A young Peter Lynch?

As far as I’m concerned, Peter Lynch ranks as one of the greatest money
managers of this generation. Not only did he make pots of money for investors
in his Fidelity Magellan Fund during his tenure from 1977 to 1990, but he did
so with flair and style seldom seen in the normally staid mutual fund industry.

Anyone who invested $1,000 in the Magellan Fund when Lynch took over saw it
grow to $28,000 by the time he decided to take early retirement at the age of
46. During his period at the helm, the fund generated an amazing average annual
compound rate of return of 29.2 per cent.

Unfortunately, Canadians weren’t able to participate as the fund was
only available in the U.S. But we were able to benefit from Lynch’s unorthodox
yet effective approach to stock-picking, which he described with a blend of
wit and wisdom in his wonderful 1989 book, One Up on Wall Street.

Lynch’s approach was deceptively simple. He would look for new ideas
in such unlikely places as the local mall, the family medicine cabinet, and
his wife’s shopping bag. In one of my favourite anecdotes, Lynch tells
how he discovered Hanes stock when his wife Carolyn returned from the supermarket
with some panty hose that were packaged in a strange egg-shaped container. The
company was test-marketing L’eggs in the area and when Lynch saw it he
sensed immediately that the product would be a winner. He bought Hanes shares
for Fidelity Magellan and the stock went up 600 per cent before the company
was bought out by Consolidated Foods.

Peter Lynch has never returned to active money management, although he still
serves as a consultant for Fidelity. In this new era, when technocrats dominate
the money management business, his common sense, invest-in-what-you-understand
approach is sorely missed.

But now it appears that Fidelity may have found a successor to Lynch and he’s
a Canadian who grew up in Waterloo, Ontario and graduated from Wilfrid Laurier
University. His name is Mark Schmehl and he has Bay Street buzzing thanks to
a remarkable first-year performance from his Fidelity Special Situations Fund.
Never heard of it? It’s time you did.

The 12-month period ending May 31 was a rough one for most equity funds, especially
those with significant U.S. content such as this one (32 per cent). But Schmehl
did just fine for his investors, piloting the fund to a gain of 34.3 per cent
over the period (B units). That’s a truly remarkable result in the circumstances.

How did he do it? “I got lucky on some stuff,” he says, in a self-deprecating
way. Perhaps he did — a little luck never hurts when it comes to money management.
But the key to Schmehl’s success really appears to lie within his inquiring
mind, which sends him off in directions the computer geeks might never consider.
Like Peter Lynch, Mark Schmehl is an ideas person.

His desk at Fidelity headquarters in Boston is always covered in documents
and periodicals. He subscribes to over 400 publications, ranging from Women’s
Wear Daily
to the South China News. “I can’t read
them all,” he admits, “but sometimes just looking at pictures gives
me ideas. I’m really good at pulling out pieces of information from the
piles of paper I get.”

Lately, he’s been studying photos of the earthquake destruction in China
and what he saw prompted him to ask Fidelity’s vaunted research time to
hunt for publicly-traded Chinese steel-makers that will be working overtime
to supply material for the vast rebuilding effort that is needed to get Sichuan
Province back on its feet.

Fidelity Special Situations is a unique type of fund and it’s not for
everyone. Schmehl says the company needed “a strange sort of person”
to run it and settled on him. Officially, the fund is classified as Canadian
Focused Small/Mid-Cap Equity but that only tells investors that most of the
companies in the portfolio will be relatively small and that Canada will be
the fund’s largest geographic component (currently Canadian stocks and
income trusts represent 50 per cent of the mix.) Apart from the U.S., the only
other significant positions are a 9.2 per cent holding in Brazil (which Schmehl
sees as one of the top growth stories of the future), and 4.5 per cent in Bermuda-based

“I take big bets in areas where I think we can make a lot of money,”
Schmehl says in describing his investing style. “I’m a growth manager
all the way. I’m the worst value investor you ever saw; I have never been
able to make money out of cheap stocks. I buy small companies with good earnings
growth, many of which no one has ever heard of.”

So, apart from Chinese steel companies, what ideas interest him now? “Oil.
I’m aggressively thinking about oil, especially deep water oil,”
he says. High oil prices are going to result in more deep water drilling going
forward, he believes, and he has Fidelity’s researchers looking for the
companies that will benefit most. He also likes the opportunities in the Alberta
Oil Sands, in fact Canadian Oil Sands Trust is one of his top holdings.

Of course, one year does not a career make and Schmehl has a long way to go
before he can earn the mantle of being the new Peter Lynch. But there is a lot
of similarity in their stock-picking styles and Fidelity Special Situations
is off to a great start.

Adapted from an article that originally appeared in Mutual Funds Update,
a monthly newsletter that provides advice on fund selection and strategies.
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