Five minutes with Kate Howitt
Kate Howitt, portfolio manager of the Fidelity Australian Opportunities Fund, was recently awarded the Lonsec Rising Star Winner award for 2016. After being in the industry for some 14 years, Kate not only sees the irony in this, but is also immensely satisfied as being recognised as someone who can be expected to add value to client portfolios. We talk to Kate to find what makes her tick.
1. What made you want to be a portfolio manager?
The thread of my career has been an enduring fascination with “what makes a great company?” Whether it was working in a start up in the US, working for one of the world’s largest companies, Intel Corporation, doing PhD level coursework in Industrial Organisation at one of the world’s top business schools the Booth School of Business at the University of Chicago or being a consultant with the Boston Consulting Group, my driving motivation has been understanding what separates great companies from mediocre ones. If you love watching how economics, industry structure, management, innovation – and sometimes blind luck – all interact to drive company outcomes, funds management is the ultimately box seat!
2. What attracted you initially to Fidelity?
Fidelity’s longevity in the industry, almost 60 years when I joined, showed that there was something good going on there. But all the Fidelity people I knew were truly quirky, not just cookie-cutter suits! That combination of history and diversity was intriguing. I wanted to understand how this firm could be so successful for so long, and yet manage to be a place where different personalities and viewpoints could thrive. I came to see that a deep respect for individual investment insights and capabilities, within the context of industrial-grade infrastructure and oversight, has been one of the main drivers of Fidelity’s ability to deliver alpha to clients for decaedes and decades.
3. Why did you create the Fidelity Australian Opportunities Fund?
We have a strong analyst team, applying themselves to understanding company fundamentals. The aim of the Fidelity Australian Opportunities Fund is to take those insights and combine them with sensible portfolio construction to deliver strong risk-adjusted returns to clients. As much as possible I bias the risk in the portfolio towards stock-specific issues where our process can generate insights, rather than macro issues which can be very, very hard to predict month to month.
4. What are the most important things investors should know about the Fund?
It is as much built on my ignorance as my insights! By that I mean that we believe we can generate insights on specific stocks, such as how individual value creation paths will change in future years, but we don’t believe we can add much value on macroeconomic factors. In light of that, I aim to position the fund to exploit individual stock differences, and as much as possible to be agnostic on the larger questions that periodically whipsaw the market. There will be times when macro shifts move things around, but through time company fundamentals reassert themselves and drive outcomes.
5. What advice would you give a new investor?
As Buffet says, investing is simple but not easy! We have a dedicated, talented team of nine analysts locally and 185 around the world working to uncover the drivers of stock valuations. We have time and resources at our disposal – but even for us investing well remains a challenging task. Keep it simple: get good financial advice, diversify your holdings and entrust your funds to managers with appropriate fees and a track record of delivery.
6. Now must be an interesting time to be an active manager?
We are in very strange times! At the macroeconomic level we have monetary authorities openly intervening in markets to make low risk investment unattractive, to herd investors into higher-risk asset classes. At the structural level, we have passive investing creating a momentum factor that is swamping other factors. And at the “plumbing” level we have new regulatory standards resulting in fewer and less-liquid market makers in most asset classes. This is a potent recipe for volatility! With all these distortions, your best anchor remains attractive, well-run companies generating free cash flow at a rate which beats inflation.
7. How would you describe your style?
Investment “style” usually means focusing your efforts on exploiting one of the market’s many inefficiencies. Having a high style bias can be a terrific approach in a broad asset class such as global equities. In a narrow market such as Australian Equities, high style bias can result in sector bias and factor bias, both of which can create volatility of returns. Given the consolidated nature of this market, I aim to exploit a range of market inefficiencies, depending on which opportunities the market provides at any given time. Through time, the fund has empirically shown a moderate growth bias, but this is an aggregate outcome that contains within it a range of different investment opportunities: unloved cheap stocks, underappreciated growth stocks, stable income stocks...
8. Next year you’ll have been managing the Fund for 5 years – what have you learnt over this time?
What makes this job interesting is how much the world changes. We’ve seen companies buy offshore assets then write them down and dispose of them. We’ve seen management teams come and go. We’ve seen commodity prices rise and fall and rise again. Market darlings become reviled and market dogs have their day. Valuations go up, valuations come down. Capitalism is creative destruction – not inertia. So change is the only constant!
9. What’s the most important thing you look at when evaluating a stock?
At the most fundamental level I need to understand the returns profile of the company, ie what it is returning relative to its cost of capital, and how that interacts with its growth plans. So company-level economics, and how management is likely to direct and impact those in future. At that point I have a grounding to look at value versus price.
10. Were you surprised to be awarded Lonsec’s rising star of the year? What does it mean to you?
Well aside from all those comments about how old I am to be a rising star... yeah thanks for that... it’s a tremendous accolade and a real vote of confidence. I have worked in this industry for 14 years and it’s immensely satisfying to be recognised as someone who can be expected to add value to client portfolios. That’s the point of what we do: to help people make the most of their retirement savings. It’s great to be a part of that.
11. Can you tell us about a stock that really encapsulates your investment philosophy and process?
Quantm IP is a new stock to the market but it is over 100 years old. Created from the amalgamation of Davies Collison Cave and FPA Patent Attorneys, QIP is now the number 2 Intellectual Property patent attorney firm in Australia, with a 14% market share. It has the leading position in Australian-generated patents and its management team is highly respected in the industry. As a fast-billing services business QIP has low capital intensity and so return of funds employed is around 30% and should climb to 40% over the next few years. Free cash flow exceeds earnings and delivers a 5% full franked dividend yield. The business will grow through time by expanding incrementally into Asia. QIP has low sensitivity to the business cycle or to macro events, yet is priced on a very moderate PE. In a market of mature large caps, fully-value defensives and volatile cyclicals, QIP is a well-run, well-managed and attractively valued cash generator.
Kate Howitt is the portfolio manager for the Fidelity Australian Opportunities Fund. The fund provides investors with the potential for long-term capital growth and diversification benefits by investing in between 40 to 70 Australian listed companies. Since inception it has delivered strong risk-adjusted returns of 13.16% p.a. to investors outperforming its benchmark by 2.96% p.a. net of fees^.
^Performance as at 31 October 2016. Past performance is not a reliable indicator of future performance. Returns of the Fund can be volatile and in some periods may be negative. The return of capital is not guaranteed. The returns shown have been calculated using the net asset value of the Fund from one period to the next. The returns include any re-invested distributions and are after fees and expenses. No allowance has been made for taxation or for any fees charged by operators of master trusts or wrap accounts through which the products are offered. For periods greater than one year returns have been annualised. Growth return is the unit price movement on exit to exit basis. Income is expressed as Total Return less growth component. The Fund’s benchmark is the S&P/ASX 200 Accumulation Index. Inception date: 31 July 2012
*You should refer to respective research houses (and their disclaimers below) to obtain further information about the meaning of the rating and the rating scale. Ratings are only one factor to be taken into account when deciding whether to invest. Ratings are subject to change without notice and may not be regularly updated. Fidelity pays a fee to some research houses for rating our funds.
The Lonsec Ratings assigned as follows: Fidelity Australian Opportunities Fund, — October 2016; Fidelity Australian Equities Fund — October 2016 and Fidelity Future Leaders Fund — January 2016 ) presented in this document are published by Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421445. The Ratings are limited to “General Advice” (as defined in the Corporations Act 2001 (Cth)) and based solely on consideration of the investment merits of the financial products. Past performance information is for illustrative purposes only and is not indicative of future performance. They are not a recommendation to purchase, sell or hold [Fund Manager name] products, and you should seek independent financial advice before investing in these products. The Ratings are subject to change without notice and Lonsec assumes no obligation to update the relevant documents following publication. Lonsec receives a fee from the Fund Manager for researching the products using comprehensive and objective criteria. For further information regarding Lonsec’s Ratings methodology, please refer to our website at: http://www.beyond.lonsec.com.au/intelligence/lonsec-ratings
Reference to specific securities should not be taken as recommendations.
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