Launched in 1989 and having grown to $37 billion in assets, Fidelity Low-Priced Stock (LPS) defies the conventional wisdom that successful funds inevitably grow assets to a level of chronic underperformance, notes John Bonnanzio, editor of Fidelity Monitor & Insight.
In an age when “star managers” are dismissed as relics of a bygone era, and index funds are celebrated like Super Bowl MVPs, Low-Priced Stock (LPS) fund’s Joel Tillinghast (and the 7-person team supporting him) personifies just how little the business press appreciates the value of active portfolio management.
Yes, there have been periods when it has trailed its Russell 2000 small-cap benchmark (not the best measure for how the fund performs anyway). And, yes, we’ve avoided the fund when our outlook for small- and midcap value stocks was not positive. But this is not one of those times.
Actually, we’ve purchased LPS in two of our model models this month, for several reasons. Among them is Joel’s buy-and-hold approach to value investing. (Turnover is extremely low at 9%.)
As we’ve seen in recent market blow-offs, companies with sustainable cash flows and low price-toearnings tend to fare better (though not great) than stocks with elevated valuations. While investing in stocks that hold the promise of accelerating sales and earnings certainly has merit, ratcheting down risk in our more conservative models is appealing.
Its relative volatility score of 0.86 means that it’s 14% less risky than the S&P 500 and, far more remarkably, about 37% less risky than its Russell benchmark! Of course, investing isn’t only about mitigating risk, it’s primarily about making money. On that score, some things stand out:
1) Since the start of the bear market in 2000 through this February — including the financial crisis in between — LPS was Fidelity’s #1-performing domestic stock fund with a total return of 636% versus 157% for the S&P 500;
2. Should past be prologue (and we’ll allow that it often isn’t), it’s notable that during the tech collapse of 2000 to 2002 (which wiped away about 80% of the Nasdaq’s value!), LPS gained 28%.
As already noted, uncovering undervalued shares of companies with otherwise solid business models, and then waiting for them to realize their full value, has been elevated by Joel to an art form in his eclectic fund.
With nearly 1,000 holdings spread across about two dozen countries (37% of assets are overseas, including a 7% stake in the emerging markets), LPS is simply not like any other fund — anywhere!
And while so many holdings suggests that its managers have no shortage of ideas, late in 2017, its investment universe was expanded to include stocks that have an earnings yield at or above the median earnings yield of the Russell 2000.
The higher a stock’s earnings yield the better its relative value. It’s possible that this change will allow LPS to reduce its 10% stake in cash, which did hold back performance in 2016.
While there’s no such thing as a “fund for all seasons,” in its nearly 30-year existence under Joel’s leadership, Low-Priced Stock continues to turn conventional investment wisdom on its head.
