John Roth does not believe that the U.S. stock market is overpriced, although he concedes that small- and mid-caps and growth-oriented names have higher valuations and are more vulnerable. Yet that's where he is aiming some of his firepower.
"In the last two years, there has not been a lot of easy or organic growth. A lot of the earnings growth has been derived from cost-cutting and efficiency gains," says Roth, a portfolio manager at Boston-based Fidelity Investments who oversees the $726-million Fidelity U.S. All Cap. "Those companies that have been able to grow organically have commanded larger and larger valuations. That's apparent as you go down the capitalization scale."
Roth's objective is to beat the benchmark S&P 500 Index, which is dominated by "mega" caps. He is less keen on that segment, which accounts for about 41.1% of the portfolio. The fund also holds 19.3% in large-caps, 22.8% in mid-caps, 7.4% in small-caps and about 8% cash. "I'm cautious so the cash level is a little high," says Roth. "But I'm more aggressive because I'm focusing on mid- and small-caps."
A bottom-up stock-picker, Roth divides the portfolio into three buckets: emerging, fast-growing names such as Tesla Motors Inc., TSLA; value-oriented names such as Chevron Corp. CVX; and so-called "special situations" such as American International Group Inc. AIG. Single holdings in the fund, which has about 155 names, are limited to about 4%. Due to high inflows, the fund had an 88% turnover rate in the 12 months ended June 30.
Referring to AIG, Roth says the firm is undergoing positive changes. "That is creating the opportunity for revaluation," he says. "It used to be the poster boy for what you didn't want to be in the financial crisis. It had a lot of peripheral businesses with a lot of risk. Today, AIG is a life-insurance company, specializing in property and casualty. And it is very focused under a new leadership team."
Roth notes that AIG is growing at single-digit levels and trading at about 11 times forward earnings, but he believes AIG's earnings will grow faster than expectations.
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A Boston native, Roth is a 22-year veteran who has spent most of his career with Fidelity. After completing a BA in economics at Maine's Colby College in 1992, he worked for five years as a trader at a small Boston investment house called Tucker Anthony. "I quickly realized that I wanted to be an investor rather than a trader and got my chartered financial analyst designation at night," recalls Roth, who later entered the MBA program at MIT's Sloan School of Management, where he graduated in 1999.
Roth landed a summer internship with Fidelity which quickly turned into a full-time job in 1999. He began as an equity analyst covering electric and gas utilities.
Between 1999 and 2002, Roth managed the Select Utilities Portfolio for U.S. investors, followed by the Select Chemicals Portfolio which he managed from 2002 to 2004. From 2004 to 2006, he served as consumer-sector leader and oversaw Fidelity Advisor Consumer Discretionary.
In 2006, Roth assumed responsibility for Fidelity New Millennium, which has grown to about US$4.3 billion in assets. It shares many holdings with Fidelity U.S. All Cap, its Canadian counterpart which was launched in January 2013. Roth also oversees the US$9-billion Fidelity Mid-Cap Stock and co-manages the US$26- billion Fidelity Advisor New Insights, an all-cap product. "To have a little extra focus on mid-caps helps the performance of the all-cap funds. And you want to focus on small-caps, because they are the ones that grow into mid-caps and maybe large-caps," says Roth.
Indeed, Tesla is one example of a small, fast-growing company that is now worth about US$30 billion. And even though the stock has a sky-high multiple, Roth argues that he's taking a long-term view of the automaker's growth. "We're looking at where Tesla could be in five years, or even 10 years, and what the business model will look like. We use a discounted-cash-flow framework to get a sense of its value. I still think there is upside."
Fidelity U.S. All Cap returned 19.4% for the 12 months ended Oct. 31, versus 21.2% for the median fund in the U.S. Equity category. Roth attributes the underperformance to the cash position and a sell-off in small- and mid-caps in the third quarter.
Yet Roth is staying the course. "From a process perspective, I'm comfortable with the long-term bet on mid and small names. It has been, and will continue to be, a big source of alpha to shareholders," he says. "You can get these patches when the market violently revalues stocks. But that's not a reason to change strategy. I want to be opportunistic. We'll put that money to work one way or another, and hopefully do it in a very efficient way."
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