Joanna Faith talks to Aruna Karunathilake about the process behind the recently renamed Fidelity UK Select fund.
Can you describe your investment process?
We have a fairly disciplined strategy whereby we look at a stock and give it a score according to five different factors. These are: valuation; fundamentals; whether the company has a strong market position or there are barriers to entry; sentiment, if it is sell-rated by brokers it gets a high score; and change – if there is going to be new management or it is a takeover candidate.
This helps me to take some of the emotion out of investing and stops me falling in love with or disliking a stock. Humans were not designed to be investors because we tend to get emotional about things we like or don’t like.
I set target prices for each stock I own and when they reach that set price, that is one catalyst to re-evaluate the portfolio. I also personally re-evaluate every six months but the analysts keep an eye on things in the meantime.
Fidelity's Aruna Karunathilake on his fund's rebrand
I do not have a strong style bias. I am just looking for the most attractive stocks. I keep the number of names reasonably low at between 35 and 55 positions and I try to be at the lower end of this scale. This forces me to make choices between stocks and makes sure I have meaningful sized positions in companies I own.
What has driven performance over the past five years?
Performance has been driven by a couple of stocks. One is the Danish pharmaceutical company Novo Nordisk. We are allowed to hold 20% of the fund’s assets outside of the UK. The company makes diabetic medicines so has benefited from the obesity trend.
Another is British American Tobacco (BAT), which has been a very strong contributor over the five year time period.
Avoiding financial services stocks has also helped, especially in the earlier part of the five year period. This is an area where we are still underweight.
What financial stocks do you own?
My general outlook is the Western world is still struggling with excessive debt and the outlook for banks and financials remains challenged. I own HSBC and Standard Chartered because a lot of what they do provides debt into the emerging markets which in aggregate are carrying a lot less debt than the Western world.
This article continues…
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