(10/21/14) “GARP” Investing with Fidelity's Fruhan

Fund manager Matt Fruhan has a lot on his plate; in all, Matt runs almost three dozen different portfolios within Fidelity with assets totaling over $33 billion, notes John Bonnanzio in Fidelity Insight & Monitor.

Apart from managing Growth & Income (FGRIX), Large Cap Stock (FLCSX), and Mega Cap Stock (FGRTX), he also runs several share classes of the same, plus the annuity VIP Growth & Income.

Too much to handle? Not really. With overlapping investment objectives (total return through income and capital appreciation) and strategies (reasonably valued large-caps), an appropriate stock for one fund is often a candidate for others.

Indeed our analysis reveals 36 different stocks that are held in all three of his “regular” funds: Growth & Income, Large Cap Stock and Mega Cap Stock. Moreover, these stocks account for more than half of each fund’s assets.

So, you can think of it this way: each day Matt needs to make a bunch of meatloafs of different sizes and shapes. But the only real difference is that there are three different ways they’re seasoned.

If that imperfect analogy suggests that there’s little pleasure to be had from being served any of Matt’s portfolios, not so.

In fact, his three main funds have outperformed virtually all of their peers in the past three years and two have beaten more than 90% in the prior five. (He’s only run Growth & Income since February 2011.)

What accounts for his successes? Smart stock selection is the simplest bare-bones answer. But it’s the least revealing. A better response that puts meat on that skeleton is that Matt successfully employs a “growth-at-a-reasonable price” (GARP) investment process.

Where the rubber meets the road, Matt observes that over the last 15 years large- and mid-cap stocks had been overvalued but now their “premium has been worked off.” So, he says (and we’d agree), “the best risk-reward is in large-caps.”

Drilling down a bit further, he’s been tilting his portfolios ever-so-slightly towards value stocks; companies that are steadily growing earnings, but not so fast that investors are willing to pay big multiples to own them.

He’s also sidestepping stocks with highly leveraged balance sheets (the market is not paying for that now) as a slowly growing economy no longer warrants their risk.

Drill a little further: Matt especially likes money center banks like top-holdings JP Morgan Chase, Citigroup, and Bank of America.

His rationale? Capital ratios (reserves) have tripled from pre-crisis levels, legal expenses are starting to wane, and they’re making higher quality loans.

And, while some businesses fear rising interest rates, lenders (and some others like inventory-rich distributors) stand to benefit. That’s because their earnings will improve owing to wider loan-spreads. (Longer-term he says, “They’re much safer.”) Add to that list life insurers and even payroll processors.

Notably, Matt overweights financials in all three funds. Noting that his funds are “underexposed to what a lot of people are all lathered up about right now,” Matt says he’s pleased as to where he’s currently “sourcing earnings and yield.” Being a GARP investor, he says, “is a good place to be.”