Disruptive Funds: A New Theme From Fidelity

11/16/2020 5:00 am EST


John Bonnanzio

Editor, Fidelity Monitor & Insight

In April, the Fidelity fund family launched 6 "Disruptive" funds focused on industry innovation. John Bonnanzio, a leading mutual fund expert and editor of Fidelity Monitor & Insight, offers an overview of these new fund offerings.

The Disruptive funds are considered thematic funds. In considering the purchase of any of these funds, Fidelity encourages prospective shareholders to have a longer-term investment horizon as each fund’s narrow investment universe may require several market cycles to bear fruit.

Reflecting their own buy-and-hold strategies, fund turnovers are likely to remain in low single digits. Moreover, the funds aren’t constructed to fit any particular style box (such as large-cap growth), and they are not benchmarked to any familiar indexes.

Finally, a note about expenses. As actively managed funds — and ones with considerable exposure outside the U.S. (which drives up research costs), total expenses are now capped at a “highish” 1.00%.

But to encourage long-term investing, Disruptor funds use time-based pricing: the longer one holds their shares, the more expenses decline.

For example, during the first year expenses start at 1.00%. But in years two and three, they drop to 0.75%, and after that to 0.50%. (By comparison, expenses average about 0.70% for Fidelity’s active stock funds.)

This is made possible by Fidelity automatically shifting shareholders’ assets (in a tax-free transfer) to less expensive “Loyalty” share classes. All of the funds reviewed below earn our "OK to buy" rating.

If you’re worried that you might lose your job to a robot, you may want to hedge your career by holding Fidelity Disruptive Automation (FBOTX), a large-cap growth fund.

Fully half its assets are in industrials — companies that not only automate the factory floor, but through artificial intelligence and ultra-high speed semiconductors, will soon make autonomous driving and even robotic surgery commonplace.

The 36 holdings in Fidelity Disruptive Communications (FNETX) are, as its name suggests, in communications services, while other stocks fall within the information technology and consumer discretionary segments of the market.

Many of its holdings are quite familiar and gigantic including social media giant Facebook and Amazon. But less well-known, though critical infrastructure companies like American Tower and chip makers who make the “internet of things” possible via 5G, may well be the fund’s real growth engines.

Frankly, we prefer Fidelity Select Financial Services to Fidelity Disruptive Finance (FNTEX) as little about the latter fund’s holdings are disruptive.

Granted, credit card companies and banks are finding efficiencies with digital payment systems, but that’s not disrupting, it’s merely innovating. And even with its 30% exposure to tech, its style still doesn’t skew towards growth, but rather towards large-cap blend.

Faster, better, cheaper. That’s what modern medicine is all about. And if a company can do any of those things in the operating room or in an office park processing health insurance claims, that company’s stock could wind up in Fidelity Disruptive Medicine (FMEDX).

That said, 27% of assets are in 29 biotech stocks — many of them engaged in gene therapy and genomics, technologies that are speeding the development of vaccines for such things as Covid-19. With its market cap skewed by holdings in Big Pharma, the fund truly offers exposure to smaller, more innovative companies.

Fidelity Disruptive Technology (FTEKX) plays the tech sector a bit differently from its large cap cousin Select Technology in that it holds far more interactive media stocks like Alphabet’s Google and Facebook, though far fewer software providers (though it does hold Microsoft).

In its short life, the fund has delivered unrivaled returns owing, in part, to new spending habits related to the Covid economy.

Can’t decide which of the other five Disruptor funds to buy? Fidelity Disruptors Fund (FGDFX) — a fund-of-funds — holds them all in equal lots of 20%.

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