Long-time readers of Fidelity Monitor & Insight may recall that our rating on Fidelity Low-Priced Stock Fund (FLPSX) has drifted over the years, notes editor and mutual fund expert John Bonnanzio.

Upgrading or downgrading the fund is a tricky proposition as its lead manager, Joel Tillinghast, has one of the industry’s best records for small-to-mid-cap investing.

Over its life (December 1989 to August 2020), Fidelity Low-Priced Stock Fund has an average annual return of 12.8% versus 9.1% for its small-cap benchmark the Russell 2000. While that’s always been its official benchmark, it’s long lacked any real purpose.

Indeed, we take some exception to its use as it’s been roughly two decades since Fidelity Low-Priced has invested the preponderance of its assets in small-cap stocks.

Ironically, Joel’s success on the fund (he’s managed it since inception, though he’s long had a team who direct a share of its $24 billion in assets) forced him to buy stocks with higher market caps. Eventually, it grew to mid-cap status, and has largely stayed there thanks to some novel maneuvering.

For example, while Joel has stuck to value investing (stocks whose share prices are less expensive on say a price-to-earnings basis relative to their industry peers), he’s long been a successful foreign stock investor, too.

In the past 20 years or so, the fund’s large size has forced his hand: today, 40% of assets are in foreign stocks, including a 9% stake in the emerging markets. For these reasons, the Russell 2000 is a poor benchmark.

Now that we’ve established that Fidelity Low-Priced is still in the hands of a gifted fund manager, but is otherwise impossible to classify, it’s time for us to explain our recent upgrade from "Hold" to "OK to Buy".

First, we like the fund’s exposure to economically sensitive stocks. Setting aside its sector weights relative to its benchmark, roughly 12% of assets are in industrials and materials.

But there’s a much larger 24% stake in consumer discretionary stocks, which could also benefit from a post-Covid, resurgent global economy. And while you can’t make money from things you don’t own, we appreciate that there’s almost no exposure to utilities and real estate which have systemic shortcomings.

From a style perspective, we also believe that downtrodden value stocks will eventually rotate back into favor. While we favor growth stocks generally and tech in particular, let’s face it, by most conventional measures they ain’t cheap!

Value stocks are, in both relative and absolute terms, and we don’t mind being a bit early to their revival. It also warrants mentioning that Low-Priced Stock has a relative volatility of 1.05. While that’s 5% higher than the S&P 500 (the market), it’s significantly less than any of its mid-cap value peers.

Lastly, Fidelity Low-Priced has been performing better than its peers. Though down 7.4% for the year-to-date, it surged 8.0% last quarter (even as it slipped 1.1% in September). With its recent strong performance, Fidelity Low-Priced offers superior risk-adjusted returns relative to other mid-cap value fund peers.

If your portfolio is too heavily skewed toward large-cap growth funds or is in need of both value and some foreign stock exposure, Fidelity Low-Priced Stock provides immediate diversification, and plenty of upside potential. It may also lower your portfolio’s risk.

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