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A Sophisticated Process Drives Results
The key to the success of Fidelity Insight's portfolios
is an intensive and disciplined research process. We begin at the macro
level, evaluating the economic and market environment looking out 6-18 months. We continue the process down to the micro level, evaluating the qualities and skills of individual mutual fund managers. Though the actual process is quite involved, it can be summarized as three steps.
Step 1:
Determining the Right Asset Mix for the Current Market
Our investment process begins with a fundamental investment analysis of
the economy and the investment markets in the United States and in foreign
countries. Major factors include:
- Economic factors such as inflation, employment and interest rates
- The outlook for corporate earnings
- Current stock valuations (price to earnings, price to book, etc.)
- Supply and demand for various asset classes
Given our view of the overall investment environment, we determine for each of our Fidelity portfolios the percentage that should be invested in U.S. stocks, foreign stocks, U.S. bonds, and money markets or other cash equivalents.
While all of our portfolios are actively managed, we don't normally shift significant amounts of a portfolio from equity funds to money market funds over a short-term period. However, we may invest in money markets or short-term debt instruments as a defensive measure even in our more aggressive portfolios.
Step 2:
Choosing the Best Mix of Investment Styles
Once our asset allocation
decisions are made, the next step in the process is to determine
the percentage allocated to each of
the following
seven global equity styles:
- U.S. Growth - Large Capitalization
- U.S. Growth - Small Capitalization
- U.S. Value - Large Capitalization
- U.S. Value - Small Capitalization
- Diversified International Equity
- Specialized International Equity
- U.S. Real Estate Investment Trusts
We first review the broad-based economic factors that will influence the earnings prospects for each style. The resulting earnings outlook for each style is compared to its current valuation, both relative to historical norms and to other styles, to determine its overall attractiveness.
Step 3:
Selecting the Best Mutual
Funds for Each Style
The last step in our process is to select the
Fidelity funds that we believe offer the highest risk-adjusted
return potential for their investment
style. We use an internally developed screening process which includes
a risk-adjusted performance analysis as well as an evaluation of
each fund relative to its peers. But this screening process is
just a preliminary refinement before a more in depth quantitative
and qualitative evaluation takes place. Key factors we examine
include each Fidelity fund's:
- Asset Allocation
- Individual Holdings
- Sector Weightings
- Risk Characteristics
Another vitally important factor in fund selection is the fund managers themselves. In our face-to-face meetings, we look for Fidelity managers who display what we consider are five critical characteristics of success:
- A passion for investing
- A well-defined investment discipline
- Superior knowledge of their holdings
- Strong conviction of their investment ideas
- A substantial amount of their own money invested in the fund
- A Demonstrated Record of Success
This combination of sophisticated quantitative research and in-depth one-on-one manager interviews gives us a unique advantage in building and continuously managing Fidelity
Insight's portfolios. And it shows in our results.
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