This manager finds both moats and bargains

“To me, high barriers to entry mean pricing power at every point in the cycle. Even when demand is lousy, these companies can still maintain their prices. And I spend a lot of time making sure that macro exposures are not the primary driver of performance. It’s stock-picking that drives the fund.”

Problems are opportunities

A native of Bethesda, MD and a 22-year industry veteran who joined Fidelity in 1997 after graduating from Harvard University with a BA, Weiss nevertheless acknowledges the current environment is beset by worries such as tense US-China trade relations and the uncertainty surrounding Brexit. “There is always something to worry about. To me, that spells opportunity. The market can react very negatively to headlines and sometimes disproportionately so. One of the ways I am able to find great franchise businesses on the cheap, is to precisely look for market dislocations.”

A case in point was the market turmoil at the end of December 2018. “There were fears of China slowing down, fears over the [policies of the] U.S. Federal Reserve and fears of China-U.S. trade wars and poor liquidity at the end of the year,” recalls Weiss. “The market sold off aggressively. For a guy with turnover in the 20-30% range, I was finding a lot more opportunities.”

In a similar vein, in the days after the Brexit vote in June 2016 many U.K. stocks sold off aggressively. “Three years later we’re still talking about Brexit. But the period of dislocation lasted only for one week. You had to have done your homework ahead of time. You have to be ready to pounce.” Take, for instance, InterContinental Hotel Group PLC, which is based in London, but the bulk of whose operations are in Holiday Inn hotels in the U.S. and to a growing extent in China. The sell-off in the stock presented an opportunity.

Pragmatism paid off

“Lo and behold, within a few months, the stock exceeded its pre-Brexit price,” recalls Weiss. “But if you were familiar with that franchise it was a great opportunity. You had to do your homework ahead of time: select those stocks with multi-year structural growth stories, and high barriers to entry. It was an attractive value [to begin with] and was now even more attractive,” says Weiss, adding that he has about 45-50 names on his research list, although he’s ready to make an acquisition in only about half of them.

From a top-down perspective, Weiss believes that an uncontrolled Chinese economic slowdown might cause deep concern. “It could be the result of an uncontrolled trade war. Ideally, we can hope that trade peace will be achieved. Stability would be okay too. But what is more challenging is an unbridled escalation.” Thus, rather than predict the outcome of these complex issues, Weiss tries to determine their impact on the 80-to-90 companies in the portfolio, and those that he is considering in the future.

Weiss credits his methodology to working as an analyst with three leading portfolio managers and the quantitative analysts at Fidelity. “Will Danoff taught me the power of product cycles. My valuation discipline came from Joel Tillinghast, who has a very clear valuation discipline. And Neil Miller taught me a lot about thematic investing and identifying themes that others are not focused on and thinking broadly about how to play those themes. I learned from a lot of other people, of course, but I attribute to those three individuals the characteristics in a company that I look for.”

His own picks

As a bottom-up manager, Weiss tends to avoid matching benchmarks such as the MSCI Europe Australasia and Far East Growth Index. Indeed, the so-called active share of the fund is around 80%.  The sector weights also differ considerably from the index. As of March 31, industrials were the largest sector, at 22.8%, compared to 18.3% in the index, followed by information technology at 22.2% versus 11.1% and financials 15.1%, versus 8.2%.

Among the top holdings is ASML Holding NV [ASML], a globally-dominant provider semi-conductor equipment that is based in The Netherlands. “There is a big trend going on in this area: extreme ultraviolet lithography [EUV] is critical to lithography and to ensuring that Moore’s Law continues,” says Weiss, referring to the observation put forward by Gordon Moore that transistor density within semiconductors doubles every two years. “This is what enables our devices to become cheaper and more powerful over time. It is part of a big product cycle that can occur over many years. That’s a secular growth tail-wind benefitting ASML.” According to Weiss, ASML has a near-monopoly on EUV and demonstrated very strong pricing power even in tough economic times.

Weiss has followed the company for 20 years and owned it for several periods. The stock is currently trading at 29 times 2019 earnings, according to Bloomberg. Weiss is reluctant to predict the forward direction of the stock.

Another favorite is Azbil Corp. [YMK], a Japanese maker of automation software for buildings. “They have close to 80% market share in Japan and are leveraging those customer contacts to expand into South-east Asia. In addition, general labor shortages in Japan are driving demand for automation, both for buildings and factories. These are nice secular growth drivers for Azbil.”

Weiss argues that Azbil also benefits from strong relationships with Japanese building contractors and a dedicated services network. “That’s something their competitors cannot claim. Azbil has had pricing power at every point in the cycle.”

The stock is trading at 19.6 times 2019 earnings, according to Bloomberg.

From a performance standpoint, the fund has outpaced the benchmark on a one, three and five-year basis. For the 5-year period ended June 24, the fund averaged 8.6%, versus 7.25% for the benchmark.

“Past performance is no guarantee of future returns. But you can count on me sticking to my guns from an investment process standpoint,” says Weiss. “Stock-picking will drive the fund. That will be true irrespective of the market we are in, whether the market is up, or down.”