Fidelity Investments portfolio manager Mark Schmehl is bullish on the markets right now, in part because most investors aren’t.
“I’ve never seen so many people so scared at the same time, especially when the market is going up,” says Mr. Schmehl, who oversees about $10.5-billion in assets. “The fear and negativity are overwhelming.”
Whether it’s worries about trade wars, the inverted yield curve, or low interest rates, Mr. Schmehl says the concerns are largely overblown.
“I think the most important thing right now is to ignore the nonsense. There is always something to worry about. The end of the world [in markets] never shows up when everyone is waiting for it," he says. "[It happens] when everyone is happy and excited. I’ve never been more bullish because everyone is bearish.”
This approach has been working for the growth-oriented investor. The F-series of his $2.4-billion Fidelity Special Situation Fund, which is generally available for fee-based advisers, has returned 27.9 per cent year-to-date as of June 30. The return was 1.1 per cent year-over-year as of June 30, dragged down by the market correction in the last half of 2018. Longer term, the fund has a compound annual growth rate of 14.4 per cent over the past three years and 12.7 per cent over the past five years. These returns are after the management expense ratio of 1.1 per cent. The fund’s holdings included stocks such as Etsy Inc., Shopify Inc., Canada Goose Holdings Inc. and Suncor Energy Inc. as of the end of March, the most recent information available.
The Globe and Mail recently spoke with Mr. Schmehl about what he’s been buying and selling.
Describe your investing style.
I like really bad companies that are getting better – those are great stocks. I also like really good companies that continue to be great or are changing something in their industry. Those are the stocks I gravitate toward. If it’s not getting better, it’s usually a boring company that doesn’t change much over time, or it’s getting worse and it’s not a stock you want to own. I tend to invest in the tails of the market. About 80 per cent of stocks are in the middle and don’t change that much over time – they can be good or bad, I don’t pay attention to them much because nothing is changing. I like watching fundamental improvements in a company more so than valuations or some other random metric.
What’s your take on the markets right now?
When you look under the hood, there is no question the world economy is slowing. The question is: Does it continue to slow down and we get a recession or is the slowdown baked in and, as central banks start easing, we continue to bump along at the lower growth rate? The latter seems more likely.
In the fourth quarter, we were pretty much priced at a recession. My fund from June to Christmas Eve was down about 36 per cent and now we’ve come back up. I think the markets have figured out the economy isn’t going to go into a recession. It’s just going to slow down and we’ll be back to where we were two years ago, which is slow and boring growth, which is good for growth stocks because growth is scarce.
What’s your view on when the next correction or recession will happen?
We don’t know when the cycle ends. The stock market and economy will blow up when the U.S. Federal Reserve tightens too much. I think the Fed got really close in December [with the quarter-point increase]. They may have just dodged a bullet by a whisker. If they cut rates in July, I think we may be okay. If they don’t, I think we could have trouble. I think that’s what the market is suffering from right now – investors aren’t sure what [U.S. Fed Chairman] Jerome Powell will do.
What have you been buying lately?
[Without naming specific stocks] I have been active in a lot of the recent initial public offerings. I think new companies lead the market. While a lot of these new companies are expensive – which people are happy to tell me – they’re in sectors that are growing and changing. A lot of what I own is digital-transformation stocks. I’ve also been adding to my enterprise software bets, which I think will grow for the next five-to-10 years, and to health care, specifically biotech. Gold is also interesting right now. It’s another sector that hasn’t been very well liked. I don’t have any gold holdings now, but I am watching it.
What have you been selling?
We’ve been continuously selling financials and industrials for months. Cyclical stocks aren’t for me. There’s no growth in a low-growth environment. I am finding better ideas elsewhere. Also, I don’t like energy. There’s too much oil, way too much natural gas. We continue the secular shift away from fossil fuels. I have one energy position, Suncor, which is a company doing better than people think in a sector that’s really hated. On an absolute basis [Suncor] will be fine, because it’s cheap. I look at energy every day because I love sectors where things are awful, but I don’t see it changing any time soon.
What’s the one stock you wish you bought?
A stock I wished I bought a lot sooner is ServiceNow Inc. [a California-based cloud computing services company]. I watched it steadily go up for six years. I could never wrap my head around what they did. I never did the work to figure it out. I should have been all over it. I capitulated last year and bought the stock. [The stock has increased by about 60 per cent over the past 12 months and by more than 400 per cent over the past five years]. It has been a great stock for me, but it would have been a better stock if I owned it years ago.
This interview has been edited and condensed.