Quick Take: Global markets may have hit a rough patch recently, but Kevin McCarey, manager of Fidelity Advisor International Capital Appreciation (FCPAX), thinks the world outlook will improve this year as central bank policies and the more reliable accounting standards of foreign companies lift stock prices. McCarey thinks international large-cap growth stocks look particularly promising, since they’ve been beaten down quite a bit.
Brighter prospects for large-cap growth suits McCarey, who describes his fund as Fidelity’s most aggressive international diversified offering. McCarey has a lot of flexibility, saying “I reserve the ability to go anywhere.” Currently, he’s focused on Europe, with a 60% stake, and Japan, with a 20% stake, although these positions don’t vary very much from his benchmark, the Morgan Stanley All Country World Free ex-U.S. Index.
McCarey says his focus on growing earnings boosted the fund in recent years. The first half of this year, the fund rose 4.98%, while the average international equity fund fell 1.2%. For the three years through December 2001, the fund rose an annualized 6.7%, while its peers lost 1.8%.
Individual holdings were not reviewed in this interview in accordance with Fidelity policy, which prohibits such discussion.
The Full Interview
S&P: How would you describe your fund?
McCAREY: The fund is designed to be Fidelity’s most aggressive diversified international fund. We describe it as a speedboat flying across the world that will be fast and long in good times, but when it gets choppy, the captain will idle the engines until the waters are flat. In performance terms, we hope to be in the top decile in up markets, and in the second quartile in down markets.
S&P: Is shifting gears analogous to market timing?
McCAREY: It could be, but it’s not, because we look mostly at stocks on a bottom-up basis. Market timing would mean that you buy big pharmaceutical companies because they’re defensive, but I’ve been underweight in that sector for a couple of years. Even though pharmaceuticals have growth prospects, their valuations are higher than we’d like.
S&P: What’s your approach to stock picking?
McCAREY: I start with the basic belief that you will make more money in stocks with rising price/earnings ratios. I look for companies where management interests are aligned with shareholder interests. That may not mean (looking just at) stock options, since they aren’t very common outside the U.S.
S&P: The conventional wisdom had been that U.S. accounting standards were generally better than international standards. What’s your view of global accounting?
McCAREY: Overseas, you don’t have as many problems with stock options and accounting quality as in the U.S. International accounting is at least on par with the U.S. and may be a little better. Fidelity has more than 200 analysts in the U.S. and around the world, so we can try to get behind the reported numbers.
S&P: What type of portfolio have you built based on your process?
McCAREY: The fund is fairly concentrated, with about 60 names. I started the fund with 100 to 120 names, but as I’ve gained maturity, I’ve become more comfortable with concentrated bets. I also tend to invest in companies that focus on one or two businesses.
In the last year and a half, I’ve usually ended up in mid-cap stocks — above $1 billion market cap. That wasn’t true four years ago when large-cap stocks tended to be the fastest growers, mainly because they were more global. I reserve the ability to go anywhere. Large-cap stocks have been beaten down so much in the last year and a half that I wouldn’t be surprised if my large-cap weighting started to edge up.
S&P: What is your benchmark?
McCAREY: I’ve specifically picked the Morgan Stanley All Country World Free ex-U.S. Index as our benchmark to have a bigger sandbox to play in. The index is in basically every country outside the U.S., including emerging markets.
S&P: What are your country weighings?