Seeking stability in uncertain waters

Fidelity's Sammy Simnegar believes stocks offering growth potential and resilience can serve as an effective portfolio anchor when the investing seas turn choppy.

• Fidelity Portfolio Manager Sammy Simnegar is a growth investor, but he acknowledges that recent market volatility has renewed his appreciation for stocks with defensive qualities, which may help provide ballast, or investment stability, within the portfolio as he looks to navigate economic turbulence, geopolitical tension and uncertainty.
• "As part of my investment strategy, I believe it's good for the fund to hold some businesses with defensive qualities to balance the risk associated with growth-oriented holdings, which can be more susceptible in times of economic turbulence," says Simnegar, who manages Fidelity Advisor^® International Capital Appreciation Fund.
• The challenge, in his view, is to invest in businesses that have those qualities, but without disadvantages such as an unappealing valuation, fierce competition and high sensitivity to interest rates.
• In managing the diversified international equity strategy since 2008, Simnegar favors high-quality growth stocks benefiting from long-term "mega trends," as well as what he calls the three "B's" — brands, barriers to entry and a "best in class" management team.
• He says that the fund has generally avoided utilities, real estate and consumer staples stocks, noting that these income-oriented defensive segments are vulnerable to higher interest rates.
• "With the global economy in early cycle and rates remaining elevated, I believe these sectors face headwinds that will make it hard to achieve earnings growth," Simnegar contends.
• Accordingly, he has sought portfolio ballast in other areas of the equity market. For example, within the commercial & professional services segment of the industrials sector, he points to stakes in U.K.-based RELX and Dutch firm Wolters Kluwer. Both have generated strong profit margins in providing information and analytics across diverse end markets, according to Simnegar.
• Perhaps more important, he points out, each possesses a powerful combination of value-added services and a durable competitive moat, making them largely indispensable to their customers.
• In the financials sector, Simnegar values the relative stability of businesses with recurring revenue, leading him to positions in U.S.-based insurance brokers Marsh & McLennan and Arthur J. Gallagher, each with extensive global reach.
• "The great thing about both businesses, as I see it, is that they receive a percentage of each premium paid, providing a measure of stability and predictability in their financial performance," Simnegar highlights.
• He concludes that while none of these stocks would be considered a bargain based on their valuation as of early spring, he believes they are reasonably priced given the growth potential they offer.

Securities mentioned were fund holdings as of March 31.