A contrarian approach to markets

As a student at Yonsei University in Seoul, South Korea, HyunHo Sohn watched the Asian financial crisis roll through his country in 1997, wiping out billions of won in value in a matter of months.

He had just begun investing and wasn’t ready to concede defeat. He looked at his devastated holdings — and bought more.

“I had invested in banks, just looking at charts without knowing fundamentals,” Sohn said. “I naively thought, ‘Well, the stocks are already down 70%. How can they go down even more?’ But actually, they went to zero.”

However, that experience, rather than leave a bad taste in his mouth, led Sohn to a career in finance. He’s now portfolio manager of Fidelity Investments Canada ULC’s Technology Innovators Fund, and this year, he is Investment Executive’s Mutual Fund Manager of the Year.

Before this year, returns for the Fidelity fund had grown steadily since Sohn took over in 2013 — the fund has not dropped in value in any of the past 10 calendar years.

However, 2022 could bring his first negative posting. And while the Fidelity fund was down by 17.7% for the year to Oct. 31, it still outperformed its benchmark, the MSCI world information technology index, which was down by 29.1% over the same period.

For the 10 years to Oct. 31, the fund has recorded an annualized return of 22.3%. (IE uses 10-year performance for Mutual Manager of the Year. See methodology, below.)

Sohn’s first job was assessing small-cap Korean companies for a Seoul brokerage. After six years, he joined Morgan Stanley as an analyst in Seoul, and he joined Fidelity in 2006. In 2010, Fidelity moved him to Hong Kong, where he focused on the tech sector — good preparation for his move to London in 2011 to work with Dmitry Solomakhin, his predecessor on the Fidelity fund.

“He and I had a similar style, in terms of taking a contrarian approach to markets,” Sohn said. “I like to discover things the market currently doesn’t favour. We both take that approach.”

Sohn said the transition to his management from Solomakhin’s was smooth. The wind was at Sohn’s back thanks to a technology bull market. But Sohn also made good use of what he learned in Hong Kong about tech fundamentals.

“Tech in Asia is a lot about hardware, like semiconductors and electronic components,” he said. “There were a lot of good stocks trading on reasonable valuations, and I was able to find some cyclically recovering stocks.”

Sohn chose not to follow the hype surrounding FAANG stocks — Facebook (now Meta), Amazon, Apple, Netflix and Google (now Alphabet): “Although those are good companies, I thought a lot of things were priced in and sometimes overpriced.”

While these tech staples earned a place in the Fidelity fund, Sohn sought out lesser-known companies with good earnings potential and durable competitive advantages, and he often forgave small performance hiccups.

“Sometimes the market penalizes a company for some short-term reason. A company with strong, long-term fundamentals will get misunderstood by the market, and negative sentiment prevails,” he said. “That creates opportunity. I look for good fundamentals that are not fully reflected in the numbers yet.”

For example, Sohn realized the value of LinkedIn Corp. when he noticed friends and colleagues in several countries using the platform to find new jobs. When the stock price stumbled in 2015, he pounced.

“It was a high-growth, expensive stock, but then the company missed a quarter in a meaningful way and the stock went down 50% in one day,” he said. “That caught my attention. I looked at the company fundamentals, I did the evaluation work and I built quite a meaningful position. Within a year, the company was acquired by Microsoft [Corp.] at almost a 100% premium, which was a significant return for me.”

He admitted he doesn’t always get it right. Early in his tenure with the Fidelity fund, he bought shares in Violin Memory Inc., a small California-based company that develops data-storage technology, but sold them at a loss in 2014.

“Revenue was growing quite fast, and I thought it was promising. But the company failed because the technology was easily replicated by incumbent companies,” Sohn said. “It wasn’t a big position, but I lost more than 50% in a very short period.” (Violin Memory filed for bankruptcy protection in 2016.)

Coming to grips with market misses is important. “Sometimes you just have to cut your losses,” he said. “If [the] original investment thesis gets broken and there’s no reason to continue to own the stock, you have to stop, even though you’ve sunk a lot of money into it already.”

These days, Sohn is watching clean energy and 3D printing, both of which may become critical soon.

As part of his process, he holds face-to-face meetings with company managers.

“A lot of investment information is available online, and I do a lot of channel checking, but talking to management is quite important. That helps me discover ideas and also build conviction on companies I own,” he said.

He recently flew to Silicon Valley to speak with the management team of NXP Semiconductors NV, a microchip company based in the Netherlands.

“Investors were quite concerned about the macro economy, and had demand questions,” he said. “The management team explained why more semiconductors need to go into cars and industrial machinery. We concluded that there’s a lot of growth opportunity, even though macro uncertainty is there.”

Sohn believes the global pandemic sparked a new relationship between business and high technology, particularly regarding cloud computing and cybersecurity.

“The habits that were created over the last two years will continue. Demand for technology is structural,” he said. “We as consumers use technology every day, and it’s critical to businesses that want to compete effectively. That’s been the trend, and that trend will continue.”

Sohn said his strategy for riding out the current volatility is to take a longer-term view and maintain valuation discipline as well as portfolio diversification.

“Many investors try to forecast a company’s earnings over the next year or two,” he said. “This is very difficult when consumer sentiment and business confidence is heavily influenced by macro factors.”

Instead, he focuses on trying to determine if a company’s products and services are likely to be in greater demand when markets settle down.

“A lot could go wrong in turbulent times,” he said. “If you diversify your portfolio with companies that have good long-term prospects, and buy those stocks cheaply, your overall chance of winning will be higher — and you will sleep better.”

Fidelity Technology Innovators Fund (series F)

• Assets under management (Nov. 30): $542.7 million
• Management expense ratio: 1.13%
• Annualized 10-year return to Oct. 31: 22.3% (vs. 16.7% for benchmark MSCI world information technology index)
• Performance, year to Oct. 31: -17.7% (vs. -29.1% for benchmark)
• Number of holdings (Sept. 30): 104
• Top 10 holdings (Sept. 30): Microsoft Corp., Apple Inc., Amazon.com Inc., Alphabet Inc., Fidelity U.S. Money Market Investment Trust, Salesforce Inc., SAP SE, Samsung Electronics Co. Ltd., Ericsson, Workday Inc.
• Risk rating: Medium to high
• Award: 2022 Refinitiv Lipper Fund Award for Best Sector Equity Fund (three, five and 10-year periods)

Methodology

Investment Executive uses a points-based system to rate Canadian mutual funds with at least 10 years of history. Points are awarded for each year of positive annual returns (to Sept. 30, 2022) as well as for relative outperformance and quartile rankings.