6 investing lessons from fidelity’s kate howitt

For Fidelity International’s Kate Howitt, the road to becoming a fund manager wasn’t straight forward.

After completing her Bachelor of Arts from St John’s College and Master of Business Administration at the University of Chicago, Howitt pursued a career in management consulting where she became fascinated with understanding the building blocks of highly successful businesses.

She eventually became an investment analyst as it provided a different way to explore her passion and in 2012 started the Fidelity Australian Opportunities Fund, which has nearly $170 million in funds under management (FUM) as at July 2018.

“What makes a great company versus a not so great company, and what’s the right price to pay? That’s what I love to understand – I get to come to work and explore that question every day,” she says.

With over 15 years’ investing experience under her belt, she shares her top 6 lessons with investors looking to build wealth in the stock market.

Lesson 1: Avoid style bias

As a standard point, investors shouldn’t restrict themselves to certain types of stocks or investing strategies. After all, the Australian share market makes up approximately 2% of the global index, according to MSCI data.

“You’re better off not to have too much of a style bias. If you lock into ‘I’ll only buy growth companies or I’ll only buy value companies or equity income’, you’ll find that you narrow down into a very small number of companies,” she says.

“You’ll also lock yourself into outperforming in some market conditions and underperforming in some market conditions.”

As reflected in the Fidelity Australian Opportunities Fund (mFund code ‘FIL21:ASX’) top holdings below, she employs an “all-weather” approach which involves scanning for mispriced stocks regardless of whether they’re growth, value, large or small. She says this approach provides resilience to the fund when the market is favouring one investment style over the other.

Fidelity Australian Opportunities Fund – top 10 holdings

Source: nabtrade (as at 31 July 2018. Past performance isn’t a reliable indicator of future returns).

Lesson 2: Understand a company’s ability to reinvest

When it comes to evaluating companies, Howitt stresses the need for investors to gauge a business’s ability to reinvest capital.

“That will tell you what the economic value growth potential of the business will be and therefore how should you think about valuation,” she explains.

“Companies that are creating a lot of economic value in a short space of time are going to trade on richer premiums. Companies where the value is going to be pretty flat, they can be worth owning if you can buy them well below what they’re worth.”

Lesson 3: Diversify your portfolio

Every investor has their own approach to diversification.

Howitt says while she mixes different types of stocks across various sectors in her fund, it’s important that investments are first and foremost made on a solid thesis.

“We wouldn’t terribly go over or underweight at a sector level because there’s generally something good on offer in each of those if you can judge them on their merits,” she says.

Fidelity Australian Opportunities Fund – sector allocation

Source: nabtrade (as at 31 July 2018. Past performance isn’t a reliable indicator of future returns).

Lesson 4: Have extra patience with small companies

When it comes to small caps, Howitt emphasises that investors need to do their homework carefully before investing in this part of the market and also have the thick skin to weather surprises that can be thrown their way.

“For smaller companies where you have stars in your eyes because you can see the potential of what they might become, it always takes longer than what you think or management thinks and there’s always going to be an extra capital raising or two,” she says.

“We do own some of those stocks – but it’s where we’ve got the conviction that the upside is enough to wear the extreme dilution you’ve got along the way.”

Lesson 5: Management can lie

Another big lesson Howitt has learned is that management teams may not necessarily be telling the truth to shareholders. It’s important for investors to be aware of issues such as companies providing wildly optimistic earnings forecasts and projects failing to meet stated deadlines.

“Our process involves a lot of interaction with companies and it’s very disheartening that a management team you’ve been talking with over the years has actually been lying to you,” she says.

She suggests diversification is the best defence against poor management.

Lesson 6: Learn to be greedy when others are fearful

Billionaire investor and the Chief Executive Officer of Berkshire Hathaway, Warren Buffett, once said that investors should be “fearful when others are greedy and greedy when others are fearful.”

It’s an adage that Howitt wholeheartedly agrees with and encourages investors to learn and put into practice.

“No-one’s born feeling great jumping out of a plane – you’ve got to train yourself to do that. And the same way to be a great investor - you’ve got to train yourself to be a contrarian and do the opposite of what most of the market is doing,” she says.

“Not always - sometimes the market is right but where your analysis and numbers prove up a great opportunity you’ve got to be prepared to have that conviction and back yourself even though a lot of people would say you’re crazy.”