Stock switches score success

Manager finds rotating 70% of fund yields sizable profit

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December 22, 2005|By BLOOMBERG NEWS

BOSTON -- Tim McCarron, who runs the $6.8 billion Fidelity European Fund, has doubled clients' money since taking over in 2003 by switching about 70 percent of his equities every year and avoiding becoming attached to any stock.

"The biggest danger with a stock is falling in love with it," McCarron, 43, said in an interview from his office near London. "You should run to the trading phone and sell it if you don't have a good reason to hold it anymore."

The strategy has spurred a 105 percent gain for McCarron's fund over the past three years, eclipsing the 72 percent increase for its benchmark, a version of the MSCI Europe Index. The fund is Europe's seventh-largest by assets, according to data compiled by Bloomberg.

This year, McCarron decided to dump all of his holdings in telecommunication stocks, such as Deutsche Telekom AG, Europe's largest phone company. He moved the money into drugmakers, including Roche Holding AG, the world's biggest maker of cancer drugs.

The average fund changes about 50 percent of its holdings in a year, according to Watson Wyatt & Co., an Arlington, Va., company that advises on investment strategies.

"For any research-driven company like Fidelity, 70 percent is on the high side," said Iain Beattie, who is in charge of investment consulting at Watson Wyatt's London business.

McCarron says he had good reason to get out of telecommunications, noting mounting competition among European phone companies. Declining sales of new mobile phone contracts in Nordic countries, which traditionally have had a higher percentage of cell phone users, signal the industry might be reaching saturation, triggering price wars and pressure on profit, he said.

"The one thing that always worries me is when pricing power deteriorates because of competition in the industry," he said. France Telecom SA's head of finance, Michel Combes, said last month that 2006 would be a "challenging" year for the Paris-based company, due in part to a drop in mobile-phone rates.

That's why McCarron sold the approximately 7 percent of his fund, worth some $480 million, that was invested in companies such as Deutsche Telekom and France Telecom, Europe's top two phone companies, and Telecom Italia SpA, Italy's No. 1 telecommunications provider.

Shares of France Telecom have fallen 14 percent this year, those of Bonn-based Deutsche Telekom are down 17 percent and those of Milan's Telecom Italia have declined 19 percent.

As he pulled money from telecommunications, McCarron detected an opportunity to shift toward European drugmaker stocks, which he said had been unfairly penalized by the troubles of the U.S. industry. The Standard and Poor's 500 pharmaceuticals index has fallen by 7.3 percent this year amid challenges such as the 6,400 lawsuits facing Merck & Co. stemming from its Vioxx painkiller, which was withdrawn last year because of heart risk.

"The basic fact is the U.S. industry has had a lot more problems than the European one," McCarron said. The 13 percent gain of the dollar against the euro this year also will boost drugmakers' earnings, because companies such as Novartis get about half their revenue from the Americas, he said.

He shifted the money from phones into Sanofi-Aventis SA, the world's No. 1 producer of flu immunizations; Novartis AG, Switzerland's biggest drugmaker; and Roche Holding AG, based in Basel, Switzerland.

Shares in Roche have advanced 53 percent this year, and Paris-based Sanofi-Aventis' stock climbed 25 percent and Novartis, also based in Basel, gained 18 percent. This year the fund has advanced 27 percent, compared with a 21 percent return for its benchmark.

McCarron's strategies have helped him turn the fund into one of three Fidelity International funds ranking among Europe's 10 largest stock funds, alongside Graham Clapp's European Growth fund and Anthony Bolton's Special Situations fund, Bloomberg data shows.

McCarron took over the European fund from Bolton in 2003, a decade after joining Fidelity. Bolton had boasted returns of 32 percent in the four years before McCarron took over, outperforming the MSCI Europe index, which fell 34 percent. Neither the fund nor the index includes the U.K.

"He has done a great job taking over from Bolton," said Justin Modray, a financial adviser at Bestinvest in London. "There were some doubters."

McCarron chooses the roughly 150 stocks in which he invests by looking at companies individually rather than using economic trends to identify outperforming regions and sectors.

Over the past two years, the fund has been moving more money into larger companies and away from the smaller and medium-sized stocks it had targeted. While his index allocates about 75 percent of its assets to larger companies, the fund has about 60 percent in large company stocks. Two years ago it held only 25 percent in larger companies.

McCarron says he moved from smaller companies because they have become more expensive in relation to larger companies. At the same time, the fund is outgrowing the ability to invest in smaller stocks, he said. Its largest holding is $350 million in Novartis shares - almost double the size of the average European mutual fund.

McCarron says his best investments this year have been in oil-refinery companies such as ERG SpA, Italy's biggest exporter of refined oil products, and OMV AG, central Europe's biggest energy company. Stocks of both companies have more than doubled as oil reached record prices.

He's not planning to sell out of oil in the near future, because prices may rise further.

"The potential for a supply-side shock is there from the geopolitical risk," he said. "If you look at Nigeria, Iran, Saudi Arabia, Iraq, Venezuela - they are all flashpoints."

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