Portfolio Manager Perspectives

Jeff Benjamin

Kyle Weaver of Fidelity pursues deep value in secular themes

High-performing growth fund includes pre-IPO Juul among its top holdings

May 13, 2019 @ 2:29 pm

By Jeff Benjamin

Kyle Weaver doesn't describe his investing style as aggressive, but he does adhere strictly to a three- to seven-year time horizon when picking stocks for the more than $6 billion he manages across three portfolios at Fidelity Investments.

Mr. Weaver, 42, who joined Fidelity in 2008, had no interest in investing in college and majored in public policy at Stanford University. But public policy led him to behavioral finance, and portfolio management was the next logical step.

"It's called behavioral finance now, but they didn't really have a name for it back then," he said. "I did enjoy thinking about systems and incentives, and how things should work versus how they do work."

Our conversation with Mr. Weaver focused primarily on the $730 million Fidelity Advisor Series Growth Opportunities Fund (FAOFX) he has managed since 2015.

Jeff Benjamin: What kind of investor would be interested in this growth fund?

Kyle Weaver: The way I invest this fund is I look for business models that can double or triple in value over a three- to seven-year time period. That's how I look at the fund with my own money. That's what an investor is going to get who chooses to invest in it.

I don't really have a view on what's going to happen over the short term, on a quarter-to-quarter or even year-to-year basis. I'm often unsure which of my holdings will end up being the best performers in any given year.

Success to me is putting together a portfolio of idiosyncratic growth stocks that are not macro-dependent and that have a set of secular business model drivers that can create significant value for shareholders over that three- to seven-year time period.

JB: How would you sum up your investing style and approach to portfolio construction?

KW: I take a deep value approach to growth investing, and what that means is I'm looking for business models that are extremely cheap.

In terms of portfolio construction, my guide rails are I want a position to be large enough to count immediately if I'm right. I also want it to be small enough to take advantage of if I'm early or wrong in the near term. I want positions to be sized so that it's always survivable if I'm completely wrong.

JB: How many securities is this fund likely to hold?

KW: It's ranged between 150 and 230, but about 90% of the fund is in 90 positions. Then there's the tail that is that last 10%. That's where you can have some big variations of how many names are in the fund.

JB: Based on this fund's above-average performance and above-average standard deviation, would it be accurate to call this an aggressive strategy?

KW: I do not think of it as aggressive because I try to be very sober in my judgments about what a company is worth and what a business model is worth, and I fundamentally believe in comparing price to value. To me, it's not particularly aggressive.

JB: According to the most recent public report, the fund has a 5% weighting in Juul Labs, a privately held electronic cigarette company. Does such a large position in a nonpublic company introduce liquidity risk in a mutual fund?

KW: Juul is now under 3% of the fund, and that began as a much, much, much smaller position. The size of the position is the result of appreciation, and there is some liquidity in these privates. As they get bigger, there usually ends up being some liquidity in the secondary markets.

JB: Can you comment on your justification for buying pre-IPO companies in a registered mutual fund?

KW: The pre-IPO companies that I invest in have the exact same characteristics that I'm looking for in the companies in the public markets.

The reason you see some of the pre-IPO companies is that companies tend to stay private longer these days. But in either case, I'm still looking for a path to becoming a very, very cheap stock based on free cash flow and earnings several years out.

JB: What about market capitalization or style drift? Do you feel like you must stay in the large-cap space?

KW: There's plenty of scope for stock picking within that style bucket. I haven't run into any constraints in terms of being able to pick the stocks that I buy.

JB: What makes your investment approach different from other growth funds in Fidelity's lineup?

KW: I can't speak to all the other funds that Fidelity has, but I truly believe in this kind of deep value approach to investing.

Not for Fidelity in particular, but there is kind of a misconception sometimes that growth investors don't care about value. I do want to emphasize that I care very deeply about value. But I view my role as a growth fund manager to pick stocks that are going to be very cheap in the future, versus kind of looking backwards.

JB: Can you share your rationale for being way overweight the communications sector and way underweight industrials?

KW: Communication services has a wide variety of different companies and service models in it that are influenced by different secular themes. For example, Google and Alphabet are communications services stocks, but so is T-Mobile and so is CarGurus and so is Disney.

Each of those is in the fund for a different reason, but I guess the similarity is that I think all of them are going to prove to be very cheap on a three- to seven-year basis.

On industrials, one of the things I try really hard to find is idiosyncratic non-macro-driven growth drivers. I don't have a view on oil. I don't have a view on interest rates. I don't have a view on gas prices. Not all, but many parts of the industrial sector almost require a macro view that I often don't have. So it doesn't always resonate as much with my process.

JB: Where are you seeing investing opportunities?

KW: Rather than focusing on where the market is, I tend to focus on where we are within some of the secular trends, the really long-lasting secular trends that you can hopefully ride for years, if not decades.

As I look down my list of those where there's still good runway left, whether it's the movement of advertising dollars from traditional media to the internet, the disruption of traditional retail models by ecommerce, the disruption of the global tobacco industry by new devices that are cheaper and more powerful than the cigarettes that they're replacing, the unquenchable thirst for wireless or the ongoing improvements in battery technology.

First you need to identify the secular shift and then the hard part is finding which business model stands to benefit from that shift.

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