The largest sectors held by this enhanced small-cap fund are: Technology (17% of assets); Industrial (15%); Healthcare (14%), Real Estate (9%) and Consumer Defensive (6%).
Fidelity Small Cap Enhanced Index (FCPEX)
From Fidelity Monitor & Insight
This month’s trade into Fidelity Small Cap Enhanced Index (FCPEX) fund is a rare foray into Fidelity’s “Enhanced” lineup of funds. Unlike their typical offerings, Enhanced Index funds and their closely related index funds have long used Geode Capital Management as their subadvisor.
In 2001, Geode was formed by Fidelity’s Johnson family and other insiders. Initially, it offered long/short equity strategies that are common among hedge funds, though their approach was quantitative. Then in 2003, Fidelity abruptly spun off Geode making it the subadvisor to their index funds.
Unlike Fidelity’s fundamental (bottom-up) approach to stock picking, Geode’s computer algorithms (not fund managers) drive portfolio construction.
By 2007, hybrids of simple index funds morphed into “smart beta” funds; they are marketed by Fidelity as Enhanced Index funds. The idea is to combine the best attributes of passive (index) and active investing. Among other qualities, indexing offers lower cost and style consistency, and returns in line with a particular benchmark. For their part, active funds hold the promise of index-beating returns and Enhanced funds attempt to add a twist on that: superior risk-adjusted performance.
In the parlance of Fidelity, Small Cap Enhanced Index and its counterparts largely use “computer-aided, quantitative analysis of historical valuation growth, profitability and other factors to select a broadly diversified group of U.S. and foreign stocks.”
In truth, the concept is yet to catch on, in part, because the short-term results have been inconsistent. For example, in a match-up between 500 Index fund and Large Cap Core
Enhanced Index, risk has been the same, but 500 Index has a marginally better return over the past 3- and 5-year periods.
But Geode and Fidelity have found success elsewhere with both its Int’l Enhanced Index fund (which has outpaced Int’l Index with the same risk over 3- and 5 years), and with Small Cap Enhanced Index, which has outpaced its Russell 2000 benchmark since the fund’s December 2007 inception—and with roughly 10% less risk!
And, while it has been riskier than Fidelity’s actively run small-cap blend funds, the smart-beta algorithms that drive Small Cap Enhanced Index fund’s returns have provided better returns over the prior 3- and 5-year periods.
While Fidelity’s actively managed small-cap funds offer the potential for outsized gains versus their benchmarks, they can also underperform to a similar degree. Small Cap Enhanced Index, on the other hand, is unlikely to beat or trail its index by a large margin in any given year, but should outpace it over time. In the current market, we find that attractive.
Jack Bowers, John M. Boyd and John Bonnanzio, Fidelity Monitor & Insight, www.fidelitymonitor.com, 800-397-3094, October 2016