Stock picker Joel Tillinghast will not invest in countries unless he can be certain that there is rule of law.ANTHONY MACCARI PHOTO
Joel Tillinghast, one of Fidelity's star stock pickers for more than 30 years, frequently travels abroad searching for the next hidden gem in small-cap companies. Next month he will be heading to Japan, a market where he continues to find value, while steering clear of today's investor frenzy around marijuana stocks and bitcoin.
Most well-known for managing the Fidelity Low-Priced Stock Fund for U.S investors, Mr. Tillinghast began managing funds in Canada in 2002 with the Fidelity Northstar fund and later the Fidelity Global Intrinsic Value Class in 2015.
Since inception, the value-class fund has seen a 14-per-cent annualized return and has more than $1.7-billion in assets under management, as of Dec. 31.
During a rare visit recently to Toronto, where he addressed more than 1,700 financial advisers at Roy Thomson Hall, Mr. Tillinghast sat down ahead of the event with The Globe and Mail to discuss the companies in which he continues to see value, common investor mistakes and missed opportunities.
How would you describe your investing style?
Intrinsic value is an approach that makes a lot of sense to me and I often wonder why everyone doesn't do it? But they don't.
There are steps you have to take to do it right. Think rationally; be a long-term investor and not be a gambler. You have to know what you own; to do that you have to understand there are limits to areas that you are good at and try to focus on them. Invest with honest and capable stewards. Intrinsic value is the present value of all the cash flows to the shareholder from here to eternity. Sounds like a ridiculous formulation if you are not thinking about, 'Will a business be around in five or 10 years.' What you want is resilient businesses – stay away from companies that are too faddish or too competitive. And lastly, never never pay full price.
Where are you finding value in today's market?
I find better value in most countries outside of the United States, especially in emerging markets. Although the ones I like best are on the edge between emerging markets and developed countries in terms of classification. Countries such as Taiwan and South Korea can be very prosperous. The knowledge-based industries have a lot of high-tech stuff in Taiwan, such as technology and health-care companies. South Korea has a much broader market so I look at everything from food companies to electronic companies to software and apparel companies.
[Phison Electronics Corp., a maker of flash drives, and St. Shine Optical Co. Ltd., a contact lenses company, are two companies of interest to Mr. Tillinghast in Taiwan. In South Korea, holdings include auto-parts marker Hyundai Mobis and DB Insurance Co. Ltd.]
Are there other regions that have caught your eye?
In general, I am pretty bullish on Asia. Looking at India, I did find good value a few years ago and a lot of positive things are happening there so I continue to look there. [Current holdings in this region include Zensar Technologies, an IT consultant.] India is a big outsourcing hub. Modi has tried to reform a very complicated tax structure in India. In general, I prefer countries that are democratic and rule of law and India has that tradition but it also has a huge tradition of bureaucracy and maybe corruption, but I am hoping that Modi will reform some of that.
Rule of law matters a lot to me … the best bargains in emerging markets are places where rule of law is [missing] – like Russia. If I knew that [Vladimir] Putin was going to treat me well then I would probably be all over some of the stocks there, but I don't know that. The Yukos expropriation has kept me away from that.
Japan has rule of law and I continue to focus on the Japanese market. I have had great luck with Japanese retailers – specifically Japanese drug stores. They have an aging population so there is a demographic tailwind. The drugstore market is much less consolidated in Japan than in North America.
[Japanese drugstores such as Cosmos Pharmaceutical Corp, AIN Pharmacy and Kusuri No Aoki Co. Ltd. are held by Mr. Tillinghast as well as smaller supermarket chain Aoki Super Co. and do-it-yourself supplier Arcland Sakamoto Co. Ltd.]
In your book Big Money Thinks Small, you discuss how to become a smarter investor. What common mistakes do investors often fall prey to?
There is always going to be a lot of news out there, but should you redo your investment portfolio because [for example] the American government shut down? If you find you often change your mind then you are not investing. You should change your mind when something important happens. If you discover the product is going to be obsolete or that management is not trustworthy, then of course you should sell.
You are known for having a very low turnover rate. When do you sell?
My turnover rate is in the lower percentage bracket – in the teens – which implies an eight-year holding period. In addition to things like discovering the product is going to be obsolete or that management is not trustworthy – clearly if something is overvalued and you couldn't begin to justify how you could make a fair return, that is a good reason to sell.
There is a lot of buzz around artificial intelligence (AI) active managers and roboadvisers. What are your thoughts on these new technologies and how we are now seeing actively managed funds run by AI managers?
For smaller clients a robo-adviser may be a good thing. It can provide good asset allocation and portfolio structuring advice in certain segments of the market, such as millennials, where they are use to dealing with computers. The cost of robo-advisers are so much less that it is similar to the discount brokerage business. If you give it 20 years, in a certain segment of the market, it will be universal and everyone will do it.
When it comes to an AI driven portfolio manager... well I work with Salim Hart on the Global Intrinsic Value fund. One of his suggestions is that human plus machine will beat human or machine all the time. I like that because it justifies keeping me around even with AI. But seriously, I truly do think he is right. Man plus machine beats both of them and we should be using AI as a tool that can help us in our investing. Renaissance technology has focused on the short, rapid trading part of the market, which accounts for 12 per cent of trading on the NYSE. Churn and burn. No human could do that. But I don't think most of the algorithms have focused on longer term investment because they are focused on short-term patterns. There are technologies that focus more on the guided form of AI, where they try to replicate human thinking and that is an area I would be more likely to use.
Looking back over your 30 years, are there any companies that stand out as missed opportunities?
Regrets that stand out would be that I held Netflix briefly and sold it. It wasn't profitable at the time and I didn't realize it would be as big as it would be. I held Constellation Brands Inc. They sold wine coolers and later bought Svedka vodka. Then they bought the distribution rights to Corona and I sold the stock thinking it was ahead of itself after holding it for many many years. It continued to go extraordinarily well. More recently, they ventured into the Canadian marijuana industry.
Is there any value to be found in the marijuana sector?
The nearest I have gotten to that is the Potash Corp. of Saskatchewan with the ticker POT.
Have you been following the investor interest in bitcoin?
As an old guy – bitcoin makes gold look more sensible to me. I've never been a gold bug but it almost makes sense to me if you are going to look at bitcoin. Bitcoin is for people under 30 and gold is for people who are older. Gold has been around for years and it has been a store of value. You can pay too much for that too, but it makes more sense to me than bitcoin.
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This interview has been edited and condensed.
Clare O’Hara