Fehim Sever believes the best way to exploit investment opportunities in Europe is to combine a thematic view with bottom-up stock selection.
"There is no one source, as far as themes are concerned," explains Sever, a portfolio manager who oversees the $104.7-millionFidelity Europe Series A for Fidelity Investments International in London, England. As he meets three to four companies a day, and gathers information from 70 in-house analysts, themes emerge on closer examination. "Many data points may add up in a resulting theme." But valuation is also major consideration. "No stock gets into the fund if the risk-return profile does not look interesting enough," says Sever from his office in the shadow of St. Paul's Cathedral.
The dominant theme revolves around companies in the global energy sector. Sever is focusing on a select group of oil and gas producers and power generation firms that are benefiting from strong demand.
This has resulted in a large weighting in Gazprom OAO, Russia's state-owned energy producer, which supplies Europe with one-third of its natural gas. "Prices are going up in Russian commercial and residential markets, as are export prices," says Sever. "There is a demand/supply imbalance, and Gazprom is well positioned to supply Europe."
On conventional valuation metrics, the market values the firm on the same earnings basis as senior Western producers. Yet Sever notes that Gazprom's reserve life is considerably longer than those of its European peers. "The market does not give it enough credit. Over time, that [reserve life] may warrant some attention from the market."
Acquired in November 2006, when Sever assumed the portfolio, the stock has more than doubled in price since then. It has also contributed to the fund's strong performance.
For the 12 months ended May 31, the fund returned 11%, impressively ahead of the 11.1% loss for the median fund in the European Equity category. On a two-year basis, the 5-star rated fund has a 22.4% average annual return, versus 6.4% for the median fund.
Sever continually re-evaluates each of his holdings. "When I look at the European landscape, there are not that many firms [like Gazprom] that are selling into a market where commodity prices are rising," he says, adding that a stock must generally have a minimum 20% upside over the next 18 months to remain in the portfolio.
Agriculture is another dominant theme. One representative holding is K&S AG, Europe's largest producer of potash. "On the supply side, there are only five companies controlling pretty much the global market. Plus, it takes five years to bring new supply to the market," Sever says. "Together, this has caused a significant increase in potash prices globally."
Because the German firm has a high cost structure, it has experienced stronger earnings growth than low-cost producers. "The potash market could remain strong for the next one to two years," says Sever.
Turnover has been high, at 157% in 2007. Most of this is attributable to Sever's frequent trimming and adding to core holdings.
The fund is quite concentrated and has about 52 holdings, with 40 names accounting for the bulk of the portfolio. Single positions are limited to about 6%.
A 32-year-old native of Istanbul, Turkey, Sever attended Bogazici (Bosphorus) University, where he graduated in 1998 with a bachelor of arts in finance. He joined Global Asset Management in Istanbul, and for about two years managed Turkish equities.
In 1999, he resumed his studies and earned an MBA at University of Michigan at Ann Arbor. On graduation in 2001, Sever joined Fidelity in London, where he had worked as a summer intern.
Sever was a research analyst for four years and covered the engineering and consumer products sectors for the European equity team. Then he was promoted to assistant manager on Fidelity European Growth, a $20-billion fund sold in Europe on which he worked for 18 months. "It was a good platform to get more diverse experience in the European market," Sever recalls.
Last January, he took on an additional challenge when became lead manager of Fidelity European Special Situations Fund, a more aggressive fund also marketed in Europe.
Besides emphasizing energy and agriculture stocks, Sever is also exploiting investment opportunities on a regional basis. In particular, he sees very strong growth in southeastern Europe.
"There is a lot of investment in that region, through private and public funds. That is creating a very strong environment for employment opportunities, which is resulting in wage growth," says Sever. "There are many Greek companies that are well positioned to benefit from this trend," he says, noting the fund's recent 11% weighting in Greece.
One representative holding is Fourlis SA, an Athens-based firm that has the IKEA franchise in Greece and Bulgaria. "There are 14 IKEA stores in the UK, which has about 65 million people. But there are only three IKEA stores in southeastern Europe, which has 140 million people," says Sever. "There is a very big opportunity to have more IKEA stores in the region."
