U.S. Markets closed

Investing in Durable Secular Growth Themes: A Wall Street Transcript Interview with Gavin S. Baker, a Portfolio Manager at Fidelity Management & Research Company

67 WALL STREET, New York - March 10, 2014 - The Wall Street Transcript has just published its current Investing Strategies Report. This special feature contains expert industry commentary through in-depth interviews with highly experienced Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Bottom-Up Stock Selection - High-Quality Companies - Dividend-Paying Stocks - Midcap Growth Strategy - Secular Growth Themes

Companies include: Amazon.com Inc. (AMZN), Illumina Inc. (ILMN), Gilead Sciences Inc. (GILD), Intuitive Surgical, Inc. (ISRG), Pfizer Inc. (PFE), Merck & Co. Inc. (MRK), Biogen Idec Inc. (BIIB), NII Holdings Inc. (NIHD), Google Inc. (GOOG), Rackspace Hosting, Inc (RAX) and many others.

In the following excerpt from the Investing Strategies Report, a highly experienced portfolio manager discusses his investing methodology and top long term stock picks:

TWST: Could you please begin with an overview of Fidelity OTC and its investment philosophy?

Mr. Baker: The Fidelity OTC fund is a large-cap growth fund that is benchmarked versus the Nasdaq, which differentiates it from most other large-cap growth funds that tend to be benchmarked versus either the Russell 1000 or the Russell 3000 Growth.

In terms of the fund's philosophy and stock-selection process, I start with an academic perspective, and the philosophy is that there are three dominant sources of alpha in the stock market. One is valuation, which a variety of academic studies have shown can generate as much as 500 to 600 basis points of alpha per year. The second is price momentum, which has also been shown to generate 500 to 600 basis points of alpha per year. And I'd note that these academic studies are not real-world studies. In other words, there are very few value or momentum funds that outperform by 500 to 600 basis points per year, because in the real world there are transaction costs, size constraints and other factors.

The third bucket of alpha is correctly forecasting future earnings growth and/or earnings revisions, which has been shown to generate up to 3,000 basis points of alpha. That is the essence of fundamental analysis. Correctly forecasting future earnings has the highest alpha payoff because it is the most difficult to do successfully, because it involves predicting the future. People have been trying to predict the future unsuccessfully for thousands of years. In contrast, price momentum and valuation are backward-looking known variables.

I try to blend those three alpha sources into a process that's 30% valuation, 30% price momentum and 40% my fundamental analysis of earnings power in the future. What this means in practice is that...

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.