Fidelity Low-Priced Stock Fund's Star Manager Returns
Joel Tillinghast is back from a three-month sabbatical, but, in his absence, his six co-managers ran the fund like he was never gone.
Joel Tillinghast has been running Fidelity Low-Priced Stock Fund (symbol FLPSX) for 22 years by himself. But now, after a three-month sabbatical that ended in January, he has company. “Team Joel” -- the six co-managers who took over Low-Priced Stock, a member of the Kiplinger 25, during his absence -- are staying on. Tillinghast now runs 95% of the fund, and Team Joel divides the remaining 5%. Of that portion, Jamie Harmon manages half -- 2.5% of the $36 billion portfolio -- and five others, each focusing on a specific sector, split the rest.
This isn’t a big change. Team Joel has worked with Tillinghast for years, and Harmon says he and his colleagues continue to work with and learn from the seasoned manager. But it does offer an answer to those who questioned Tillinghast, 53 (54 in June), about a succession plan. “I have no plan to get hit by a bus” or to retire, he says, but with Team Joel in place, “you sort of see an implicit succession plan.” The group shares a good camaraderie. While Tillinghast was on leave, for instance, Harmon had hats made for the team embroidered with the letters WWJD -- What Would Joel Do.
The group’s devotion to the lead manager shouldn’t come as a surprise. Tillinghast’s long-term returns are impressive -- and are bound to draw admirers. From December 1989, when Low-Priced Stock was launched, through May 10, it earned an annualized 14.0%, beating Standard & Poor’s 500-stock index by an average of 5.4 percentage points per year. Even more remarkable is Tillinghast’s performance year in and year out: Over the past ten years, including this one, he and his fund have outpaced the S&P 500 in all but two years (2007 and 2011). Meanwhile, the fund’s assets have doubled over that time. So far in 2012, the fund has returned 9.0%, 0.2 percentage point ahead of the index.
Each of Low-Priced Stock’s seven so-called sleeves -- Tillinghast’s, Harmon’s and the sector fund managers’ portfolios -- operates on its own. Competition is friendly. There’s a daily performance review so that all the managers can see how they’re doing relative to the benchmark, with an emphasis on who leads rather than who lags.
All hew to Tillinghast’s winning formula of finding high-quality, growing companies that trade at bargain prices. How the team defines a bargain may vary depending on the company -- but the stock must trade for $35 or less when it is first purchased. Tillinghast says of his strategy: “I’m only interested in stocks selling for 12 or 14 times earnings or less.”
Finding a good-quality company is part of the process, too, and it’s more of an art than a science. “Joel is looking for a special situation, a leader in an industry that is also cheap,” says Harmon. For example, a strong balance sheet and good free cash-flow yield (the ratio of free cash flow per share divided by the share price) are all part of the “balance of mosaic of facts” that Tillinghast says goes into a good investment.
About ten years ago, that approach led Tillinghast to Monster Beverage, a stock the fund still owns. Back then, it was a maker of organic fruit beverages known as Hansen Natural, with a small energy-drink business on the side. Tillinghast picked up shares for 24 cents apiece. Over time, energy drinks gained in popularity, and the original business became irrelevant. The stock now trades for $71. “The company is still growing very fast, and it’s not a capital-intensive business as it throws off a lot of cash,” says Tillinghast. (Monster shares got a big lift in early May from rumors that Coca-Cola was mulling over an acquisition. Coca-Cola later said it was not considering a deal.)
In April 2011, Low-Priced Stock had 10% of its assets in cash because Tillinghast “wasn’t finding good opportunities.” As the market fell through early October, the managers, including Tillinghast, snagged stocks at low prices. Records show that one such company was Microsoft, which at last report was the fund’s number-two holding. So far this year through May 10, the stock has climbed 19.2%.
The fund is adventurous. Although it began as a small-company fund and required most new holdings to sell for $15 or less, it bears little resemblance to the Russell 2000, the small-company index that Tillinghast still uses as a bogey. Microsoft, for instance, may have fit the fund’s valuation and share-price criteria, but the software giant is a far cry from small or even midsize. And that’s okay with Tillinghast. “I go where the opportunity is,” he says.
Lately, that’s been in Japan and South Korea. Tillinghast, who was in Japan in March 2011 when the country suffered its worst earthquake and tsunami ever, recently traveled there again for a weeklong visit. During the trip he met with officials at 32 companies, most of them small. “I want profitable companies,” he says, and many of the large ones in Japan (especially the exporters) don’t fit that criteria. But plenty of small companies do. “You have to turn over a lot of rocks,” he says, “because there are a lot of bad companies, but there are a lot of great ones that are cheap.”
In 2011, Tillinghast bought stock in a small Japanese drugstore company, Cosmos Pharmaceutical, which has since returned 150%. Despite the stock’s ascent, its price-earnings ratio is still only 10 -- well within Tillinghast’s simple range of a starting-point P/E. Many Japanese and Korean companies in sectors such as technology, health care and retail pharmaceuticals “amaze me,” he says. With an aging population, he adds, “health care and drugstores have a good future in Japan.” Plus, many Japanese companies are starting to pay dividends or buy back shares -- “a radically new idea in Japan,” he says.
At the end of the day, fundamental research drives the fund. And with more than 900 stocks in the portfolio, the managers have their hands full keeping tabs on the companies -- many of which are small and have little analyst coverage, or are overseas and don’t publish financial information in English. Indeed, many make up just 0.01% or less of the fund’s assets.
Such companies make up the “statistical bets” that Tillinghast says help mitigate the fund’s growing asset base. There are dozens of them, but Tillinghast is familiar with each one, says Harmon. During Tillinghast’s hiatus, Team Joel roped in 40 to 50 people -- from the firm’s lowest to highest rungs -- to call each of the fund’s smaller holdings and write analyst reports. “It was a real challenge, but we all pulled together because we wanted Joel to know that we were doing good things for him,” says Harmon.
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