Market volatility has so far been low this year (no large daily swings up or down). But there has been considerable market rotation which actually got started late in 2020, explains John Bonnanzio, editor of Fidelity Monitor & Insight.
In the first quarter of 2021, Fidelity’s large-cap value funds easily outpaced their pricier growth-stock counterparts with an average return of 10.8% versus 2.6%, respectively.
An even wider gulf of about 18 percentage points appeared between small- and large-cap funds. And so it followed, of course, that small-cap value funds left large-cap growth offerings in the dust.
The second quarter was different. Once again, tech, health care and communication shares propelled growth funds ahead of value funds in April and June (though they lagged a bit in May).
Investors’ on-again, off-again interest in smaller, value-oriented stocks reflects their optimism that a post-pandemic economy may be especially beneficial to economically sensitive cyclicals including energy, airlines, and consumer stocks.
And while growth stocks don’t stand to lose ground because sales and earnings are supportive of their share prices, their decade-plus dominance has made them more expensive relative to value stocks.
As a consequence, this year we’ve modestly increased our model portfolios’ exposures (and raised our fund ratings) to both value stocks and mid- to small-caps.
Of course, with the market vacillating from month-to-month (and sometimes week-to-week!) between growth and value stocks, we’re glad to have maintained our positions in Fidelity Blue Chip Growth (FBGRX) and Fidelity Contrafund (FCNTX). Together, they account for almost half the Growth Model’s assets.
Granted, shifting investor sentiment has made stock picking more challenging for their managers. But as we saw with June’s re-bound, there’s no good reason to abandon this area of the stock mar-ket. Below we update both funds.
Blue Chip Growth
Last year, Fidelity gave this top-performing fund more room to maneuver (and grow). It did so by lowering its initial purchasing threshold to stocks with a $1 billion market cap.
While there aren’t too many “blue chips” that small, there are enough well-run, fast-growing ones to compel ace man-ager Sonu Kalra to snap them up for his increasingly large (asset-wise) stock portfolio.
Before the expansion of its investible universe, Blue Chip Growth was mostly bereft of small-and mid-sized companies; now they account for about 20% of its assets. While impossible to quantify, they appear to have provided the fund with some welcome diversity during those periods when large-cap growth stocks took a breather.
To that end, Sonu’s bet on a cyclical recovery instigated overweights in industrials, materials and energy — hardly the hunting ground of a large-cap growth investor! Then again, the fund is outpacing its Russell 1000 Growth benchmark this year, so we’re not complaining.
Contrafund
There have been the occasional times this year when we wondered if Contrafund’s astounding 30-plus-year average annual return of 14% would become a record we might one day recount while bouncing grandkids on our knees.
With legendary Manager Will Danoff at the fund’s helm since 1990, was the market’s flirtation with value stocks a marker that Will’s best days at Contra are behind him?
However, another Boston leg-end comes to mind: Ted Williams. In 21 seasons with the Red Sox, “The Splendid Splinter” batted over .300 every year save one: 1959. Though his career ended in 1960, his legend only grew: He batted .316 that year, while his very last at-bat was a homerun!
For the record, we haven’t heard of any plans that Will is set to retire (he’s 61). Nor do we think he’s having trouble eyeing “best of breed” growth stocks.
Last year for example, Contra gained 32.5% versus 18.4% for the S&P 500. And while slightly trailing his bench-mark this year, the fund’s comparatively low risk of 1.03 is the result of Will investing almost 40% of Contra’s assets in value (7%) and blend (29%) stocks at the expense of growth.
Should growth stocks continue to wax and wane, Contra could wind up performing better than its more pedal-to-the-metal large-cap growth peers like Fidelity OTC (FOCPX) and Fidelity Growth Company (FDGRX).
