John Roth, manager of Fidelity Investment's New Millennium Fund, opens up to MME about the tensions between active and passive management, hard lessons learned during the financial crisis of 2008, and the biggest challenges he sees ahead.
What is unique about the New Millennium Fund compared to other mutual funds on the market?
This mutual fund has achieved significantly better performance than the S&P 500 over time. The fund is 21 years old and was founded by Neal Miller before the new millennium. He was looking for longer-term trends and thinking about the future. The fund is aimed at people who want opportunistic equity exposure and likely is not a core holding. It's based more on an investor's risk level than their age.
While the weighted average market capitalization of New Millennium is large-cap, it is a multi-cap fund with a flexible mandate that gives me the opportunity to invest across the entire U.S. market spectrum based on where I see the best opportunities. It's intended to be an opportunistic fund focusing on capital appreciation as opposed to dividend growth.
During your tenure, the fund has beaten the index 98% of the time on a rolling three-year basis, according to Morningstar Inc. How have you done this?
I'm looking for investments where we've done fundamental research. We've done well in emerging growth companies. One such factor that contributed to the funds' performance is Green Mountain Coffee. It's a company that had a new product innovation that really took hold.
It's also essential to understand cyclical and market factors. For example, AIG was not part of the fund before the crisis but owned it afterward, when things were getting better. It's this investment philosophy that gets us these opportunities.
In other words, I focus on areas where I have a differentiated view from the consensus and categorize the opportunities for future earning power into three main buckets:
- Emerging growth companies
- Understanding cycles
- Looking for opportunities where the intrinsic value of companies is not recognized by the market.
How do you view the tension between active and passive management?
As an active manager I need to earn my keep through performance. I expect investors to look at a manager's track record to make an informed decision. One of the difficulties of the market today is that there is an increasing focus on short-term performance, which is hard to get right consistently. I can take a longer view at the fund and often look at aspects where the market is panicking to uncover opportunities.
How do fees compare to funds in the same category?
The expense ratio of the fund is 0.96% compared to 1.37% for the Capital Appreciation funds tracked by Lipper.
This means I need to generate returns in excess of that to make it worthwhile for investors. For the past 10 years, we've been 30% ahead of the market. If a fund manager can do that, it makes sense.
A lot of people in this business think they can outperform, but the beauty is that it's very quantifiable. One of the things I look at when I evaluate myself is information ratio or how much excess return did I generate per unit of risk, and is that a worthwhile tradeoff? I want to generate returns ahead of the benchmark and make it as consistent as possible. Generating longer-term returns is the difficult part.
What is the total size of the fund?
The fund has $2.4 billion in assets as of the end of July.
During this rebounding market that we're now in, is there anything you pay more attention to or do differently as a result of hard lessons learned from the financial crisis in 2008? If so, what are they?
In general I look for excess. Markets tend to be cyclical. Liquidity was the key driver during the financial crisis and there's still a lot of liquidity out there.
One thing I am aware of is where we are with economic cycles. We're still recovering from the 2008 shock. As a fund manager, I'm sensitive about where things are overdone. I think there is still opportunity in technology as a sector. There's a lot of innovation happening across the economy, which is creating investment opportunity. If you look at valuation of the market over the past 13 years, the market hasn't really gone anywhere. From my view, there are a lot of opportunities to find longer-term growth in technology and healthcare, and there's cyclical recovery in housing and financials.
What is your outlook for this fund?
I am optimistic there are investment opportunities; there are always first class emerging companies and the fund with its flexible mandate can invest across the value to growth paradigm and the entire market cap spectrum looking for those companies where their future earnings are not appropriately reflected in their current share prices.
Long-term drivers of growth are innovation and that's alive in the U.S. In technology, if you look at the fund's holdings, there's a lot of innovation in software.
What are the areas-with regard to regions and asset classes-where you see the greatest opportunity for high performance?
Longer term, the healthcare sector continues to look interesting especially on the IT and equipment side. In terms of cyclical plays: financials are still recovering as well as housing.
What are the biggest challenges you foresee?
The world is more connected now than it was 10 years ago and macro-driven with its economic and geopolitical challenges. Europe, China and the Middle East are areas where this is most apparent.
I think the 2008 crisis taught us that the developed world has gotten more interconnected in the last 15 years. You need to be aware of what's happening globally. Most of the changes are macro-related. They could be challenges that the economy needs to overcome, but the U.S. in general looks good. The success of the fund comes mostly from stock picking. There's always something out there, I just need to find it. This is a game of averages. The biggest risk for me is a macro related slowdown.