Q: What is the recent history of the fund?

The fund got its start in 1987, and had had six fund managers before I took over in July 2009. I started at Fidelity, however, in 1998, when I joined as a media analyst, eventually covering the technology sector. 

The biggest change I’ve effected is to give the fund more of a growth profile. My intent has been to identify companies that are not only blue chips today but which we believe have the staying power to remain so in the future. 

We have a global research presence that provides us with a breadth and depth that we believe is unparalleled in the industry. This research presence helps generate investment ideas from around the world at a time when a lot of growth is stemming from outside the U.S.

Q: What is your investment philosophy?

I am a firm believer that there is no better indicator of a stock’s strength and quality than earnings. However, because we are particularly growth-minded, I take that one step further and focus on stocks that have the potential to sustain earnings growth in double digits, over long periods of time. An internal Fidelity study revealed that when companies grow earnings above 10% each year, they generate an average of more than 1,300 basis points in annual outperformance. 

At heart I am an analyst, so I work closely with our research team to identify companies in industries with high barriers to entry that can lead to a competitive advantage and pricing power. I focus on the management team of each of these companies to ensure that their incentives are aligned with those of their shareholders. I would say that the majority of my time is spent doing this.

What we primarily look to invest in are companies that the market is mispricing, not only in terms of the absolute rate of growth, but also the sustainability or the durability of that growth. 

As long-term investors, we have an advantage by focusing on long-term time horizons, which allows us to take advantage of the volatility the market may provide on a short-term basis. 

Q: What is your investment process and what companies are considered blue chips?

In terms of how we view what constitutes “blue chip,” we focus on three facets: the business model, the returns a company is achieving, and its growth rate. So, firstly, when we talk about assessing the business model, we are looking to see whether the business can generate high levels of free cash flow over time. Now, it does not necessarily have to be generating free cash flow today as long as we are comfortable predicting that it demonstrates the potential to do so in the future. 

Secondly, we look at returns: returns on capital and returns on equity, where we are scrutinizing both the absolute level and the direction of returns. We focus on whether the returns are increasing or decreasing over time, as an indication as to whether a company is entering new opportunities that are additive to its existing business.

Then, we look at growth rate. We look for companies that can grow faster than the average sustainably over long periods of time. 

Ultimately, we want companies that possess superior business models in healthy industries that maintain strong competitive position, require low levels of capital intensity, and demonstrate strong returns over time. 

Q: How do you categorize growth?

With regard to growth, we think again in terms of threes: secular growers, cyclical growers, and opportunistic growers. Most of the fund’s holdings tend to be in the secular category. Here we look for companies with sustainable tail winds, companies where we feel Wall Street is underestimating the magnitude and/or duration of their growth.

Cyclical growth companies, depending on where we are in any given business cycle, are those where we judge consensus to be either overly optimistic or pessimistic during a specific time frame. We try to identify market opportunities where that consensus is underestimating or overestimating the depth of the cyclical downturn or time to recovery.

In the third category, we define opportunistic growth companies as those that are or may be benefiting from one-time factors; industry consolidation, a turnaround situation, a new product introduction, or a new management team.

Q: What is your research process?

Our process begins with idea generation—I keep the funnel as wide as possible, looking at companies above $1 billion in market cap. To do this, I am interacting daily with our research staff. I travel frequently to visit companies, conduct customer interviews, and attend industry conferences. 

I work with our quantitative team to generate investment screens and ideas that meet certain characteristics. We then evaluate on a stock-by-stock basis to see whether a particular business merits further work and potential investment. 

We conduct total market analysis, comparing market expectations and identifying any gaps. We conduct a three- to five-year outlook and analyze the sustainability of the company’s growth rate. 

I’m flexible on a valuation perspective—I’m sensitive to it, but if I believe the growth prospects of a business are greater than what the market expects, or will last longer than the market expects, I tend to be flexible. I utilize a variety of valuation metrics: price-to-earnings, cash flow, and I look at long-term earnings power. For more cyclical companies, I look at peak or normalized earnings metrics, as well as asset value.

The quantitative work starts from the revenue analysis. I focus on revenue growth a lot. I then take that process through the income statement. I look closely at margin improvement and whether the margins are expanding or deteriorating, on down to earnings growth level. We run screens on specific metrics—growth characteristics—such as certain minimal hurdle rates on revenue, earnings per share and earnings revisions. 

After combining the bottom-up research with qualitative analysis, I seek to identify some top-down themes that might be shaped by long-term secular trends. Then, I look at the risk parameters and evaluate the risk/reward ratio to determine whether or not an investment is merited.

Q: How do you look for opportunities?

We look for opportunities everywhere. Currently, the biggest weighting in the fund is in the technology sector. There are several current trends to keep an eye on; for example, the move toward mobile computing. We also watch the ways in which consumers spend their time consuming media. Where mobile computing is concerned, we have gone through several iterations of Internet penetration, as these trends have created many opportunities not only for device makers, but also for the semiconductor companies that contribute to what goes inside these devices.

As we have evolved to fourth-generation technology, creating faster networks requires increased semiconductor content, which then enables consumers to spend more time consuming media on these devices. 

One of the key mantras I learned as a media analyst was, “Ad dollars follow eyeballs.” We are seeing a huge shift in the industry in terms of where people spend their time. Consumers spend 20% of their time on mobile devices; yet, mobile advertising only garners 4% of total ad dollars. Not only will we see the shift of traditional media to online, but, within online, we anticipate that we will see more ad dollars move toward mobile advertising.

Many technology holdings in the fund are focused on this mobility theme, as well as the anticipated shift in ad dollars. They include Google Inc, which is the top holding, Apple Inc, Facebook Inc, and Amazon.com, Inc , to name a few. 

Google and Apple have been large holdings in the fund for the last six years, ever since I took over.

Once we identify the themes, we look for companies that stand to benefit from the secular trends. Our fundamental analysis of Google, for example, demonstrated to us that they are a leader in online advertising, in terms of market share. We believe they have several opportunities available to them to continue to grow their business over time. 

From a valuation perspective, Google trades at a reasonable market multiple for healthy revenue and earnings growth. We look at its competitive positioning and market opportunities, and what the level of innovation will be and its potential earnings power in the coming three to five years.

We build our positions thoughtfully over time. I don’t tend to swing the fund in one direction or another quickly. We prefer to build small positions, monitor them, watch them carefully, and if we become convinced of their potential, the position sizes grow over time.

I pay close attention to market share as an early indicator of the competitive threats or opportunities that typically show up in the industry. We want to see these indicators before they are reflected in the financials that we see each quarter. 

Q: How is your research team organized and how does decision making work?

One advantage that Fidelity has is our centralized research group that provides proprietary research to all of our portfolio managers. We are organized by sector, following the S&P 500 sectors, and we have experts in each industry looking at core groups of companies. 

As I said, I work closely with them and they make recommendations on particular companies. 

I am the portfolio manager of the fund, so I make the investment decisions, the buy and sell decisions, and each is done on an individual basis—it’s a stock-by-stock decision. Although I make the ultimate decision, it is a collaborative effort with our research team to choose to invest in or divest of a particular company.

One example of our deep research and differentiated views is Tesla, which held its IPO in 2010. We did extensive research work that convinced us that their battery technology along with their approach to their market was potentially disruptive. We determined that the company had the potential to grow to multiples of its size at that point in time. 

This personifies what we do—it’s the heart of what we do on a daily basis. On behalf of our shareholders, we try to identify companies we think will become much larger in the future, not just those that are large today. 

Q: How is the fund diversified and what is your portfolio construction process?

The fund has about $20 billion in assets, spread across roughly 300 positions. The top 20 positions normally constitute about 40% of the funds assets. 

I am benchmark aware, so individual security bets will be within 300 basis points of our benchmark, the Russell 1000 Growth Index. From a sector perspective, we manage sectors to within 500 basis points of that benchmark.

The majority of the fund is populated with secular growth companies, followed then by cyclical growers, and then a far smaller percentage of opportunistic investments. 

In the portfolio construction process, I take advantage of Fidelity’s research department in order to diversify sufficiently for our shareholders. I view diversification by security, position size, and sector positioning, while also factoring in risk characteristics. We have a dashboard that provides us a daily view into risk factors such as earnings volatility, momentum, size, earnings growth, and leverage amongst a host of others as well. 

The top 50 positions make up roughly two-thirds of the fund, with the remaining third being a long tail at the end of very small positions in many promising companies. We feel this approach gives us insight into many companies in order to better target those we feel will become blue chips in the future. 

The research staff does a lot of work following those names in the tail closely on a daily basis. This gives me the flexibility of owning these names without losing focus on what is driving performance at the top end of the fund. 

Q: What drives buy and sell decisions?

I build positions over time and build conviction as the market digests information, either confirming or rejecting our investment thesis. I tend to buy in small increments of one or two basis points at a time.

On the sell side, I try to identify negative fundamentals before they are reflected in a stock price. Market share is a leading indicator, and when we start to see negative earnings revisions, we pay more attention. If valuations are excessive, relative to the anticipated growth rates, we tend to sell such stocks faster, as negative indicators are not usually a one-time event in my experience.

We maintain discipline and patience to deliver strong long-term performance for our shareholders. If we think a hiccup is more short term in nature, we will attempt to take advantage of that volatility.

Q: How do you define and manage risk?

I consider risk management a very important part of the process, and it boils down to diversification. We accomplish this by weighing position size in the fund, sector exposure, and monitoring risk factors. 

I try to understand where potential risks lie in the fund, which factors and characteristics the fund is exposed to. Furthermore, I look at market share and evaluate competitive threats and opportunities before they show up in the financials—any change in market share reveals whether a company is at risk, such as with new competitors, which, particularly in technology, are inevitably on the horizon.

Many people use beta—the measure of stock and market volatility, the exposure to general market movement, to gauge risk. While beta is one way to look at risk, it is not the only way. So, while I look at beta, I also look at such factors as tracking error data, volatility, and exposure to earnings volatility and momentum factors. 

The key is to ensure one understands the risks each investment and each business faces. My goal is to run a well-diversified portfolio to avoid or minimize such risks.