“We think we’re picking up a lot of good companies that are being negatively cyclically impacted,” said Paul Taylor, head of Australian Equities at Fidelity Worldwide Investment and Manager of the Fidelity Australian Equities Fund.

Mr Taylor said today: “There is some confusion in the market about what is being caused by Reserve Bank of Australia interest rate settings (and resultant high A$) and what is being caused by larger structural shifts.

“Bricks and mortar retailers, for example, are facing structural headwinds that have more to do with changes in consumer preferences, focus on value for money and channels to market and have very little to do with interest rate policy.

“The significant structural headwinds facing large parts of the automotive sector, aluminium smelting, steel and media will be there for a prolonged period regardless of interest rates.”

He said: “Over the long-term there are still very good companies that we think should return to normal profitability levels and we’re picking several up very cheaply and see strong earnings growth over the next three years.

“In contrast, when a company is in structural decline, it is a lot more difficult to work out what is the right price, because how far those structural declines go is very, very difficult to work out, whereas a cyclical decline is much easier to value and work out where and when you think the company becomes good value.”

He noted changes are being prompted by technology, such as online developments and shale gas recovery. There were also major changes underway in the retail, health care, insurance and media sectors.

Mr Taylor manages $2.2 billion in the Fidelity Australian Equities Fund, which has outperformed the S&P/ ASX 200 benchmark by 4.9%, 3.1% and 3.8% net over the one, three and five years respectively to 30 September). The fund has consistently outperformed the benchmark since its inception in 2003 (13.5% return versus the benchmark’s 8.8%).

He suggested that while macro issues, such as global sovereign debt, and politics would drive markets in the short- and medium-term, investors also needed to look at individual company fundamentals.  “How we’ve managed to outperform over the last nine years, I think is from not spending time focusing on the macro, but by being a bottom-up stock selector.

“What you see from the macro is a lot of volatility. The market goes up for a couple of weeks, then it goes down. But if you actually focus on which companies are gaining market share, what their balance sheet looks like, the quality of their management team, their strategy. We think all of those factors are important all the time, but incredibly important in this sort of volatile environment.”

He added: “Just understanding an Australian company doesn’t really get you to where you need. Australia’s a small, open economy. So a lot of the time, with Australian companies, their sales could be offshore, they could have domestic sales, they could have international sales… even if they are domestic-based, their competitors could be international companies. Their suppliers or customers could be international. And these offshore influences can have a great impact on how they perform: you need to understand those factors.”

Overall: “I’m looking for yield and growth. I think in a low-growth world, companies that can deliver good and sustainable yields will be bid up by the markets because that’s obviously very attractive.”

“There are still opportunities for Australian investors to generate income and returns. You’ll still get volatility issues from European sovereign debt issues, US fiscal cliff or China slowing, but at the end of the day, there’s great value, there are strong cash flows, and there are pretty strong balance sheets, which is why we focus on company fundamentals. We think at the end of the day, that’s what’ll drive markets.

“At present, whether a company is a good quality company, low quality company, high growth, low growth; pretty much all companies are trading around very similar ranges. We think there should be differentiation, there should be discernment in the market – and there will be at some stage – and that’s where we see opportunities.

“We think we’re picking up a lot of good companies that are negatively cyclically impacted, but over the long-term are still very good companies and we think they should return to normal profitability levels.”

Past performance is not a reliable indicator of future performance. Total returns (net) shown are as at 30 September 2012 and are calculated using mid-prices and are net of Fidelity management costs, transactional and operational costs and assume reinvestment of distributions. No allowance has been made for tax or the buy/sell spread. Returns of more than one year are annualised. The return of capital is not guaranteed. Inception date: June 2003. This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity Worldwide Investment. Prior to making an investment decision, retail investors should seek advice from their financial advisers. Investors should also obtain and consider the Product Disclosure Statements (“PDS”) for any Fidelity fund mentioned in this document. The PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading from our website at www.fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. This document is intended as general information only. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Reference to ($) are in Australian dollars unless stated otherwise. (c) 2012 FIL Responsible Entity (Australia) Limited.  Fidelity, Fidelity Worldwide Investment and the Fidelity Worldwide Investment logo and F symbol are trademarks of FIL Limited.

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Equity Fund Manager of the Year as voted by The Asset magazine’s Triple A Investment Awards 2012 – was awarded to Paul Taylor, Fidelity’s head of Australian Equities and Portfolio Manager of the Fidelity Australian Equities Fund.

The region-wide honour was bestowed, in part, for consistently achieving above-benchmark performance. Mr Taylor has managed the fund since its inception in June 2003 and generated a 12% return net of fees since its inception, annualised outperformance of 3.7% against the S&P/ASX 200 Accumulation Index benchmark.

Mr Taylor said “I’m proud to have been able to build a quality team of people and a quality investment process that helps provide for people’s retirement needs – and this is what is being reflected in this accolade.”

Fidelity was also awarded Best Asset Management Company in Australia for the third year in a row.

The Asia-wide magazine said the award recognised Fidelity’s lead in servicing the investing needs of institutional and corporate clients and consistently achieving above-benchmark performance.

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“The impact of today’s global uncertainties on the Australian economy, stockmarket and investors this financial year can be separated into those associated with a crisis of confidence and those associated with ongoing debt deleveraging,” says Paul Taylor, Head of Australian Equities at Fidelity Worldwide Investment.

“The impacts from a crisis of confidence in Europe will primarily be focused on eurozone and global debt markets. This could potentially impact Australian corporates with higher debt levels as well as Australian banks seeking wholesale funding. Currently Australian corporates have very low debt levels and Australian banks have been reducing their dependence on wholesale funding due to the very strong growth in domestic term deposits.

“The damage from a crisis of confidence would likely be fleeting. If anything, it might create a short-term buying opportunity for local investors in the Australian market,” says Mr Taylor, who is also Portfolio Manager of the Fidelity Australian Equities Fund.

“In contrast, ongoing global debt reduction will slow global economic growth for a sustained period.

“But a lower growth world is not necessarily bad for markets or investors,” says Mr Taylor. “There are still ways for Australian investors to generate income and returns.

“The Australian market has one of the highest dividends yields in the world and some of the best growth prospects.

“Australian dividend yields are high and sustainable and even if world markets do not go anywhere in 2012-13 investors can receive close to a 6% fully franked yield from the local Australian market.

“With the cash rate heading down, this yield will look more and more attractive to investors. Companies that can deliver a high and sustainable dividend yield, or companies that have growth in a low growth world, or both, will be bid up by the market. They are the ones we want to own.

“At present, whether a company is a good quality company, low quality company, high growth, low growth; pretty much all companies are trading around very similar ranges. We think there should be differentiation, there should be discernment in the market – and there will be at some stage – and that’s where we see opportunities.”

Mr Taylor also notes “I also think there is also some confusion in the market about what is being caused by Reserve Bank of Australia (RBA) interest rate settings and what is being caused by larger structural shifts in markets and economies. Bricks and mortar retailers are facing structural headwinds that have more to do with consumer preference changes, focus on value for money and channel to market and very little to do with interest rate policy.

“Interest rate settings will not change the longer term structural themes playing out in the economy. The significant structural headwinds facing large parts of the automotive sector, aluminium smelting, steel, media and bricks and mortar retailers will be there for a prolonged period regardless of interest rates.”

2 July 2012

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity Worldwide Investment. This document is intended for use by advisers and wholesale investors. Retail investors should not rely on any information in this document without first seeking advice from their financial adviser. This document has been prepared without taking into account your objectives, financial situation or needs.  You should consider these matters before acting on the information.  You also should consider the Product Disclosure Statements (“PDS”) for respective Fidelity products before making a decision whether to acquire or hold the product.  The relevant PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading from our website at www.fidelity.com.au. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Details about Fidelity Australia’s provision of financial services to retail clients are set out in our Financial Services Guide, a copy of which can be downloaded from our website at www.fidelity.com.au. © 2012 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity Worldwide Investment and the Fidelity Worldwide Investment logo and F symbol are trademarks of FIL Limited.

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We first assigned a five-star rating to the Fidelity Australian Equities Fund in 2008. Paul Taylor and his team of analysts at Fidelity have demonstrated great skill over an extended period of time and we believe the manager’s competitive strengths remain in place for this to continue. Conversely, while we continue to regard Ausbil and Perennial Growth as two of the stronger managers in this peer group, we no longer have a five-star level of conviction.

“Ausbil has continued to attract significant inflows across its large-cap strategies, which is testament to its exceptional long-term track record. While the manager’s flagship strategy is soft closed to institutional investors, we believe that strong growth in total assets over recent years may present some additional challenges in terms of Ausbil’s particular style of growth investing. For Perennial Growth, the retirement of Ken West in 2009 and subsequent departure of his replacement earlier this year have temporarily reduced experience in the key resources sector. This, in conjunction with modest performance outcomes relative to peers, has reduced our overall conviction,” said S&P Fund Services analyst James Gunn.

We have upgraded the three CFS growth funds to four from three stars, primarily due to our conviction in the depth of the team’s industry and stock research, as well as improved stability under the leadership of Marcus Fanning. Mr. Gunn concluded: “While we only assigned one five-star rating at this review cycle, the number of four-star ratings is a strong reflection of the overall quality of offerings within this peer group.”

We have now released ratings on nine of the 12 peer groups in our 2011 Australian Equities Large-Cap sector review. We will release the remaining peer groups progressively over the next month, followed by our key findings in the sector report. Reports for all funds rated in the peer groups published today are now available on S&P’s subscriber website www.fundsinsights.com.

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