
Yeah, I think of myself as being benchmark aware. It's important because that is what investors are counting on you to beat, and my incentives are aligned with beating the benchmark, and so I do focus on it, but I would say I wouldn't overly focus on it. I'm willing to go outside the benchmark. I'll own names that aren't in the benchmark. The Russell one thousand growth benchmark, it has a rebalance every year, and so the weights change once
a year in June. And there's been times where, you know, a great example is actually a Meta or Facebook which came out of the benchmark, or it went down a lot in the benchmark, can completely come out in twenty two, you know, after it had fallen quite a bit, and then in twenty three, after a hit were covered quite a bit, it went way back up in the benchmark. And so you can get whipsod by just following the benchmark.
And so what we want to try to do is own names that we think can deliver those double digit earning sustainably over long periods of time, and if we're doing our job correctly, you know, we should outperform the benchmark over time. And the metrics you mentioned tracking error, you know, I monitor all those metrics. They're important, you know, for clients, and you know, understanding how the fund is positioned.
There's ways where as a portfolio manager you can manipulate those metrics if you want to, so I don't get overly focused on them.
I make sure I understand them.
You know, there's an easy way to take your tracking error up or bring your tracking error down your active share as well.
So I watch all those ratios. But for me, it's really just.
Understanding how I think the fund is going to perform on a day to day basis and long term be able.
To deliver the type of results that we'd like to deliver.
And do you ever think about capitalization strategy, especially right now, It just strikes me that so much of our optimism seems to be concentrated in the biggest and the best of the megacap names, and it feels to me like maybe that leaves an opportunity for some of these smaller stocks to start to catch up. Even within a big rustle one thousand index you have, you know, pretty big
distribution of market cap. Do you think about that in context or is it really If it's a great growth idea and it's at a reasonable price, we're all in it.
You know. I think I'd be kidding anyone if I said I wasn't paying attention to it. It's been a big topic of conversation here internally over the last several months in terms of what we've seen the gap between the megacaps and the rest of the market. And you know, we've seen all the statistics out there, and so you know, the great thing about the strategy here and I think what the breadth and depth of Fidelity's research staff has allowed me to do is keep a long tail in
the fund. And so we own about three hundred names in the portfolio. And the great thing about Fidelity is that we have research analysts that are following each and every one of these companies, and I think of them as kind of my eyes and ears and feet on the street. So we're talking to these companies on a regular basis for conducting the due diligence, and it enables
me to have a portfolio. You know, right now, it's very heavily concentrated at the top of the fund, with the top twenty names making you know, up over sixty percent of the fund. But it also allows me to have a long tail and identify what I consider my emerging growth names.
These are smaller companies nature.
That we've identified and we think have the characteristics that could make them blue chips down the road, and if we can identify them early on, that will benefit our shareholders. You know, there's an interesting piece of research that a professor, Hendrik Bessenbinder did from Arizona State University where he looked at stock performance from nineteen twenty six onwards, and he found that ninety percent of the value created by the stock market since since nineteen twenty six has been created
by just two percent of the stocks. But you never know where that two percent is going to come from. And so having that long tail helps me work with our analysts and identifying potential names that we think can be much bigger over time. And I think it's a big differentiator, you know, versus some of our peers out there.
And one last question for me is I could you mentioned you know, you have this just pool of incredible resources internally in the analyst community. Do you ever look at external research? You know, David and I have an incentive to to provide great ideas ourselves as well. I'm curious if you ever get some great ideas from cell side research, whether it be bottom up or top down, how you might think about integrating other research sources in addition to your very valuable internal partners.
Oh.
Absolutely, I have no bias in terms of where an idea is going to come from. I want to my funnel is as wide as possible, and so if you want to give me an idea, I'm all ears, Tina, you know, whether it comes from the cell side other by side, you know, peers of mine. You know, I read a lot my kids. My kids have been great sources of ideas. You know, I have three teens in the house, so they've been great sources of ideas over
the years. For me. I'm always peppering them questions in terms of what they're doing, where they're going, where they're shopping, et cetera. So absolutely, that's you know, I'm kind of came out of the old Peter Lynch school, where you know, look around you and you never know where an idea comes from. So you know, I do read external research, I do talk to the cell side, and you know, they're an important part of what we do here, and
it's part of the mosaic that we're building. You know, the market is very big, and you need to understand how others are thinking and you know why stock places are moving the way they are, So it's really important to understand, you know, what other views may be as well.
That's great to hear.
Thank you. That definitely brings up another question I had, you know, in terms of what you're doing now, what do you think has changed the most since you started in the industry.
Yeah, it's a great question as well. I think the thing that's changed the most is how quickly information travels, you know, and you know, information gets incorporated into stock prices much quicker today than I think it did twenty five thirty years ago. You know, when I first started in this industry, and you know, we used to get information through fax machines and telephone calls and now everything's online instantaneously.
All the you know, quant firms out there.
Are you know, trading the news before it even comes out there, you know, so that's probably the biggest change in the industry is just how efficient mark you know, relatively efficient.
They're not fully efficient.
And I think that's an advantage that fidelity has is our time horizon. I've really tried to incorporate a longer time horizon into my investment process and philosophy.
And uh, you know.
I was actually looking back at Apple recently. So over the last since two thousand and five, so almost twenty years, Apple has had around twenty instances where the stock has dipped twenty percent in any given year, and so you can have, you know, a great company like Apple even go through, you know, lots of periods of time where the stock is down twenty percent, but over time, you've wanted to own the stock given how well they've done, and so we try to use volatility to our advantage.
But you know, I would.
Say, you know, the biggest change for me is just how much information is available at your fingertips and how quickly it gets incorporated into stock crisis.
No, that definitely makes sense. And I've got just one more reflective question. What advice would you give your younger self if you were able to go back in time, just for in this yeah.
I tell you know, our interns and our young analysts, is just go out there and talk to as many people as you can, network, learn, and find something that you love.
I think that's really important in life.
You know, when you're picking your career, make sure you love it because you're going to be doing it every day for you know, at least eight hours a day, if not more. I tell my kids that is just you know, find something you're passionate about and go go after that and figure out if you can make a career out of it. To me, you know, I've always been passionate about stocks, and you know, fortunately I've been able to make a career out of it. That's kind
of what I tell younger folks. I always say it's better to be lucky than good, and luck has a lot to do with, you know, where we all end up in life.
Well, that's definitely great advice. I think we're running out of time, but this is a great discussion. Gina Sonu, I wanted to thank you both again for joining me today.
Thank you for having us, and thank you so new for your frank response to all of our questions. I think we all learned a lot.
Thank you very much. It's a pleasure to be here.
Well until our next episode. This is David Cohne with inside act