Transcript February 24, 2015 Viewpoints Inside/Out eReview ...€¦ · Transcript February 24, 2015 ‐ Fidelity Viewpoints Inside/Out eReview# 714766.4.0 1 John Sweeney: Good evening

Transcript February 24, 2015 ‐ Fidelity Viewpoints Inside/Out

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John Sweeney: Good evening. Welcome to Dallas, and we’re thrilled to be here and thank you for joining us for our 14th

Inside/Out. The theme, as Steve mentioned, is ideas for tomorrow’s market. We want to give you some

insight into what you should do. There’s a lot going on in the markets, and in fact, as Steve said, today we hit

another record high. How about that? This has happened to us before, at several of our other Inside/Out

events, we have entered the evening after coming off a record day. It’s really, it’s been a volatile ride over the

last month or two, so we’re going to ask our panelists to give us some insight into what’s going on.

Joining us from Boston, Jed Weiss, who manages international portfolios for Fidelity Investments. To his right,

Candice Tse from Goldman Sachs, joining us from New York City. She is a market strategist at Goldman Sachs.

To her right, Raman Srivastava, joining us from Boston. He manages fixed income portfolios for Standish,

Ayers, and Woods. Joining us from San Antonio, Texas, Matt Freund. He manages global fixed income

portfolios for USAA. And to my immediate left, Jeff Feingold, who runs the Fidelity Magellan Fund, also joining

us from Fidelity in Boston. So with that, please join me in welcoming our panelists.

So Raman, can I start with you? We talked about Janet Yellen, and the Federal Reserve, and she had a

conference today. She used the words that not all of America is participating in the economic recovery, so she

was understandably concerned about the global recovery around the rest of the world, and the impacts here

in the United States. So, can you interpret the conference for us? Can you interpret her remarks, and what

does that mean for the fixed income markets in general?

Raman Srivastava: Sure, John. I actually had a chance to watch some of the conference live today, which is a treat. As a fixed

income investor, it’s exciting to watch Humphrey Hawkins live. And I think, she was pretty clear. I think what

she ‐‐ the message she conveyed was number one, she’s encouraged by the employment growth numbers,

and she should be. The overall numbers, and jobs created, unemployment rate declining. Where her

concerns lie are in the underemployment. So perhaps people aren’t working as long, perhaps the wage


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they’re working for is lower than what they had in the past. And I think the real question mark for the Fed

right now is less around the employment side, and more around the inflation side. What they need to see

before they lift off, in terms of Fed funds policy rates, is evidence of inflation bottoming, and in fact turning,

whether it be wage inflation, core inflation, other measures of inflation. I think you’ll begin to see that as the

year progresses, the question is how quickly will you see it, and how quickly will the Fed respond? The market

right now is not really priced at all for the Fed moving in June. However, today what Janet Yellen did was

actually open the door for potentially the Fed raising rates as early as June. My sense is more likely it’s going

to be a bit later then, perhaps July, perhaps September. Either way, when that happens, as you see inflation

starting to turn, as you see energy prices stabilizing, and if they do lift off rates, whether it be June, July, or

September, I think that’s going to cause some volatility in the markets.

John Sweeney: So Matt, can I turn to you? So what’s your sense on the conference? Did you see it the same way; did you

have a different opinion?

Matthew Freund: Yeah, well so yes, I did. I think that the Fed is a little bit boxed in. So, as was mentioned before we started,

the dollar has gotten a lot stronger over the last six months. And interest rates around the world have just

collapsed. So, you think rates are low here in the States? If you look overseas, you’re just going to be

shocked. In fact, there are trillions of dollars in Europe that actually have negative yields, which is just a totally

new concept. So we think the Fed is really looking for a problem to solve, and you’re absolutely right, I think

inflation is one of the issues that they’re looking at. But I don’t think they want to raise rates. I think they feel

that they have tightened relative to the rest of the world by standing still, and absent inflation, absent an asset

bubble, absent wages getting out of control, and I’ll tell you, even there, wages have been stagnant for about

a decade, so it’s hard for me to believe they’re going to raise rates as soon as things recover a little bit, so

again, I think they’re more data‐dependent, and I think they’re looking for a reason to stay put, as opposed to

raise.


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John Sweeney: Candice, do you have a perspective on that?

Candice Tse: Well, I think we are actually at an inflection point right now, based on today’s meeting. We’ve seen the Fed be

very patient in terms of raising the Fed funds rates; we think based on what Janet Yellen said today, it will be

more so based on a meeting’s by basis, right? In terms of when they plan to raise the rates. And what they’re

focusing on is definitely strengthen the US economy, which they do see happening, because they are the US

Fed, they have two mandates since 1977, so they’re focused on things like employment and inflation, and

from the employment standpoint, things have gotten a lot better, but there’s still some slack. From an

inflation perspective, wage inflation is still quite low. So at around 2%, perhaps moving more towards 3 to 4%

would be a better number to look at. So those are some of the things that they’re focused on. The concerns,

as you mentioned, were with Europe and also China, and the strength of their growing economies, and also,

she addressed oil prices, and how, that is more due to supply, and oversupply.

John Sweeney: Yeah. So yeah, can you talk about inflation? So Raman, you introduced two different types of inflation, you

talked about two different ways to measure inflation. Candice, you said that wages haven’t grown as fast,

perhaps, as prices. So what is the right number to look at, and how should economists and investors be

thinking about inflation, and when does it actually hit our pocketbooks? Candice, go ahead.

Candice Tse: Well, so in terms of wage inflation, I think this is important, right? Because we’re seeing a lot of folks, finding

jobs now more so than they have in the past. But there’s still a number of folks who cannot find jobs. So the

difference between let’s say the U3, which is people who are working and are constantly looking for work over

the course of the last four weeks, and then you have the U6, which is still high, right? Elevated at levels of

11%, perhaps it could start moving down towards 9%. So, from that perspective, unemployment still remains


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elevated, though it’s come down quite a bit. And with regard to wage inflation, it hasn’t moved up as much as

we want it to, so it hasn’t really impacted the pocketbook as much as we want it to.

John Sweeney: So Raman, do we see a divergence then between what people are getting paid, and what they’re having to pay

for the goods and the services that they demand? Is that happening, and does that create a problem for us?

Raman Srivastava: I think it does create a problem, and it’s certainly that divergence, the Fed typically focuses on ‐‐ they are, their

mandate is total inflation. But they tend to ignore the volatile sectors, food and energy, and focus more on

core inflation than setting policy directly. The PCE, the personal consumption expenditure, that’s the measure

they focus on. And I think there is this divergence, you’re seeing the unemployment rate come down, but

you’re not seeing that evidenced in wage inflation. But I think as Candice said, I think you’re hitting this

inflection point now. And remember, we’re not talking about the Fed that’s trying to normalize rates from 0

to 3%, immediately. We’re talking about the Fed who’s really just trying to look to get away from this

extraordinarily low, 0% rate, and wage inflation tends to be a lagging indicator. I mean, the Fed historically

has risen ‐‐ has increased rates, even before wages ‐‐ or you’ve seen a lot of evidence in wage inflation. So I

think they’re just looking for some stabilization, some evidence that inflation is rebounding, and that will

eventually lead to wage inflation, they begin to see that the summer, as they’ve told us time and time again, I

think they’re prepared to begin to move.

Matthew Freund: But I think the problem is, is that inflation is actually going to the other way. So for right now, when the dollar

goes up, the good news is, is what we all get to buy gets cheaper, but that is actually, it’s disinflation. So

inflation is going down. And that’s a little concerning, it’s actually at levels, when they actually started

quantitative easing, three and four years ago, it was actually higher than it is today.

Raman Srivastava: It’s going down today, the question is will it continue ‐‐


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Matthew Freund: Exactly. And so, you nailed it. And so, I think the issue is, is the Fed going to be early, precisely on time, or

late? So precisely on time is gratuitous, right? That’s just luck. So, are they going to be early or late? I’m

guessing they want to be late, because they’re really close to zero, they don’t have a lot of runway.

John Sweeney: So, what does that mean for our fixed income investors here? They can remember situations where

government bonds were paying double digits, and nobody’s seen numbers like that, they’re making tradeoffs

and buying dividend‐producing equities instead of fixed income securities. Make the case to me for fixed

income, and why should these people be buying fixed income securities?

Matthew Freund: Do you want me to go first?

Matthew Freund: So, when you think about fixed income, it is not just one bond market, it is a market of bonds. And there are

parts to the market that we like, there’s parts to the market that we don’t. So I would strongly encourage you

to think about the market more broadly. In terms of making the case, I think when you look at US rates and

compare them to the rest of the world, rates where they are now are something that we’re going to have to

get used ‐‐ we’ve lived with it for two ‐‐ the last two or three years, we’re going to have to live with it for a

little bit longer. With, increasing volatility. So think about the entire market, so there’s places that I know

we’re going to talk about later, bank loans, high‐yield, we think municipals are outstanding values here. And

stay very diversified within that framework.

John Sweeney: Great, OK. We’ve got to come back to some of those ideas that you mentioned, high‐yield, etc. But Jeff, let

me turn it to you. So the stock market hit a new high based on the Fed’s comments today. Why, what does

that mean for investors?


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Jeff Feingold: I can appreciate the challenges, of course, as an individual investor today, an enormous amount of volatility,

as John talked about. Issues with currencies and interest rates, and obviously what’s going to happen with Fed

policy, I know as an equity fund manager, someone who’s particularly bottoms up, meaning at the end of the

day, I’m really thinking about stocks, and my fund in particular is a little bit more sector neutral. The way that

I’m trying to deal with all this, and that I generally try to deal with this, is quite honestly that old adage of,

remaining diversified. Remaining diversified from the types of stocks that I own, remaining diversified in

terms of sector bets, listening to the panelists talk about Fed policy, one of the bets I’ve had in the fund now

for close to three years are financials. I think financials are cheap, but they’ve remained cheap for a long time

now, and the world has changed in certain regards. But, if the Fed begins to raise rates, and the yield curve,

the difference between the long end and the short end steepens, financials will most likely be a very good

investment. And I’ve had to be very patient. But this idea of being diversified in the context of changes is, I

think, one way to kind of traverse this kind of an uncertain environment. I tend, quite honestly, not to be very

good at finding the direction and picking the direction of the economy. I’ve done much better over the course

of my career, again building a portfolio of stocks that can generally do well, hopefully in different

environments.

Nevertheless, I really think about different things. I think about earnings, are earnings going to grow quickly?

Where are earnings going to ‐‐ where are companies and fundamentals going to accelerate the most? Where

are things getting better? And then lastly, valuations, are valuations cheap? I think it’s hard to make a case,

certainly, that they’re cheap. I think you can make a case that they’re not egregious, they’re not terribly

expensive, but nevertheless, we’re past the point where you can, really blindly look at the market and pick

different stocks because the valuations are there. So I really think that for me as a portfolio manager and the

analysts that we have, I’m spending a lot of time thinking about sectors where fundamentals can get better.

So you think about energy prices being low, I think there are parts of the economy, and where consumers will

be helped. Restaurant stocks are an idea that I think is pretty interesting these days. The Magellan Fund owns


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a fair amount of restaurants, and I’ve been increasing the exposure, because I think traffic in general will be

helped by it. So my point is, from a bigger picture level, there are companies still in this environment doing

quite well. And at Fidelity, what we’re trying to do is to really find those companies that are doing well, and

hopefully can continue to do well. I tend to not think about the next 3 to 6 months as much as the next 6, 12,

18, 24 months. That’s where we can hopefully, generate, differentiate ideas.

John Sweeney: So Jeff, can I go back to a point you made about financials, and financials is a very broad category, there are a

lot of different types of financial companies. Which categories are most interesting to you in that financial

sector?

Jeff Feingold: Sure. I mean, as I mentioned John, it’s actually been, as a sector, financials last year underperformed, they

were up about 10%, versus about 14% for the market over the last couple of years, they’ve managed to hang

in there, but they’ve underperformed. Some of the most rate‐sensitive parts of the financials are going to be

some of the money center banks, the JP Morgans of the world, the Bank of Americas, the Citigroups, the

Goldman Sachs of the world. The Morgan Stanleys. Now if you look historically, buying money center banks,

and buying investment banks around one times price to book, meaning the assets of the organization, is

generally a pretty good time to make money in financials. However, the world has changed, as we all know.

The government is tougher on financials, they’re requiring them to hold more capital, and thus the returns

that they can expect on that capital is lower, so there are real reasons why the world has changed. But

nevertheless, they’ve been in this environment, whereas we know rates have been enormously ‐‐ at

historically low levels for a long time, they haven’t had any opportunity to really get yield on their loans, and

so if we do see rate increases, and I think all the panelists, those who have much better expertise than I do, as

it relates to rates and the macro, we’ve generally, I’ve had the bet, for the last ‐‐ as I mentioned, for the last 12

or 18 months, that at some point, rates will rise. That’s been wrong, and it’s ‐‐ the opportunity cost for

holding financials in the fund has been pretty great. Nevertheless, they are cheap, and if we see rates


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increase, I believe that financials will be a good sector of the market. Even today, you saw the money center

banks, even today, outperform, given some of the comments and JP Morgan had their analyst day today, as

well.

John Sweeney: So Raman, you work for one of those money center banks, your firm is owned by Bank of NY Mellon. What’s it

look like from your perspective? You’re looking at the debt side of the equation, so how do you see the same

financial opportunity that Jeff is describing?

Raman Srivastava: Well I see two things. First off, on the debt side, and use JP Morgan or Goldman Sachs, there’s a number of

different ways to play financials on the debt side. There’s senior bonds, there’s subordinator bonds, there’s

hybrid bonds. One of the things that’s happening in the market today is due to this increased regulation,

increased demands on capital, what it takes for a bank to hold capital, you’re seeing a lot of these junior

pieces of debt being bought back, being called, if you will, by the banks. And that’s a good opportunity for

fixed income investors. I think it’ll continue to happen, particularly in Europe. The other thing I’ll mention,

just on the back of Jeff’s comments, is the yield curve. The yield curve, the difference between, as Jeff said,

short dated yields and long dated yields, is very important for stocks, banking stocks. And I think what’s

happened is the yield curve has continued to flatten, meaning that where yields have fallen the most have

been on longer maturities. If we do see the Fed begin to rise, raise short‐term interest rates, what that could ‐

‐ obviously, that’ll have the effect of raising interest rates on the shorter maturities, it’s a question as to

what’ll happen on the longer end. Because if the Fed is embarking on policy rate hikes, that will be seen by

the market as them perhaps tightening too early, or at least getting ahead of any sort of inflation that may be

having the chance to come down the road. So, in cycles historically, if you look at periods where the Fed’s

begun to increase the Fed funds policy rates, typically you could see, flat yield curves. In fact, if you look

globally today, Australia and New Zealand, you see examples of yield curves where whether you’re looking at

a 1 year bond, or a 2 year bond, or a 5 year bond, or a 30 year bond, the interest rate’s the same. You know,


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it’s, 2 to 3% across the board. And I think, we could be sitting here in this panel two or three years from now,

and we could be looking at a US, interest‐rate market which is 2 to 3%, regardless of whether you’re talking

about a short‐term rate or a 30‐year rate.

Matthew Freund: Yeah, I think that’s what worries them. I mean, I think the idea that they raise rates in the long end just stays

there. I think that’s a downside situation for the Fed ‐‐ that they’re concerned about that.

Jeff Feingold: And, John, I just want to say one quick thing. As it relates to financials, I’m not advocating that financials are

an all‐out, buy. I’m just simply suggesting, back to your original question as relates to what do you do with a

market that is up as much as it is the last, several years? And one of the things I think you can do as investors

is look for contrarian plays ‐‐ plays that haven’t worked. You know, sectors ‐‐ I am overweight healthcare. I

own healthcare. It’s been a ‐‐ obviously, a wonderful sector. Stocks like biotech. But there are other sectors

that really haven’t done great the last three years, where the valuations aren’t excessive, where you need a lot

of patience, but the risk/reward may be as, if not more, attractive than some of those other sectors of the

market that have really participated in this bull run.

John Sweeney: Jed, I’m going to throw it to you, if I can. You manage an international fund ‐‐ several international funds for

Fidelity. Europe has been the laggard of the global economy for several years. Germany is trying to jumpstart

some of the economies, at least, surrounding its own economy. But clearly you’ve got some of the emerging

parts of Europe, like Greece, that have continued to cause turmoil for the European economy. Give us your

sense of what’s going on in Europe and where you see potential opportunities there.

Jed Weiss: Sure. Well, the nice thing about international investing is, there’s always something to worry about. And

there’s nothing like a good, old‐fashioned crisis to present opportunities, so, Greece being the latest. If I think

‐‐ if I roll back the clock a little bit, the euro crisis first started in about May of 2010. And for the next couple of


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years, it was sort of the crisis that kept on giving. Every few months there’d be a new fear that the Eurozone

was going to split ‐‐ the euro would split up, and, PIGS was a dirty word, and what have you. And, basically, a

lot of my strategy in Europe during that period was, hey, let’s look for great franchise businesses that happen

to be in scary‐sounding countries but, actually, their underlying fundamentals have nothing to do with those

countries.

So, if, for example, a Polish hard‐discount food retailer ‐‐ so, they sell cheap food in Poland, and yet they’re

listed in Portugal. And, yes, they also have a small business in Portugal. But, basically, when the market would

worry about the PIGS ‐‐ well, by golly, don’t you know, Portugal is the P is PIGS. And, of course, everything

would sell off, even though Poland was doing quite well, and even in a crisis people like food. And people like

cheap food when times are tough. So the company was doing very well, but the stock was selling off

aggressively. Or, say a security company where 90% of their business is in Latin America, but they happen to

be based in Spain. It’s, the same idea.

Then, starting in about mid‐2012, you had about a 12‐, 18‐month period where, actually, peripheral Europe

did quite well. And there was a big re‐rating as the market basically said, hey, maybe the Eurozone won’t split

up after all, and you had a big trade from what I like to call lousy to mediocre. And the problem there is,

there are a number of peripheral European countries where the domestic economies are going to have a

tough time getting out of mediocre. And so, that shifted my attention more towards Central Europe. Not so

much Germany and the Nordics, because by and large, those economies never really had a recession, and the

markets never really got cheap. But if you look at countries like Belgium or the Netherlands or Denmark, or

even Czech Republic, there, there were specific financial and housing crises within those markets. So the

markets got real cheap. And yet, if you look at the balance sheets for those countries, they were much better

off than their peripheral brethren. And their trade ‐‐ their economies were heavily tied towards Germany and

the Nordics, where ‐‐ which, as I mentioned, those economies never really slowed. So you were able to get


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cheap stocks, focused on those domestic economies. Yes, they may have re‐rated from the sort of bad to

mediocre. But there’s the real prospect they can go from mediocre to good.

So that’s where I found a lot of opportunities. Industries like commercial lighting fixtures ‐‐ very consolidated

industries where the relationship ‐‐ they have strong pricing power because architects basically design‐in

specific commercial lighting fixtures. And even when times are tough, they don’t have to cut prices. That’s

critical, because that means that, in the next cycle their margins and returns can be better than the last. So

that’s where I’ve been finding the most European opportunities. I will say this latest resurgence of scares over

peripheral Europe and, specifically, Greece, have me once again looking more carefully at peripheral Europe.

But the difference between the selloff we’ve seen of late in Greece is, it’s been a much more orderly selloff.

Sort of, the market is no longer throwing the babies out with the bathwater. It’s now being more specific, and

the stocks that are going down are sort of going down with reason. That’s less where I find opportunities. The

one exception to that rule has probably been Russia, where there’s still a lot of fear in the market, especially

earlier last year when the Russia crisis first began, where there was a lot of ‐‐ if you do any business in Russia,

we’re selling your stock no matter what. So, there still are some babies‐out‐with‐the‐bathwater type of

opportunities with companies with some Russia exposure. But I would say it’s been a little bit more of an

orderly selloff this time around.

John Sweeney: Great. So you mentioned PIGS. That’s a term ‐‐ Portugal, Italy, Greece, Spain.

John Sweeney: Candice, your firm, I believe, coined the phrase BRICS, which was sort of the last basket of currency ‐‐

countries that people should think about. How do you see the opportunities in Europe? And then I’m going to

ask you to extend over to the rest of the globe, if you can.


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Candice Tse: Sure. So, within Europe, we actually, well, had interesting thoughts about Europe in general. Because we

were calling it sort of one of those dark‐horse trades from last year to the beginning of this year. And the

reason why we would think that is because there’s so much negative sentiment in these markets. Because

there is a divergence, right? If you compare these markets versus the US, the US is growing at north of three

percent this coming year, whereas in Europe you’re growing at about one percent. So, from that standpoint,

monetary policy has diverged as well, where our Fed is exiting QE, but Europe is actually starting their QE,

which should start as early as next month. So, from that standpoint, we do think that, if that positive vibe

flows through the market, we could ‐‐ you can be pleasantly surprised in terms of your returns in the euro

area.

And then, how does that impact the rest of the markets? You mentioned the BRIC ‐‐ Brazil, Russia, India, and

China. Right now, in the emerging markets, the way we think about it long‐term, that’s where the people are,

right? Demographic‐wise, you have a lot of people ‐‐ a lot of young people. They’re going to take on more

jobs, make more money, buy more things. However, right now, it’s a very idiosyncratic market. So depending

on, where you’re looking at; depending on which region; depending if they’re oil importing or oil exporting ‐‐

that’s how we would look at those markets. So when you consider emerging markets at this point, yes, we

think it’s interesting in certain areas. So, oil importers like India, where they’re, perhaps, importing about two‐

thirds of their energy. As energy plummets, 50%, that will help their economy. On the flipside you have

countries like Russia that rely heavily on energy. Those would be markets we’d be a little more careful about.

So, that’s how we think about investing in emerging markets. You can look at it ‐‐ cutting it from oil importer,

oil exporters. There are opportunities. It’s just a lot of idiosyncratic risks, so you need to be particularly

invested in where you’re focusing on.


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John Sweeney: So let me double click, then, if I can, Candice, on oil. So, you brought it up. We introduced the concept here:

decline in prices, it’s great because we’re paying less at the gas tank. That’s important for us. Lots of people

here in Texas and, particularly, with the increase in domestic US supply of oil, people have seen an impact in

their portfolios, particularly for those folks who hold oil securities that have historically paid some handsome

dividends. So what does that mean for the rest of the world? What should we think about when we think

about declining oil prices? How much further will they go? We start to see divergent policies of the oil‐

producing countries around the world, some who are trying to play catch‐up, and really are going to have to

produce regardless of whether the price continues to fall.

Candice Tse: Right, oil prices have dropped substantially. So, you’re looking at about $40, $50 oil. It could stay at this level

‐‐ the equilibrium for now. It could dip a little lower. And the reason why we say that is because when Janet

Yellen presented today, she talked about the oil issue and how it’s more of a supply issue, right? All of a

sudden, you have all this shale here in the United States. All of a sudden, you have all of the energy being

extracted in the Middle East and in Africa. And you have an oversupply issue. So, what happens now is, we

need this new equilibrium to take place, to force out some of the, higher‐cost, higher‐levered type of energy

producers. And from that, we might see a lower equilibrium. But as the supply‐and‐demand imbalance starts

to balance out, we foresee that, probably by the end of the year, oil could go back up to about $65 a barrel.

So what does that mean for the investor? What does that mean for corporations? Corporations, in general,

have come out with their earnings, right? A lot of them have said, costs ‐‐ if they’re, spending a lot more

overseas and oil prices are lower, that helps them, right? Because now you have more savings in your

pockets. Corporations can actually spend more. On the flipside, if you’re exporting from the US and oil is,

your export, that’s going to impact your country, right? So it really depends. It’s going to open up

opportunities, particularly in areas that have sold off with the energy market. So you have energy selling off,

in general. But you also have certain parts of the energy markets, like MLPs ‐‐ master limited partnerships ‐‐


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that have also sold off because they’re related to energy. But if you think about them, master limited

partnerships are more focused on infrastructure. So they’re focused on pipelines. They’re focused on the

midstream. So if you think about, the infrastructure, procedures here in the US with interstate highways, it’s

the same thing: connecting the energy production to the end client.

So from that standpoint, it’s more volume‐focused. It’s less focused on oil prices. It’s more focused on natural

gas. So from that regard, it shouldn’t have plummeted quite as much. So you’re seeing opportunities to get

into MLPs, who actually provide quite nice yields, and also potential for distribution growth. And in addition

to that, different sectors and different asset classes ‐‐ for example, high yield, as we mentioned ‐‐ they’ve been

throwing out, the baby with the bathwater, again. Energy prices plummeted. High yield ‐‐ actually, the

spreads go wider with that plummet. And if you look at high yield and break it apart, energy represents about

17% of the high‐yield market. And if you look at the other 83%, it’s not related to energy. So this is a great

time, because of the energy selloff, to invest in things like high yield. Because now you can get in at great

valuations because of the selloff.

So lots of different opportunities, not necessarily just focused on energy. But it’s provided a lot of opportunity

to get into the market.

John Sweeney: Real good plays. Matt, you talked about high yield a little bit earlier. Can you expand on Candice’s point?

Matthew Freund: Sure. Well, I could, but ‐‐ so, just to ‐‐ we get asked a lot, why haven’t we seen the benefit, right? So, why

aren’t consumers spending more because they’re saving this money? And it’s roughly $1,000. There’s a lot of

different ways to slice and dice it. But most companies that we’re looking at today, they hedge. Meaning, if

they are a big user or a big producer of energy, they will go out in the derivatives markets and hedge that

production or that cost. So Q4, which just got done ‐‐ that was all hedged. Really, Q1 and Q2 ‐‐ companies


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have a lot of hedges. So, the hedges ‐‐ we think that the impact of what’s going on in energy is really going to

show up in the second half.

Now, that being said, within high yield, you’re right. It is about 17%. That is absolutely true. It used to be

about half of that, and in the last three to five years, the energy exposure ‐‐ I mean, everybody was coming to

the high‐yield market. And, in Texas ‐‐ so, I’m out of San Antonio, and it’s great. I love it. But, three guys in a

truck start their own energy company. And so, that was ‐‐ there was a lot of that sort of activity in the market.

That’s getting washed out. And we do think it’s a little bit early to play the energy sector. We love MLPs. We

think that MLPs are ‐‐ I mean, we’re very overweight in MLPs in the portfolios we manage, and we think that’s

a great opportunity. And, again, so, when spreads go up, prices go down. That’s a great time to buy. So when

worries are higher, the opportunities are better.

John Sweeney: So, Jeff, I was on a plane the other day. I happened to be looking at the company’s financial statement, and

they had hedges disclosed. It was interesting. It was on the mobile application. They only had four or five

little screens, but one of the screens was the hedges that they had on their oil exposure. How much of an

airline cost is related to oil? And what does the drop in oil prices do for airlines and other companies that

might use oil?

Jeffrey Feingold: Sure. There’s no question that some of the real big beneficiaries, at least in the short term, of the drop in

energy prices are the airlines. And, interestingly enough, it comes at a time when there’s a lot of other great

things going on in the airline industry. I actually ‐‐ I started at Fidelity in 1997. I covered the airlines in 1999.

And, back then, if you would have told me that airlines ‐‐ some of the airlines today pay dividends ‐‐ which

they do; some of the airlines have positive free cash flow ‐‐ which they do, really, I would have fallen off my

chair. They’ve been one of the worst industry performing groups over the last decade, burning billions of


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dollars of free cash flow, as you may know. But there’s been, in addition to energy ‐‐ which is clearly, as you

said, John ‐‐ it’s a big part of their income statement.

Now it is ‐‐ certainly some of the benefits are transitory, and I do believe ‐‐ back to what both Matt and

Candice were saying ‐‐ in the back of my mind, going back to this idea that ‐‐ of a contrarian play. I do believe

energy prices are going to correct themselves. Whether or not they go back to where they were ‐‐ I don’t

think they, probably, do. The breakeven ‐‐ cash‐flow breakeven cost of a barrel of oil, I think, is around 65 to

70 dollars. But I do think we’ll see supply being taken out of the market. It’s already happening. And the

market will equilibrate over time. But in the meantime, you have industries like airlines which are big

beneficiaries. And it comes at a time when the airlines are in the midst of a real transformation. How long it

lasts, I don’t know. The Magellan Fund has had a big bet in the airlines for the last year and a half or so.

Delta’s gone from 10 to 50 in the last three years. Because we’ve seen consolidation in the airline industry, as

you know. We’ve seen yields and their traffic go up. As travelers, when you get on the plane, they’re now

charging you for a lot of things they didn’t used to charge you for. Not fun as a traveler, but as a shareholder,

it’s actually quite powerful.

And even anecdotally, what I find, really interesting, over the last 6 or 12 months, that companies are really

finding religion. Such that when you listen to the companies talk on the conference calls, they talk about

return on assets. They talk about dividends. And they have this disciplining mechanism, which is that the

other companies are doing it. Most importantly, they’re keeping their capacity low, and they’ve started to

implement dividends, which is, as you probably know, a natural disciplining mechanism as well.

So, as an investor, quite honestly, there aren’t that many, big transformations that one might see in their

lifetime. And where we are from ‐‐ where we go from here, I don’t know. I just know that we’ve seen a big

move in the airline industry. They’re getting help with oil right now, and there are some things going on that


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suggest that maybe it can continue to last. But valuations are up, so I, quite honestly, I’m still overweight, but

I’ve been taking a little bit of the bet off of the table.

John Sweeney: Jed, does the same hold true internationally?

Jed Weiss: Yeah, well, I’d say there are both micro and macro opportunities ‐‐ so, company‐specific and countrywide, as

Candice was getting to. I should give a little disclaimer, which is, much like Jeff, I am very much a bottoms‐up‐

oriented stock picker. So I spend a lot of time on portfolio construction, trying to make sure that it really is

underlying stock‐picking driving the fund, and not macro exposures like where will the price of oil go? You

know, I don’t spend as much time trying to figure that out. But I will say that there have been some real

beneficiaries. And the ones I’ve been ‐‐ the types of companies that I’ve been most attracted to are

companies with pricing power. Say, the paint industry, or the carpet industry, where it’s a little heads‐I‐win,

tails‐you‐lose. When oil prices go up ‐‐ and, these are ‐‐ these are, of course, businesses that ‐‐ where a very

important raw material is some form of petroleum‐based product. When the price of oil goes up, they raise

prices: “I’m sorry, Mr. and Mrs. Customer. You know our raw materials are up. We need to raise prices.”

And when the price of oil goes down: “Hey, we’re going to ‐‐ we’re not going to cut your price. Sorry, we’re a

duopoly, and that’s the way it is.” Those are the types of businesses I love, and especially when the raw

material drops in half. That’s great news.

But also, on a macro level, you highlighted India, and I totally agree. Turkey is another example. There’s a

number of countries that have been, historically, major importers of raw materials, especially ‐‐ including

energy ‐‐ often having big current‐account deficits like India has historically. Suddenly, the current‐account

deficit is coming down. Inflation rates are coming down. And that’s giving the central banks in places like

India and Turkey the leeway to start cutting rates and stimulate the economies. So, there’s some macro

opportunities there, as well.


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John Sweeney: So, Raman, can you give me a perspective on what investors should be thinking about? Jed threw out the

concept of some of the economies around the world like Turkey and some of the emerging economies. Do

you see opportunities there? You run some global bond portfolios.

Raman Srivastava: Yeah, and I think this is one thing where we know ‐‐ we have touched on this a little bit, but I think there’s a big

opportunity in the markets today in global bonds. There was a graphic put up at the beginning showing rates

of growth differing between the US, Europe, Japan. And there was a graphic around currencies ‐‐ how

commodity‐based currencies like the Australian dollar or Canadian dollar have really fared pretty poorly in this

decline, for obvious reasons. If you think about what drives bond prices, it’s income ‐‐ the yield you’re getting,

which obviously is pretty low in most developed markets, anyways. But it’s also price appreciation, which can

come from yields falling.

So let me give you an example. If you ‐‐ one of the graphics up there was Australia. Australia ‐‐ currency has

been hurt because of the ties to China, which is slowing, as well as a drop in commodity prices. What’s not

talked about as much as the currency is the interest rate. So, interest rates in Australia have also come down

quite a bit. The policy rate there is a lot higher than what it is here. It’s over two percent. So if you think

about that as a fixed‐income investor, even though rates are relatively low in Australia outright, they are still

high, and there is still scope for the central bank to lower rates. And we think they will. So, that provides an

opportunity. So even within the developed world, you have places like Canada or Australia. If you’re able to

take a global perspective, these provide some opportunities.

In the emerging world, on the debt side, it gets a little trickier. Because in the emerging world, you have to be

worried about, real chance of default in places like Argentina or Venezuela. But I think where we’re finding

opportunities in the emerging world today are, many of those economies which are, I would say, on the cusp


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of emerging markets and developed markets. Places with ‐‐ that, again, don’t get a lot of airtime, we don’t

hear a lot about in the press. But places like Morocco, which is going to benefit greatly from the decline in

energy. Or Lithuania, or Eastern Europe, or Central Europe ‐‐ these are places who’s going to benefit from QE

from the European Central Bank, indirectly or directly, and also benefit from what’s happening, in many cases,

in commodities.

So I think, taking a global approach, we’ve been advising our clients to take a global approach and not just

think about the US. Because if you think about 2013, when interest rates in the US rose, US Treasuries were

one of the worst‐performing global bond markets. Last year, 2014, interest rates fell in the US a lot. Again, US

Treasuries were one of the worst‐performing markets in the global bond market. So I think, what’s happening

is, low rates of growth, low inflation ‐‐ these are good things for bond investors. And that’s creates some

opportunities globally.

John Sweeney: So, Matt, I’m going to go back to high yield, because we touched on it in a couple of these prior comments.

But can you give us your perspective on how you’re advising your clients to structure portfolios, and what

you’re doing within your funds, particularly with regard to some of those different types of bond asset classes

like high yield?

Matthew Freund: Sure, you bet. So, again, it’s a market of bonds, not just one bond market. And there are sectors in the

market that we think have more appeal. So, domestically, we do like high yield. We do like leveraged loans. I

don’t think we talked about that much. So these are loan funds ‐‐ we have a slightly different approach. We

like to buy things when they’re cheap. So we like to buy, again, that ‐‐ the contrarian bent that you’ve heard

talked about in the panel. That is definitely true on the fixed‐income side as well. So, when everybody is

rushing into a market, you don’t get really good terms. You don’t get a really good coupon. And the bonds


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are OK, but they don’t outperform. When things are hated a little bit, when there’s a little bit of hair on it,

then the window of opportunity opens.

So again, within the market, we still like commercial mortgage‐backed securities ‐‐ CMBS. So, back in 2008, a

lot of empty office towers ‐‐ there was a lot of pressure. We have that in our portfolios now. The spreads

have come in quite a bit, but there’s still some opportunity. Asset‐backed securities ‐‐ again, the crisis in ’08 ‐‐

I hope we never live through that again, but it presented phenomenal opportunities for us. I think, the

panelists, you were talking about some of the hybrid financial securities. We like those, too. We think that ‐‐

so, being called when you’re at a premium to part isn’t that great. But some of these securities are still at

discounts. The fact that the issuers want to take them out provides some great total‐return opportunities.

So you really have to think very ‐‐ oh, and airline bonds ‐‐ so, EETCs. The bond market was ‐‐ so, there’s a

difference between fixed‐income and equity markets. The equity market sensed the opportunity first. The

bond market sensed the problems first. And sometimes we can’t let go. So, the airlines, they ‐‐ airline

defaults ‐‐ that was yesterday’s story, but the fixed‐income market held onto it. So, EETCs, which is how they

finance a lot of the aircraft, had very attractive yields, and we were putting those in. So, we’re ‐‐ we think very

holistically, very globally, and really try to look for the opportunities that other investors don’t like.

John Sweeney: We hear a lot about huge US blue chips and dividends. But what are some of the characteristics about

dividend‐paying stocks outside the US that may be different or unique? Jed, I’ll turn it to you first.

Jed Weiss: We started the conversation with interest‐rate policy. And what’s interesting is, there’s a lot of different

crosscurrents within interest‐rate policy. And in countries like Japan, say, where they’ve taken a very

aggressive approach towards quantitative easing, there’s that much more of an appreciation for dividend‐

yielding stocks. And so, you’ve seen massive re‐rating in stocks. Because when rates are zero ‐‐ or in Europe,


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as you mentioned, when rates are negative ‐‐ people are willing to pay a substantial premium for any kind of

yield. And if you have a high yield, better yet.

So in my mind, we didn’t talk about Japan. But I’m going to briefly segue, if I could, because I think it’s

relevant, because there’s a lot of good, dividend‐paying stocks in Japan, especially in smaller and mid‐cap

Japan, which in my mind, is one of the great ‐‐ remains one of the great valuation anomalies of our time. It’s a

market that’s been underperforming for 25 years. No one’s really paying attention. You go visit these

companies and no investor has seen them for several years. And people would always ask ‐‐ people would

often ask me, “Jed, but what’s the catalyst? What will get folks to pay attention to this bastion of cheap

securities?” And I really didn’t have a good answer for that, for a number of years, until about a couple of

years ago when Kuroda decided to double the monetary base. And since then, they’ve ‐‐ Kuroda being the

central‐bank head of Japan. And since then, they’ve continued to pour gas on the fire. And suddenly, the

market is focused on this incredibly cheap asset class, often paying good dividend yields.

So I think there’s been ‐‐ there are some great opportunities, and the types of central‐bank behavior that

we’ve seen, not just here in this country, but quantitative easing is just getting going in a lot of international

markets. It’s really putting a premium on dividend‐yielding stocks.

John Sweeney: Candice, can I ask you to comment on Asia, because we didn’t get to that a lot? Jed just brought up Japan, but

we talked about China. You referenced China’s growth being positive but slowing, and some of the impacts

that that has on other parts of the Asian markets. We got a question from Albuquerque, and it says, “What

metrics do you use to understand the Asian economy? Specifically within China, I believe, the government has

not been, to put it modestly, forthcoming on the truthfulness of their economic data.” Anything that you and

your colleagues at Goldman Sachs think about when you’re trying to evaluate markets where their financial

disclosure, perhaps, is not as developed as it is in the US?


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Candice Tse: Believe it or not, we get that question quite a lot. And what our response is, is the fact that, even in countries

like the US and the UK, for example, there are questions about the sustainability of the information coming

out. So for us, it’s important to have people on the ground and running. So they’re speaking the language.

They can go to the local ports and double check the numbers. So having that sense of confidence allows us to

assess those markets better than you or I sitting here in New York. You’re actually on the ground and running.

You’re actually in the conversations. You’re meeting with company management. So, for us, that’s a key

component of being able to evaluate those types of countries and those economies outside of the US.

John Sweeney: OK. We got a question from New York that said, “Can you comment on mortgage REITs at this stage of the

market cycle?” So, does anybody want to take REITs? OK, all right, Matt. You’re right in the middle here.

Matthew Freund: So, OK. Mortgage REITs are not traditional REITs. So that, when you think about a REIT, it goes out and buys a

property, a building, an office park, retail space. That’s not what mortgage REITs do. Mortgage REITs will

enter the repo market. So, that is a very technical market. It’s basically pledging collateral, getting very low‐

cost, short‐term lending, and then use that money to buy longer‐term securities. Often they’re government‐

guaranteed. Sometimes they’re not. And then they have ancillary businesses around that. So here’s the great

thing: if you think rates are going down, and if you want long duration, mortgage REITs will give you that. The

bad thing is, if that doesn’t happen, they’re leveraged. And I don’t have the statistics memorized, but they’re

leveraged seven, eight to one, and sometimes higher. So when rate ‐‐ when the yield curve flattens, that we

talked about, they get hurt. So there is some volatility in the mortgage REIT space. But they’re not the REITs

that you may think of when you see office properties.

John Sweeney: Yeah, Jeff?


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Jeffrey Feingold: And I would just say, going back to that chart that you had of sector performance, and you look at the

performance that utilities had last year, which was really enormous. And for me, we talked about this idea of

diversification ‐‐ I know, a word that you hear a lot, of course, and it may be overused at different times. But

as someone who is running a diversified portfolio, and generally doesn’t take big sector bets plus or minus

three or four percent, industries like REITs and utilities, for me, are really kind of striking examples of why

sometimes ‐‐ at least, again, for me ‐‐ I remain bottoms‐up. Because generally, it’s hard to know sometimes

when a sector is going to take off. And the reality is, we’re talking about the strive for yield. And in a yield‐

starved environment, as the panelists have talked about, these sectors really do stand out.

In terms of where we go from here, valuations ‐‐ traditional valuations on sectors like utilities certainly seem

stretched. But back to the very beginning of this conversation, when we talked about where rates are going,

that still is ‐‐ there is some guesswork involved there. And thus, I’ve even begun, around the halls of Fidelity, a

little bit ‐‐ on the one hand scary, on the other hand people start talking about, is there a new paradigm? If

rates stay where they are ‐‐ if they stay lower for longer ‐‐ that stable yield, and where, for utilities, may

continue to provide investors with, again, a safe haven to go.

So for me, as a diversified manager, it means that I really try not to ignore different sectors in significant ways.

As investors, the great thing is, you have the ability to look, too, at all these different sectors. I think being

contrarian and looking for opportunities where things haven’t participated are good. But avoiding sectors, I

think, over time, can pose problems, too.

John Sweeney: So we’ve got a question from the audience here in Dallas: “Tech was one of the best‐performing sectors in

2014, mainly driven by large legacy names.” So, by “legacy names,” this investor has defined them as Apple

and Google. So that gives you some perspective of what we think of as legacy within the technology industry.


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“But outside of Apple and Google, are there opportunities in SaaS and cloud‐computing themes?” Can I throw

that out to anyone who wants to comment on technology?

Candice Tse: Just broadly, technology as a sector we think is very interesting at this point. Because as the US economy

accelerates, where you want to invest are in more cyclical types of areas, and technology is one of those

sectors. So given that that’s been lowly valued ‐‐ it’s actually pretty cheap ‐‐ thinking about in terms of US

accelerated growth, we actually like technology at this point.

John Sweeney: Great.

Jeffrey Feingold: And I would just say, very quickly, good question. But interestingly, if you look last year at the top performers,

as relates to those legacy performers, you look at companies like Intel ‐‐ I think Intel was up 35, 40 percent ‐‐

Microsoft, Hewlett Packard. In 2012, I think Hewlett Packard may have been the cheapest stock, or one of the

cheapest stocks, in the S&P. I think the multiple on HP was about five or six times earnings. It doubled in

2013. It still remained one of the cheapest stocks in the S&P. And it was up, again, a big move, last year. I

think it was up another 30 or 40 percent. It still remains one of the cheapest stocks in the S&P today. And the

reality is that these are legacy companies that a lot of investors, including me at times, have avoided these

names. But they worked because the cash flow is there and the dividend is there. Another reminder that cash

flow and dividends, in an environment like this, are important.

John Sweeney: Jed, do you have a point of view?

Jed Weiss: It’s a ‐‐ technology is a smaller portion of the international indices than, say, here in the US. But I think there

are some real ‐‐ there are some very interesting opportunities in international tech. And in many cases, whole

categories of opportunity that really aren’t available within the US market. So for example, mobile messaging


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networks ‐‐ WhatsApp has gotten a lot of press here in the US because Facebook paid a big multiple for it. But

there’s, similar types of businesses that are, arguably, more dominant, earlier in their penetration curve, so

should have greater growth prospects, and trade at a fraction of the multiple that Facebook paid, in places like

China or Korea or Japan, etc. Also, classified ads ‐‐ Craigslist is, by and large, run as a nonprofit entity here in

the US, so it’s not a big business that people think about as a big, investable opportunity here in the US. Buy

there’s some dominant classified‐ads franchises overseas where there are a number of investment

opportunities. So I do think, actually, international tech is a very interesting place to be.

John Sweeney: OK. A question that was submitted by Robert from Dallas, and I hope that he’s in the room here: “Choosing a

good buy is not so hard.” You might dispute that. “But how do you decide when to sell?” So I’ll throw that

out to anybody. Who wants to take that? Raman?

Raman Srivastava: Well, and ‐‐ so for ‐‐ as bond investors, you’re trained to always think about when to sell. We have a negative

point of mind. I think, for ‐‐ it’s an interesting question. It’s a behavioral finance question almost. You know,

from my perspective, for us, as a bond investor ‐‐ for corporate bonds in particular, the one thing you’re

looking for is any sign of a turn in your thesis. Because if you’re wrong on a corporate bond and it defaults,

you can lose, half or more of your money. Whereas if you’re right, you’re really, basically, clipping a coupon.

So it’s ‐‐ so, we sell, pretty quickly, in corporations where we think the investment thesis is changing, where

there is a chance of default.

When you get into the other things in fixed income, the nice thing about bonds is, for the most part, they’re

extremely liquid and you can get in and out very, very quickly. So if we happen to be positioned wrongly... We

had a position in inflation‐protected securities. As oil began to fall, obviously that thesis changed. We can get

out of that position very quickly. So we’re continually monitoring both, micro and macro themes. And the

good news is, as bond investors, we can get out pretty quickly. And, that’s basically what we’re looking at.


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John Sweeney: Jed, I’m going to go to you, and then come back to Matt.

Jed Weiss: Sure. In many ways, my sell process is the inverse of my buy process. So, I look for multiyear structural‐

growth stories, high‐barriers‐to‐entry businesses, at attractive valuations based on my earnings forecasts. And

I tend not to trade my fund very often. I hold onto these franchise businesses for a long time. To me, high

barriers to entry means pricing power, for the reasons that we talked about earlier. It gives me a long term ‐‐

a way to forecast a company’s earnings for a long time, and it means that, even in a down cycle, these are

companies that are going to hold pricing. They can cut costs, so when demand comes back, their cycle‐to‐

cycle margins and returns are going to be higher.

So I’ll tell you, when it’s ‐‐ the right way to ‐‐ my favorite way to be selling a stock is because the third category

goes away ‐‐ namely, the stock gets really expensive. Because that means I was right and the fund

shareholders did well. The way that I’ll be... and typically I’ll trim. It doesn’t ‐‐ you don’t tend to get that kind

of performance all in one day. It happens over time, and so I’ll trim into the strength. The way to get me to

sell more aggressively is if category two falls apart, where maybe there’s a change in the competitive

landscape, or maybe my initial analysis was faulty in some way but, by and large, this is a business that doesn’t

have the kind of pricing power that I thought. Because suddenly that means that my long‐term earnings

forecast ‐‐ again, I’m turning over my fund, 20%, 25%, so I’m really looking out three, five years, or longer.

Suddenly that three‐to‐five‐year earnings forecast is at real risk because I can’t trust the pricing power of a

business. And so, that’s the category where you’ll see me sell more aggressively.

John Sweeney: Matt, come back to you.


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Matthew Freund: So, I’ve been managing money on the institutional side since 1999. And I will tell you that learning how to sell

is ‐‐ it’s a very difficult thing to do. So what I have learned over the years ‐‐ so, I love the idea, well, it hit my

sell target. You know, I’ve doubled my money. Now it’s easy to sell. So I don’t think that was embedded in

the question. I think the question is, when the thesis is wrong, or when there’s a problem. So what I’ve

learned really ‐‐ and this was an ’08 lesson ‐‐ is all‐or‐none thinking is really difficult. So when the story starts

to change, change your positioning. And, again, I would challenge everybody in the room and everybody

watching. I mean, all‐or‐none thinking ‐‐ it’s what we’re trained to do. It’s good or bad, yes or no. I want

more. Really, trim on ‐‐ as the story changes, reduce your holdings, and vice versa.

John Sweeney: Great. We’ve got just a few minutes left here, so what I want to do is, I want to give everybody a chance to

give one last thought to our audience here in Dallas, and to those watching around the country. So, Jed, I’m

going to start with you and then work down the panel, if I can. One last closing thought, if you can.

Jed Weiss: I’m going to give two thoughts. First, thank you for your time. The second thought is, I think it’s important

that folks not forget about international markets and international equity opportunities. It may not be

appropriate for everyone, so it depends on your own individual investment needs. But, especially in a year

like last year where the US market did so well relative to the world, a lot of folks are asking, “Why would I

invest internationally at all?” And I think that misses a couple of important points. First of all, international

markets represent about half the global market cap ‐‐ the whole market cap of the whole world ‐‐ and are

over 70% of the single‐stock opportunity. So it’s a big piece of the pie. And in some ways, not investing

internationally is kind of like buying an S&P fund that only invests east of the Mason‐Dixon, and there’s not a

lot of ‐‐ or, I’m sorry, south of the Mason‐Dixon, east of the Mississippi. You know what I meant. Got to get

my geography right. But also, international stocks are cheap relative to their own history, and versus their US

brethren, on almost any metric you look ‐‐ price to book, price to earnings, dividend yield, free‐cash‐flow yield,


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etc. And over time, I think you’ll find greater growth, and these tend to be less efficient markets, which means

my job is a little bit easier. So, anyway, something to consider: international equities.

John Sweeney: Great. Candice?

Candice Tse: Same ‐‐ thank you for joining us. For us, a main question that our clients tend to ask us is, how can I generate

income without taking on too much risk? And what we’re seeing is rates at very low levels. We’re seeing

high‐yielding stocks trade very pricey ‐‐ on a pricey level. So from that perspective, we think trying to stretch

for yield and loading up on those two areas ‐‐ rates and also high‐yielding stocks ‐‐ is actually very, very risky

for your portfolio. So given the divergence in the markets that I talked about and the panel talked about, this

is an opportune time to diversify your portfolio. So in your search for income, I would search for income in

areas like high yield, in bank loan. We talked about emerging‐market debt; other less‐traditional fixed‐income

areas within the equity market; REITs; also things like MLPs. That should enable you to build an income

portfolio and take on, more diversification. That’s the way we think it’s more prudent to build an income‐

based portfolio.

John Sweeney: Super. Raman, your perspective?

Raman Srivastava: Yes, and thank you all for your time. And I’d say, just picking up the diversification ‐‐ we’ve mentioned that

word, I don’t know, 10 times tonight. I think, in the fixed‐income space, if you think about this year, the

central banks around the world are falling over themselves trying to ease policy, whether it be in Europe

starting next week with quantitative easing, Japan, Canada, Australia. You know, I could name ‐‐ I could go on

and on. In your portfolio of fixed income, you have to remember it’s not just income. You want safety. You

want liquidity. You have to be worried about price appreciation and depreciation, which happens with yields

increasing or decreasing. The Fed ‐‐ we can talk about when it’s going to happen ‐‐ June, September. The Fed


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is the only major central bank which is on the verge of tightening policy. Every ‐‐ most other major banks are

easing in some shape or form. Global bonds, on a, diversification basis, if you can hedge the currency, I think

make a lot of sense for fixed‐income investors. As you’re trying to think about what to do in fixed income

domestically, without giving up the qualities of safety, liquidity, and income, albeit at lower levels.

John Sweeney: Matt?

Matthew Freund: Boy, I wish I went first. OK, so, thank you, obviously. But ‐‐ so, diversification. Diversification is really

misunderstood. When I talk to investors, people think, “Yeah, I want diversity. I want half my portfolio to go

up 10%, and the other half to go up 20. And that sounds great.” But that’s not the way it works. And that’s

not the way it is. So there’s a lot of unusual things going on in the world today. And you’ve heard, like, really

smart people, talk about their markets. But when rates are negative? That’s never happened. When you’ve

got quantitative easing, we ‐‐ the bankers were unified. Now they’re diverging a little bit. We don’t know how

that’s going to play out. You have evaluations which aren’t extreme, but they’re not cheap. So in that

environment, think about diversity ‐‐ the real kind, not the fun kind. So, have some inflation protection in

your portfolios. So, that’s things like non‐dollar debt, emerging‐market stocks, precious metals, miners. OK,

they’re hated, but that’s because they’re cheap income. So, there are ‐‐ we’ve ‐‐ we didn’t really touch on

munis. I think munis are a phenomenal value here. Think about the market of all different bonds ‐‐ so, high

yield, absolutely, bank loans, municipals ‐‐ have that income component. Have some exposure to GD‐‐

securities that are going to do well with GDP domestically and around the world. And then, have liquidity,

because again, there’s... So, I’ve been doing this for a little over 25 years, and we’ve never seen it. And if

anybody says they’ve ever seen it, they had to have been investing in the ’20s, and that’s not true. So think

about real diversification.

John Sweeney: Jeff, the last word?


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Jeffrey Feingold: Wow. Once again, I do thank you from the bottom of my heart. It’s an incredible privilege, as I mentioned, to

be in front of an audience of the people who’ve invested with Fidelity, had accounts at Fidelity for 10, 20, 30 ‐‐

I think someone stood up with 35, 40 years. Really humbled by that. You know, when I speak to an audience I

say I really ‐‐ I feel like I have the greatest job in the world. For someone who loves the stock market, being

able to eat, breathe, and sleep stocks all day, and do it at a place like Fidelity, where there’s so much help, and

being a part of panels like this, and colleagues from Fidelity, and the others. I’ve learned a tremendous

amount. I guess I would encourage you all to use all the resources that Fidelity offers, and others, and to poke

us and prod us and to continue to ask questions. Reach out to your representatives. They can always get a

hold of us. Quite honestly, I’m always available to help in any way, shape, or form. One of the things that I try

to do that ‐‐ as ‐‐ on a portfolio level, that I think you can keep ‐‐ be mindful of, is just simply, having some

cash for opportunistic buys. In an environment where the market is volatile and valuations are high, and

things... If I ‐‐ as I think about the last 12 or 18 months, and the number of moves up and down, it is really ‐‐ at

certain times, it’s quite amazing.

Earlier in this year, I think about biotech, of which ‐‐ I’m overweight biotech. You may remember last year in

March, there was a scare. If any of you look at the biotech sector, Gilead ‐‐ there were fears about Gilead

pricing. And the market, up until last year, interestingly, was kind of ripping. And then all of the sudden, there

were fears about Gilead and the biotech sector went down fast and feverishly, 10 or 20 or 30%. Now if you

had done nothing over the course of the year, that was the best move. But if you had cash on the [side lines?]

to take advantage of some of that volatility and nervousness and anxiety, and pain at the moment, that really

was a way to make a lot of money. And so, one of the things I like to do is to have a little bit of a cash cushion,

more than normal, given where valuations are, given where volatility is today. So, thank you so much again,

John. Thank you.


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John Sweeney: Great. Well, I want to join all of you in thanking our panelists. Our theme today was ideas for tomorrow’s

markets. I hope you got some of those ideas. And with that, I’d like to get a round of applause for our

panelists tonight. Thank you.

Documents

Transcript February 24, 2015 Viewpoints Inside/Out eReview ...€¦ · Transcript February 24, 2015 ‐ Fidelity Viewpoints Inside/Out eReview# 714766.4.0 1 John Sweeney: Good evening