Market volatility has been low so far this year (no major daily swings up or down). But there has been significant market rotation that actually kicked off in late 2020, explains John Bonnanzio, editor of Loyalty monitor and insight.
In the first quarter of 2021, Fidelity’s large-cap value funds outperformed their higher-priced growth stock counterparts with average returns of 10.8% versus 2.6%, respectively.
There was an even wider gap of about 18 percentage points between small and large cap funds. And so, of course, small-cap value funds left the large-cap growth offerings in the dust.
More from John Bonnanzio: Fidelity Funds to bet on infrastructure
The second quarter was different. Once again, stocks in technology, healthcare and communications propelled growth funds ahead of value funds in April and June (although they lagged slightly in May).
Investors’ continued interest in smaller, value-oriented stocks reflects their optimism that a post-pandemic economy could be especially beneficial to economically sensitive cyclical sectors, including energy, airlines and consumer stocks.
And while growth stocks aren’t losing ground as sales and gains support their stock prices, their more than ten-year dominance has made them more expensive compared to value stocks.
As a result, this year we modestly increased the exposure of our model portfolios (and increased our fund ratings) for both value stocks and mid to small caps.
With the market fluctuating month-to-month (and sometimes week-to-week!) between growth and value stocks, we’re naturally happy to expand our positions in Fidelity Blue Chip Growth (FBGRX) and Fidelity Contrafund (FCNTX). Together they account for almost half of the Growth models resources.
Admittedly, changing investor sentiment has made stock picking harder for their managers. But as we saw with the June recovery, there is no good reason to exit this part of the stock market. Below we update both funds.
Blue Chip Growth
Last year, Fidelity gave this best-performing fund more leeway (and growth). It did this by lowering its initial purchase threshold to $1 billion market cap stocks.
While there aren’t too many ‘blue chips’ this small, there are enough well-run, fast-growing players to force top executive Sonu Kalra to get his hands on them for his ever-expanding (asset-wise) stock portfolio.
Before the expansion of the investable universe, Blue Chip Growth was largely devoid of small and medium businesses; now they account for about 20% of the assets. While impossible to quantify, they seem to have given the fund some welcome diversity during those periods when large-cap growth stocks took a breather.
Therefore, Sonu’s bet on a cyclical recovery led to overweight positions in industrials and services, materials and energy – hardly the hunting ground of a large-cap growth investor! On the other hand, the fund is outperforming its Russell 1000 Growth benchmark this year, so we’re not complaining.
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There have been times this year when we wondered if the astonishing 30-plus-year average annual return of 14% was going to be a record we could ever tell as we have grandchildren bouncing on our knees.
With legendary manager Will Danoff at the helm of the fund since 1990, was the market’s flirtation with value stocks a sign that Will’s best days at Contra are behind him?
However, another legend is emerging in Boston: Ted Williams. In 21 seasons with the Red Sox, “The Splendid Splinter” batted more than .300 every year, except for one: 1959. Although his career ended in 1960, his legend only grew: he hit .316 that year, while his very last at bat was a home run!
For the record, we haven’t heard anything about plans for Will to retire (he’s 61). We also don’t think he has any trouble keeping an eye on the ‘best’ growth stocks.
For example, last year Contra gained 32.5% versus 18.4% for the S&P 500. And while it lagged slightly behind its benchmark this year, the fund’s relatively low risk of 1.03 is a result of Will’s close 40% of Contra’s assets are invested in value ( 7%) and mix (29%) stocks at the expense of growth.
Should growth stocks continue to rise and fall, Contra could outperform its more pedal-to-the-metal large-cap growth peers like wedding OTC (FOCPX) and Loyal growth company Growth (FDGRX).
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