‘No excuses’. This was how Fidelity International’s Angel Agudo opened a conference call to investors in early 2017.
The formerly Citywire AA-rated manager told his audience he had not wavered from the process he installed when he took on the $7 billion Fidelity Funds – America fund from Adrian Brass in June 2014, but he was quick to hold his hands up when it came to the strategy’s recent spell of underperformance.
Focusing on out-of-favour stocks with strong recovery potential, a method he has used on the UK-domiciled American Special Situations fund since 2012, Agudo found himself at odds with a US equity market strongly in favour of growth in 2016.
‘I look for cyclically depressed businesses that have potential to restructure. I buy into companies that I think can improve, rather than the best ones in a sector’ he said back in May. ‘The environment went against value. It is simplistic to look at markets in this way but value really did badly.’
Agudo started last year with an ‘abruptly changing’ field of opportunity and, despite having a low turnover within his highly concentrated approach, he made changes.
For example, he began to focus less on purely US companies in favour of a more global brief, and also reappraised his deeper value positions at a time when cyclicals were under increased pressure.
‘The end of 2015/16 was the first time a lot of super-cyclicals came down in value, due to concerns about China’s economy, and our process worked very well but implementation was poorer.
‘I added two agricultural stocks when it came to commodities but I didn’t add copper, which gave me more downside. Whenever I can I try to protect the downside and I decided not to pull the trigger which was a mistake.’
Agudo was more decisive on financials – moving to a 6% overweight on the sector in Q4 – but he admitted to feeling uncomfortable as 2016 progressed.
Speaking to him now, he tells me: ‘I ran the fund with very low beta, so I was more pro-cyclical than usual which made me uncomfortable. I am not paid to be comfortable and I’m happy to move around to make more adequate returns,’ he says. ‘However, I made one big mistake.’
*Figures correct to end of October 2017
The seeds of Agudo’s missed opportunity go back to the end of 2016, when his interest was piqued by an unlikely opportunity. Tech giant Apple, a stock he had never owned, fell within his value remit.
‘My clients constantly ask me about it and I have looked at it before but then in 2016 the company showed up on my investment opportunity screens. I didn’t buy it based on my upside/downside analysis. The stock quickly rallied and I was not keen on entering at an inflated price.
‘Moreover, to initiate a decent position in Apple, I would have had to fund it with a few existing positions. Therefore, from a risk management perspective, I held back.
‘I feel responsibility as the mistake was not buying it. I saw it. My analysts told me. My screens showed me. But I chose not to.’
His decision was a costly one. Over the 12 months to October 2017, Agudo has slipped to 1,480 out of a 1,553-strong peer group and returned 14.9% in US dollar terms against a 23.6% rise by the S&P 500.
His three-year numbers are not much better. Over the 36 months to October 2017, he returned 20.2% versus the index’s 36% and sits 839th out of 1,235 managers.
Agudo pins a large amount of this shorter-term underperformance on this missed opportunity, which coincided with the fund shrinking from a mid-2016 high of $8.8 billion to its current level. However, he says investors are always wiser in hindsight.
‘It is a unique situation. The FANG names also detracted from performance year to date but Apple was the only one that was attractive on the metrics I look for as I favour companies that have negative sentiment and lower margins relative to their competitors or their own history.’
So, what has worked? Agudo has fared better in financials and increased his positioning here ahead of the US elections at the end of 2016, with one eye on how a pro-business Republican could benefit the sector.
‘As 2016 progressed, opportunities increased in financials, so I went overweight before the US elections. I stuck to my methodology because at that time I did find downside protection due to the good health financial companies were in and we were lucky that Trump won.’
Agudo told the conference call he had ended 2016 slightly ahead as a result of this foresight and, on reflection, he says it was a validation of his investment thesis. ‘I had no insight into who would win the presidential election but followed my process consistently.
The companies I held within those sectors had a compelling risk reward profile and contributed to performance in Q4 2016.
‘Over the last year, I have been increasing my overweight to financials as I saw attractive opportunities within the insurance and diversified financials sector,’ he says.
Good and bad harvests
Financials are now Agudo’s largest sector bet and his most significant overweight. He has 26% of his fund invested there, 11 percentage points more than the index.
Healthcare is another big bet, accounting for 16.8% of the fund but this position has been slowly rebuilt following a difficult period.
Agudo had 22.7% invested here at the end of 2015 but reduced it following a ‘violent rotation’, which forced him to remove some strongly-performing stocks such as healthcare group Centene. However, he now believes the sector is recovering well.
‘I have increased my overweight here after it sold off in 2016, which came about following the risks to drug price inflation. This sector has performed particularly well since the start of the year as valuations were far too depressed in some names.
‘I aim to be fully invested and only use cash for efficient portfolio management and this is typically below 5%. The fund has always had a tilt towards mid-caps relative to the S&P 500. However, mid-cap in the S&P 500 is anywhere from $5-$20 billion.’
The fund currently has 47 holdings and Agudo is keeping an open mind about future investments. And he is wary of becoming a hyperactive trader.
‘The fund’s characteristics remain the same, including a tilt to value, very high active money and low turnover due to my long investment horizon.
‘Currently, I am finding new investment opportunities in a range of areas as performance dispersion throughout the market has increased significantly. There are several interesting stocks with positive long-term prospects across sectors,’ he says.
This article originally appeared in the December-January edition of Citywire Selector magazine.