This stock fund is changing its strategy to include stocks with higher earnings yields. The top five holdings in the fund are UnitedHealth Group Inc (UNH, 4.97% of assets); Seagate Technology PLC (STX.SI, 2.88%); Best Buy Co Inc (BBY, 2.82%); Ross Stores Inc (ROST, 2.80%) and Metro Inc (MTRAF.TO, 2.34%).
Fidelity Low-Priced Stock (FLPSX)
From Fidelity Monitor & Insight
By prospectus, the now gigantic Fidelity® Low-Priced Stock (FLPSX) fund has always been benchmarked against the small-cap Russell 2000. In the fund’s early days, it made mincemeat of that benchmark by targeting inexpensive (value) stocks that were initially priced below $15 a share (and later $25 and as of 1997, $35). Billions of dollars eventually poured into Low-Priced, and it went through a series of five separate closings to keep it from being overrun with cash from performance-chasing investors.
In 2007, retail assets topped $40 billion (they’re now $28.2 billion, with another $10 billion invested in separate share classes). Along the way, fund manager Joel Tillinghast needed to broaden the fund’s investible universe, so a few key things occurred. The number of individual stocks it held swelled to almost 1,200 (it now has 938), more of the fund’s assets were diverted into better-scrutinized large-cap companies (forcing him to buy more small-cap names), and Joel had to go full-bore abroad in search of small-to-mid cap issues. More recently, a dedicated team of analysts have been promoted to co-manager status.
These strategies worked better in some years than in others. When stocks were rebounding in 2009, Low-Priced soared 39.1% versus 27.2% for the Russell. On the other hand, 2016 was the worst-ever for Low-Priced: it gained just 8.8% versus 21.3% for the Russell 2000. Because of last year’s performance (which was undermined by a large overweight in consumer discretionary stocks, foreign holdings and, quite frankly, poor security selection), Low-Priced Stock’s 3–year record is now poor, even as the fund has modestly rebounded this year.
While Low-Priced remains tethered to its all-U.S. small-cap benchmark, for many years now, the Russell 2000 has been a less-than-ideal way to evaluate the fund’s merits. Indeed, we’ve had numerous discussions as to how it should be categorized in our Scorecard.
While its $7.4 billion weighted median market cap and low price-to-earnings ratio of 15.4 puts it in the mid-cap value camp, with a third of the fund’s assets actually in large-caps, and another third (38%) invested internationally, any particular categorizations are far less meaningful. Granted, the fund maintains its high correlations to the Russell 2000 and even the S&P 500. But one expects that from any stock fund.
What’s less obvious, and quite important, is how much risk Joel Tillinghast actually assumes in his quest for adding alpha (returns in excess of his fund’s benchmark). For starters, the Russell 2000 small-cap gauge is 44% riskier than the large-cap S&P 500 (it’s relative volatility is 1.44 vs. 1.00). As for Low-Priced, its relative volatility is only 0.89. That means it’s 11% less risky than the S&P and only 60% as volatile as its Russell benchmark! But as one can’t spend risk-adjusted returns, a change has been needed.
While Joel and his investment team will continue to scour the planet for low-priced stocks (with at least 80% of the fund’s assets), there’s a new twist: its universe has expanded to include stocks with an earnings yield at or above the median for the Russell 2000 (so it’s deemphasizing value just a bit).
In making this tweak, Fidelity is facing the reality that U.S. stocks have risen considerably, while fewer companies are doing stock splits (lowering their per-share price). They are also waiting longer to go public. (IPOs have been important to the fund’s performance.) Whenever a fund alters its investment process, we’re on high alert. In this case, however, we suspect that our OK to Buy rating will stand for some time to come.
Jack Bowers, John M. Boyd and John Bonnanzio, Fidelity Monitor & Insight,
www.fidelitymonitor.com, 800-397-3094, September 2017