In U.S. markets, real estate investment trusts (REITs) continue to be leaders. This remains a good e...
New Fidelity Fund Focuses on Company Founders
03/06/2019 5:00 am EST
After years of mostly introducing passively managed index funds, the diversified all-stock Founders Fund (FIFNX) was launched a month ago, observes fund expert John Bonnanzio, editor of Fidelity Monitor & Insight.
It combines quantitative analysis with fundamental research. As to the former, computer algorithms screen for a stock’s growth potential and a variety of valuation metrics. It also assesses a stock’s liquidity while attempting to gauge investment risk.
As for fundamentals, gum-shoe stock research falls to veteran manager Dan Kelley. From 2012 until this month, he ran Trend, an increasingly volatile large-cap growth fund.
On a related note, in August of last year, Shilpa Mehra joined Trend as his co-manager; he’s now its lead manager. With the above in mind, Founders is not exactly a new fund. In April of last year, a fund of the same name (and with Dan also at its helm) was offered to Fidelity’s Canadian customers.
With its emphasis on U.S. stocks (90%), Fidelity describes it as “a core equity strategy focused on harnessing the entrepreneurial spirit of founder-led companies” — and thus its name. In that spirit, Founders’ has a bias for companies whose business plans include an element of industry “disruption.”
To that end, top-holding Amazon (AMZN) is an example of a company whose founder (Jeff Bezos) is still central to their firms’ management while also being a major shareholder with considerable voting rights. (Though his recent marital woes suggest a 50% diminution in his shares!)
While founders remain important at other holdings (such as Facebook, Alibaba and Tesla), the fund’s Russell 3000 benchmark allows it to hold mid- and small-cap stocks, and it can even hold private placements which are typically pre- IPO shares. Still, as the facing table shows, Founders will skew large-cap.
Moreover, it may also resemble Dan’s Trend fund, which happens to resemble his Canadian Founders fund. Indeed, Fidelity confirms that the U.S. version of Founders will look very much like Founders-Canada.
Notably, six of their top-10 holdings are the same (although their portfolio weights differ). Sector-wise, tech stocks are both funds’ largest concentration (at over 30%). Significantly, those figures represent significant overweights to their respective benchmarks. (Trend uses the S&P 500.)
If our assumptions regarding the composition of Founders are correct (we know from SEC filings and its Canadian sibling how it will be managed), this U.S. version could, as we’ve pointed out, wind up resembling Trend as it’s presently positioned. With that in mind, Trend’s performance has picked up of late, although its risk is commensurately higher, too.
While it remains to be seen just how different Founders will be from Fidelity Trend (FTRNX) — it’s probably not a good idea to own both funds even as we categorize Founders as large-cap blend, whereas Trend is large-cap growth — we’re hoping that there’s an emphasis on industry disruptors, whether they are in early stages of development or are already “category killers” like Tesla (TSLA), Netflix (NFLX) and Amazon.
After all, that’s where the above-average sales and earnings growth is most likely to be found. As for fund expenses, a temporary fee waiver (which can be lifted at any time) of 0.13% caps Founders expenses at 1.00%. As for fund expenese, a temporary waiver (which can be lifed at any time) of 0.13% caps Founders expenses at 1.00%.
Although this is higher than their average stock fund, it’s in line with both smaller funds (asset-wise) like Event Driven Opportunities (which lacks the advantage of scale), and smaller-cap funds with less liquid holdings (where trading costs can be higher). With the above in mind, we rate Founders OK to Buy though we will carefully monitor how it is positioned.
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