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Jorma Korhonen has stepped into one of the most high profile jobs in European fund management. The fund manager has taken over the reins of the £2.8bn Fidelity Global Special Situations Fund. The fund was carved out the flagship Special Situations Fund managed by Anthony Bolton, arguably the most renowned fund manager in Europe.
Mr Korhonen’s aim is to seek out ”special situations” in stocks around the globe in a ”go anywhere” approach. These include companies going through a restructuring, cyclical turns in specific industries, stocks trading below their asset replacement value or a business with growth potential unappreciated by the markets.
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Mr Korhonen answers your questions:
Q: Re your answer to Michelle’s earlier question, you said only 5 per cent of your fund is invested in emerging market equities. This seems very small considering the nature of the fund. Can you tell us what the two major investment sectors of the fund are please?
Richard Meredith, milton keynes
Jorma Korhonen: Yes - this is the lowest weighting I have had in emerging markets in my 11-year career. I feel that the emerging market trade is very crowded and there is too much optimism about the sustainability of the market’s growth prospects. It could well be a more volatile ride than many investors think. The two major investment sectors in the fund are, at present, energy (oil refining and services) and consumer discretionary, where I tend to find good cashflow growth at reasonable prices. These two sectors account for about a third of the portfolio.
Q: A couple of weeks ago, in a brief article in the FT you said you were waiting for a correction. Is the current volatility the kind of correction you were waiting for? And my second question, to play CEE convergence one can invest directly in the region or buy a company e.g. in the eurozone with a large exposure to it. In general terms, which one would you prefer currently?
Jan Leroy, Belgium
JK: The day the Dow dropped more than 400 points was a significant correction, although by historic standards it might be regarded as a mild one - if that was it. Unless investors’ appetite for risk is checked, then I would expect to see further volatility on markets. On your second point, historically it has been easier to play the convergence theme directly by investing into the equities of the local markets. Current valuations, however, imply that is arbitrage opportunity has disappeared.
Q: Where are you finding the best opportunities now for special situations? How do you compare the merits of the UK versus the rest of Europe? Is the UK becoming a crowded trade?
Rajiv Sundaram, London
JK: The formation of my portfolio is dictated by the stocks that I pick. Where those shares are listed, or even where the issuing company is domiciled, is becoming increasingly irrelevant for investment purposes, thanks to globalisation. You have to look at the underlying, operational exposure rather than where the stocks trade. That said, close to a third of my portfolio is currently invested in UK companies. This is solely because this where I am finding some of the most attractive opportunities at the moment. But please don’t take this as representing my view of the “UK market” - this is again stock-specific.
Q: We hear a lot about the carry trade. Do you use the carry trade? Is it a big risk for the global financial system if we do see it unwind?
Drew Arnold, London
JK: The regulations do not allow me to use leverage in the fund so I cannot exploit the carry trade. If the carry trade were to unwind, there would be a reduction in global liquidity, which obviously would have a less than positive impact on a range of asset classes, including equities.
Q: What kind of valuation metrics do you look at in assessing what is a good buying opportunity? Is there one thing you think is more important than others? How do you find your stocks? Mats Karlsson, Stockholm
JK: I use a varied range of valuation metrics depending on any given situation. Often, I focus on measurements of a business’s ability to generate cash, both currently and in the future, but no single metric is more important than any other. It’s a combination of metrics that usually provides the real insight into the investment. Fidelity’s proprietary research is the source of most of my investment ideas.
Q: How do you think the problems of the US subprime mortgage market will affect other markets?
Tony Tassel, London
JK: There are a lot of moving parts to this. On the face of it, the difficulties in the US subprime mortgage market contain all the classic ingredients of a possible credit crunch. If this were so, it could trigger a significant reduction in global liquidity. Obviously, this would have negative implications for other asset classes, including equities. We will continue to monitor the situation very closely as it unfolds.
Q: With a “go-anywhere” approach to investments, how do you factor in any ethical concerns with corporate governance, environmental concerns or human rights?
Robert Minto, London
JK: Our primary objective is to make money for our funds’ shareholders. We’ve generally found that good business practices feed through into good business performance. That said, I don’t apply any ethical or governance filters to my stock-picking.
Q: Could you explain how do you generate special situation investment ideas? Where do you look for this kind of opportunities?
Luiz Codorniz, Brazil
JK: Running a global fund, with no benchmark constraints, means I am free to invest wherever I like. The only geographical boundary I have is that the majority of the portfolio will always be invested in developed markets. The main source of investment ideas comes to me through our own proprietary research. Fidelity has more than 350 equity analysts around the world, generating a constant stream of research notes on individual companies. I go through their work rigorously to identify what to appear to me to be the most promising investment opportunities.
Q: Do you intend starting up an equivalent Global Special Sits investment trust, Global Special Values? If so do you view the investment trust in a different light to the unit trust in that it gives you more flexibility
Dave Thompson, Edinburgh
JK: No - there are no plans at present to offer an investment trust version of Global Special Situations.
Q: Recently there was a report in FT that some big US institutions such as Citibank and Merryl Lynch predicted that the current GBP/USD ratio of 1.94 will fall to 1.82 by end of 2007 and to 1.68 by end of 2008 as they think that GBP is an overvalued currency. What is your opinion about this?
Also would you say that my percent asset allocation of 50 per cent Equity/30 per cent Bonds/20 per cent cash is okay in view of present market volatility?
Subrata Biswas, Solihull, UK
JK: In general, I don’t have a view on currency movements because over the longer term it’s a “wash” when investing in global equities. In other words, the currency movements even themselves out over time. More important is to look through the company in which you are investing to see where the true currency risk lies. Many UK companies, for example, have businesses which are either explicitly priced in dollars or their underlying operations are.
As for your asset allocation question, it has difficult to give an answer without knowing your time horizon, financial goals and so on. In general, however, that mix should give you reasonable diversification.
Q: How does a mutual fund, and especially a `special situations’ fund, position itself to benefit from a heating M&A cycle?
Are you increasingly gaining exposure to likely `takeover candidates’ or not more so than in other years? Is such a strategy likely to be a winning one this year?
Alexis Xydias, London
JK: Given the amount of capital chasing opportunities, especially in the hands of private equity firms, one has to bear the possibility of takeovers when assessing the investment case for any individual stock. However, this would never be the sole criterion for any individual investment. Where I tend to find more interesting ideas is among those companies with stable cash growth.
Q: What is your view of the role hedge funds play in the efficient operation of equity markets?
David Aldrich, London
JK: First, you have to define what you mean by a hedge fund. Hedge funds now cover a range of investment strategies, asset classes and so on. That said, two of these strategies - long/short and activist - clearly have had a clear impact on equity markets and, on balance, this improved the efficiency of the market.
Q: Which Scandinavian sectors do you favour at the moment?
JK: My portfolio construction is driven stock by stock, with little consideration of sector and regardless of where a company is listed. With globalisation, the location of any particular business has become less relevant and consequently impossible to derive any meaningful sector views. I hold just a handful of Scandinavian stocks.
Q: When you look at stocks trading below their asset replacement values, how much of a margin of safety do you seek before you make a commitment?
SK Tan, Malaysia
JK: It depends on your time horizon as an investor and on the nature of the industry. The key question is how fast an industry can respond by increasing supply. Usually this takes a couple of years, so as a rule of thumb I look for a margin of safety that is at least 40 per cent.
Q: On the back of the recent active involvement of hedge funds and private equity in the market, which is believed to be the main force in the yen carry trade, how would you capitalise on this investment theme globally?
JK: There are two questions here. How do I play the private equity theme? Sure, whether a company might be acquired by a private equity firm is one of the criteria I use when assessing an investment opportunity. If the asset can be more valuable in someone else’s hands then that’s worth knowing. As for the Yen carry trade, if you think that this is going to unwind, then you go underweight in emerging market equities. I’m currently underweight in emerging market equities: they account for less than 5 per cent of the portfolio.
Q: Some special situations can take more than a year before the expected values are realised. What is your typical time horizon?
Vincent Tan, Hong Kong
JK: Some stocks I’ll hold for several years, others for shorter periods, depending on my investment view. On average, I hold stocks for 18 months.
Q: I invested in your fund at about the same time as another global opportunities outfit. So far, their’s is 50 per cent ahead of yours. Now okay, I see that your strategy is looking for under-valued and opportunity stocks - of which there must be many indeed in the emerging economies. A longer-term payback then? But give me an estimate then, as to when you think you might catch up with my ANO fund. Go on, I won’t hold you to it - but an idea would be nice.
Richard Meredith, Milton Keynes, UK
JK: Without knowing which other fund you’ve invested in, it’s very difficult to answer this question in a meaningful way. What I’ve been clear about from the moment go is that investors need to take a long-term view of my fund. Really, you should be prepared to remain in my fund for at least three years. During that period there will be short-term volatility - that’s the nature of a fund at the higher end of the risk spectrum. But longer-term, I look to out-perform.
A ten-year veteran of Fidelity, Mr Korhonen became a fund manager in January 2002. He joined Fidelity in 1996 and spent the next six years as a research analyst, both in London and in Boston. He will be helped by Fidelity’s 700 investment professionals, who produced more than 31,700 separate company notes last year. Born in Finland, Mr Korhonen has an MBA degree from the IMD business school in Lausanne, Switzerland and a BBA from the Schiller International University, Germany.
Mr Korhonen often takes a contrarian stance in his bottom-up stock picking approach. ”What I try to do is look for unrecognised value and in the majority of cases this tends to be a contrarian situation: for example, a lot of the turnaround situations can be very messy - their stocks trade at a huge discount for a reason. You have have to be able to see something others cannot, and you have to be quite comfortable with that.”
He says a good example was ABB, a conglomerate which had a range of unrelated businesses. ”A combination of the global economic slowdown earlier this decade and a potential asbestos liability meant the market was pricing in the risk of bankruptcy. But we quantified the company’s asbestos liability and thought the market was pricing this too negatively. In addition, when looked at ABB’s one-year maturity bonds they were trading at 50 cents on the dollar even though the company had two years of cash in the balance sheet.”
”A year later the company was restructured and re-capitalised and its share price appreciated significantly. Today, ABB has just two divisions: power technology and automation. Both are global leaders in their areas and providing tools for China’s growth.”