TraderPlanet Digital Journal 32 TraderPlanet Digital Journal

“They do not get emotionally involved with a name. They are very open minded. That is one of the characteristics of a successful portfolio manager —because things change, industries change and the dynamics of an industry change.”

A 20-year veteran at Fidelity, Brian Hogan is president of the equity division at Fidelity Investments. He oversees 500 employees and is responsible for the management of $850 billion in assets. Hogan has been in this role since April 2009 and he oversees the portfolio management, research and trading functions within FMRCo’s equity and high income divisions. We spoke with Hogan in late March for a peek inside at the inner workings of Fidelity.

“They do not get emotionally involved with a name. They are very open minded. That is one of the characteristics of a successful portfolio manager —because things change, industries change and the dynamics of an industry change.”

A Peek Inside the Inner Workings At FidelityBy Kira Brecht

4 TraderPlanet Digital Journal

TP: What did you learn from that?

Hogan: I witnessed the importance of currency impact on the financial health of companies and the importance of understanding how companies fund themselves. Also, the need to identify balance sheet risks and to ensure I understand those risks as an analyst and portfolio manager.

TP: What is your market outlook for 2014?

Hogan: We have a constructive outlook over the next several years, not just 2014. At Fidelity, we have a mantra: stocks follow earnings. We have 134 fundamental research analysts at Fidelity. We cover 2400 stocks, including the entire S&P 500. Every month, I get a report that shows what our analysts think the S&P in aggregate, will earn for the current year as well as the next couple of years. As you can imagine, we are constantly fine tuning our estimates.

TP: Where do you see the earnings growth rate for this year?

Hogan: We see the earnings growth rate around 7-8%. One of the things that factors into that growth rate are the approximate 1-2% in share repurchases being done across the board by corporate America. For the sake of the discussion, we’ll call it 8% earnings growth for this year. In addition, the dividend yield on

the S&P 500 is around 2%, thus, I expect about a 10% return for the S&P this year before factoring in multiple expansion or contraction.

TP: Do you see the price/earnings multiple expanding, contracting or will it stay the same?

Hogan: In 2013, the earnings growth was 7-8%, but the S&P delivered a 32% return. The 2% dividend yield helped but the key in 2013 was the significant multiple expansion that took place. I don’t think that type of multiple expansion is likely this year. You could make the case it could expand a little or contract a little. But, because of concerns globally that range from the Russian-Ukrainian situation, the challenging regulatory environment in Washington, to China slowing down and its impact on Asia —all of those things weigh on the market and might tend to dampen the overall multiple of the market.

TP: What role does technical analysis play at Fidelity?

Hogan: We are fortunate to have the resources to employ fundamental, quantitative and technical analysts. A fundamental analyst might cover 20, 30, 40 stocks— as they meet with company management teams, build earning models, meet with customers, suppliers and do unique and proprietary research.

TraderPlanet: How did you first become interested in the financial markets?

Hogan: My father introduced me to the markets. He was a part-time investor; he liked to dabble in the stock market. But, it wasn’t until after college and going to business school that I realized it was the career for me. I saw the opportunity to do something and have it be very relevant and impactful. I was fascinated by markets and I liked the opportunity to match wits against other investors.

TP: What is the most significant market event you experienced in your career?

Hogan: The first significant event was the December 1994 devaluation of the Mexican peso. I saw firsthand the impact that a country’s exchange rate can have on the financial health of not only the country, but individual companies. There were Mexican companies that were borrowing in dollars, and generating revenues in pesos. When the peso devalued, their dollar liabilities were magnified in peso terms. It really put some stress on those companies.

Fidelity® Low-Priced Stock Fund (FLPSX)

Technical analysts have a different role. Our technical analysts study price patterns of large groups of stocks and have the capacity to cover hundreds of stocks. They look for clues in the historical price patterns to glean insights on what supply/demand and technical price patterns are telling us.

TP: What are the key drivers of success for Fidelity’s equity funds’ strong performance over the past five years, since you have been in your current role?

Hogan: We have some of the best portfolio managers in the industry. There are several key things that make them successful. They are long term investors and invest with a longer-term time horizon than a lot of other investment managers do. They do significant due diligence on the companies they invest in. We have, on average, 17 companies a day that come through our offices for investment meetings. We meet with their customers, competitors, and suppliers. Our portfolio managers utilize broad research from our 134 fundamental analysts. Also, they are very

passionate about their jobs, but they are dispassionate about individual stocks. They don’t fall in love. They do not get emotionally involved with a name. They are very open minded. That is one of the characteristics of a successful portfolio manager —because things change, industries change and the dynamics of an industry change. New companies emerge.

TP: Who are some of your standout portfolio managers?

Hogan: Joel Tillinghast started the Low-Priced Stock Fund (FLPSX) 24 years ago and he’s beaten his benchmark by approximately 480 basis points per year for 24 years. Will Danoff has managed the Contrafund for 23 years and has beaten the S&P 500 by about 340 basis points per year for 23 years; these are all net of fees. Steve Wymer manager of the Fidelity Growth Company fund has beaten his benchmark by 380 basis points net, per year for 17 years.

TP: Do you see active management gaining favor ahead, versus passive products like index ETFs?

Hogan: I do think there is room in a portfolio for both active and passive investments. Right now, we are in a good environment for active management. Last spring when then Fed Chairman Ben Bernanke talked publicly about tapering and the end of quantitative easing, it caused a little dislocation over the next few months in the Treasury market. The 10-year Treasury yield had been around 1.70% and it moved closer to 3.00%. Now, it is around 2.70%. What happened in the equity market is that correlations began to decrease and it became fertile ground for stock picking. Now, I would call it much more of a stock picker’s market. Correlations are lower and there are a lot more variables in stock returns. My sense is with history as a guide, the next three to four years will be a period where active managers have a tailwind. These things run in cycles.

“Now, I would call it much more of a stock picker’s market. Correlations are lower and there are a lot more variables in stock returns. My sense is with history as a guide, the next three to four years will be a period where active managers have a tailwind. These things run in cycles.”

Fidelity® Contrafund (FCNTX)

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TP: Looking back at market history, what can we learn from it?

Hogan: One of the most important lessons I’ve learned from working at Fidelity for 20 years is that starting points matter. At the end of 1999, the forward price-to-earnings multiple was 26. Today, it is 15 1/2. Yet, earnings have more than doubled. Thus, over the last 13-14 years, while earnings have more than doubled, valuations have been cut in half. I also think that stocks are attractive relative to other asset classes. Bonds have been in a bull market for more than 30 years and that may soon be ending. More recently, in 1999, the 10-year Treasury yield stood at 6.5%. Today it is at 2.7%. With the stock

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market yielding 6 1/2% versus the bond market yield at 2.7%, it argues that stocks look pretty good.

TP: What advice would you give to retail investors today?

Hogan: Take a long-term view when investing. Investors have a tendency to be more excited when stocks are going up and less excited to buy when stocks are going down. If you have a long-term view you can take advantage of those dislocations to buy.

TP: Thank you for sharing your insights.

“One of the most important lessons I’ve learned from working at Fidelity for 20 years is that starting points matter.”

Fidelity® Growth Company Fund (FCNTX)