When Fidelity Investments needed a new manager of $17.4 billion OTC Fund (FOCPX) in September, it didn’t need to look far. The Boston-based mutual fund behemoth tapped its own Sonu Kalra. Kalra was the manager of Fidelity’s market-beating $23.3 billion Blue Chip Growth (FBGRX).
With help from leading stocks like Alibaba Group (BABA), PayPal (PYPL) and Five Below (FIVE), Blue Chip Growth gained 34.93% this year through Nov. 30, outperforming 91% of its large-cap growth rivals tracked by Morningstar Direct as well as the S&P 500’s 20.49%.
He was also the manager from early 2005 through mid-2009 of OTC. Now he remains helmsman of Blue Chip Growth and lead manager of OTC.
Kalra is on track to guide both funds to IBD Best Mutual Funds Award winner status. As of Dec. 1, both funds had outperformed in all four time periods — year-to-date and trailing 3-, 5- and 10 years — needed to join the elite club, if they maintain those outperformances through year end.
In a talk with IBD from his office in Boston, 46-year-old Kalra discussed his investment strategy, his early mentors at Fidelity, why shareholders should not fear that he is stretched too thin by adding OTC to his workload, and more.
IBD: You nearly doubled your assets under management by taking on OTC Fund. How do you know you can handle two funds that large?
Kalra: I have gotten that question a few times. There are a couple of reasons why I’m not spread too thin. The biggest reason is that I have a co-manager on OTC, Christopher Lin. He was an integral part of the growth team here, a research analyst in the tech sector.
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So he covered some of the larger growth stocks in the technology sector, companies like Apple (AAPL), Facebook (FB) and Amazon (AMZN). And those companies have been key contributors to strong performance by both OTC and Blue Chip Growth funds. For him to come on as co-manager makes it possible for us to manage and for me to not be stretched too thin.
Another reason is that I ran OTC before, so I’m familiar with this product. And overall, 80% of the assets in OTC I owned in Blue Chip Growth.
IBD: Are the funds run the same way?
Kalra: There is a lot of overlap in the portfolios. But the nature of the funds differ (at the individual stock level). Their risk profiles are different. There are similar names but different weightings. They are both growth funds. But their mandates differ.
Blue Chip Growth is more of a large-cap Steady Eddie growth fund, whereas OTC is more aggressive and has more smaller names as well as some younger, faster growing companies. Blue Chip Growth is benchmarked to the Russell 1000 Growth. OTC is benchmarked to the Nasdaq (Composite). That’s why OTC has a larger tech component, given the Nasdaq’s larger tech component.
IBD: Summarize your overall investment approach for these two funds, Sonu.
Kalra: I’m trying to find companies where the market is not only mispricing the absolute rate of growth but also the sustainability of that growth. We think of ourselves as long-term investors, trying to take advantage of the market’s myopic short-term focus.
IBD: Do you think of all growth stocks as the same?
Kalra: I try to look at three buckets. One is the business model, how a company makes money. What’s the company’s potential to generate free cash flow? At the end of the day, the value of a company is all of its future cash flow discounted backward. Some companies get mispriced by some investors misunderstanding its potential to generate free cash flow in the future.
Second, I pay attention to whether a company’s incremental business opportunities are going to be better than they are today or are they deteriorating?
Last, I focus on revenue growth. It’s a number you can’t make up. I’m really trying to find companies that can grow regardless of what’s happening in the economy.
IBD: As of your latest disclosure, tell me why you hold Alibaba in both funds.
Kalra: I’ve owned it in Blue Chip Growth for some time. I introduced it to OTC in September when I took over. They are leaders in China of e-commerce, and e-commerce is growing there. About 15% to 20% of overall retail sales happen in China online. That’s higher than in the U.S. because retail infrastructure is not as developed in China. So they don’t have to compete with entrenched bricks-and-mortar competitors there.
IBD’S TAKE: Alibaba has agreed to let Netflix (NFLX) globally distribute a popular detective drama series owned by Youku, which is owned by Alibaba.
IBD: Why have you built your Blue Chip share count in PayPal?
Kalra: The investment thesis is about the online growth of e-commerce. They provide the payment mechanism that makes it easy to purchase online. Their hidden gem is Venmo, a peer-to-peer payment mechanism. It lets people share payments with a social twist that’s appealing to millennials. If they go out together for dinner with friends, they Venmo each other. It’s almost become a verb. Eventually PayPal will begin to monetize it, but now they’re piggybacking on the growth of online commerce. My guess is we’re still a few years away before Venmo makes a material impact on the parent company from monetization.
IBD: Five Below is another name you’ve been building. Is their secret sauce the fact that they sell products for $5 or less to a teen audience?
Kalra: You hit the nail on the head. Brick-and-mortar stores have difficulties. What does work is when you have a great value proposition. That enables companies to drive traffic into stores. Having a price point of $5 says it all. They have iPhone cases, power cords, chargers. They are a beneficiary of the spinner (fad) inside schools.
But there’s more to their story. They have a fast supply chain. They can spot trends quickly and come to market fast and provide unbelievable value to consumers.
They have a differentiated store model and also a store rollout that is growing their square footage more than 10% a year. So that shows healthy top- and bottom-line growth.
IBD: Do you like the way Facebook is developing new platforms?
Kalra: I started as a media analyst at Fidelity. One of the first things I learned was that advertising dollars follow eyeballs. Facebook has been a key contributor to and beneficiary of the change over the past five to 10 years in how people spend time across various media.
Facebook is a core platform, but they also have Instagram and WhatsApp. Those have audiences spending more time on their applications, driving up ad dollars.
IBD: OTC also has stocks that are not household names, like Atlassian (TEAM). What’s your thesis?
Kalra: They provide project management and collaboration software — software as a service. They went public in late 2015. Their software lets teams work on projects. They can seamlessly collaborate inside an organization. They’re showing strong revenue growth, in excess of 30% a year for the past two years. They’re in an underpenetrated market, and they are one of the leaders.
IBD: What made you introduce Intuitive Surgical (ISRG) to OTC fairly recently?
Kalra: They use technology to change the way surgery is done. Their system enables doctors to do surgery through robots. The outcomes are better. Fewer injuries. Safer. More cost-efficient for hospitals as well. It’s a win-win for everyone, hospitals and patients.
IBD: Which Fidelity managers have been your mentors?
Kalra: I feel fortunate to be at an organization with a history of great investors and to be able to learn from them, watch how they work.
Will Danoff (who runs giant $124.6 billion Fidelity Contra (FCNTX) and $28.1 billion Advisor New Insights (FNIAX)) and Steve Wymer (manager of $41.7 billion Fidelity Growth Company (FDGRX)) have been wonderful mentors. I’ve watched their work ethic, their ability to identify great growth companies early and stick with them for the long-term.
I’ve worked closely with Steve Wymer. We’ve been on the same growth team here. We’ve traveled together, visiting companies, attending trade shows. Same with Danoff — we’ve been part of the same team.
I was a tech analyst starting in 1998. For six years I was part of the research team focused on tech, so I supported guys like (Robert) Stansky (who ran Fidelity Growth Company and now-$16.9 billion Magellan Fund (FMAGX) from 1996 to 2005), Danoff and Wymer. So I’ve worked with some high profile managers here at Fidelity, identifying great companies.
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