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Online Extra: "Avoid the Major Blowups"


Like many fund managers at Boston fund giant Fidelity Investments, Ramin Arani started honing his craft as a stock picker by working as an analyst. Arani covered both retail and health-care companies at Fidelity. In 2000, he took the reigns of his first diversified fund, Fidelity Trend, which receives an A-rating on the 19th annual BusinessWeek Scoreboard for delivering strong performance with low risk relative to its large-company peers. The fund's five-year annualized return of 2.9% through December 31, 2003, puts it ahead of its typical large-cap growth peer, which lost money during the same period.

BusinessWeek Personal Finance Editor Lauren Young recently spoke with Arani in a telephone interview. Here are edited excerpts of their conversation:

Q: How do you manage risk in your portfolio?

A: Often it's an evolutionary process: I get an investment idea. I meet the company and get greater conviction. I follow the story, meeting with competitors and suppliers. And then I triangulate that information from a variety of sources. As I go through that process, which is a living, breathing organism, my conviction ebbs and flows.

To the extent that the story hits all the milestones on my roadmap as time goes on, the size of that position will grow. Conversely, in some cases, a wrinkle or crack appears. If that happens, I'll take the position size down until I can do more work and gain greater confidence.

In some industries, I also take a basket approach. There's nothing worse than being right on a theme -- but playing a single wrong name that doesn't work for some extra reason. I've taken the basket approach in biotech, playing on the advancement on oncology research and buying some 5 to 10 names because I think there's a good pipeline in the biotech industry for the next 12 to 18 months.

Q: Why did the fund beat its peers during the bear market?

A: Back when I took over Fidelity Trend in May, 2000, the market had already peaked in March. Even so, things still sounded pretty good in summer of 2000. It was easy to get caught up in all the excitement.

I remember meeting one of our analysts at John F. Kennedy Airport in September, 2000. He'd just come back for a meeting with Nortel (NT), a telecommunications-equipment company. There was a clear change in tone. He had a conversation with one of management members, who made some remarks about growing inventory. That was warning No. 1.

Then we went over to Europe. The message we took away from a lot of those telecom companies there was very similar. I remember calling our trader in New York and asking him to start scaling back. The more work we did, the more meetings we had, the more cracks we found. The cracks we found only grew wider and larger. By the time stocks imploded, I was out of them.

Q: Now how do you feel about the telecom sector?

A: We started getting back into telecom last year when capital-expenditure levels at the service companies had gotten so low. I really thought they couldn't go any lower just because companies had to spend something for maintenance. In recent months and quarters, the outlook for some areas was starting to look better. And in recent weeks, we've seen announcements from basically every major telecommunications company that they will be spending for upgrades.

Q: Has your experience as a Fidelity analyst affected the way you run this fund?

A: I was a health-care analyst, and yes, there are pharmaceutical companies in top 10 holdings. But if you look at my bet in aggregate, it has been no greater-than-market bet. Pfizer (PFE) was one of those names where they had a couple of mergers. With each merger, the story improved, and therefore my conviction level improved, and the bet became a bigger one. But it's also an industry where there's a deteriorating story, hence the overall neutral bet in the space.

Q: How hard is it to sell a stock?

A: Psychologically, if you've been right about something, it's hard to sell it because it sounds pretty good, even if the story is played out. And the valuation argument is very subjective. Yes, it's math, but just because something is trading at 20 times earnings doesn't mean it's expensive. Expensive is a relative term.

Adjusting a position size based on conviction, in some cases, should take a priority over valuation. That helps you prevent being there for the colossal blowups. If you can avoid the major blowups in your fund, you can go a long way to protecting shareholders.


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