We decided this month to increase our portfolio’s value-exposure at the expense of growth, explains mutual fund expert John Bonnanzio of Fidelity Monitor & Insight.
Last November we bought Fidelity Value Strategies (FSLSX) for our Unique Opportunities and Growth Model portfolios.
For its part, Fidelity Growth Strategies (FDEGX) had already made its appearances in the same models in 2014 and early 2015, respectively.
First, let’s first talk performance: Over the past three years, Growth Strategies has delivered its shareholders an average annual return of 12.3%. As for Value Strategies, “just” 7.4%.
So why our shift to value? Obviously, we’re not chasing performance. However, we’re beginning to see a move away from some of the market’s more expensive sectors (such as biotech and tech) to those that are more reasonably priced (certain financials, health care services and economically sensitive cyclicals).
These sectors are considerably more prevalent in value-oriented funds generally, and Value Strategies in particular.
Value Strategies’ manager, Tom Soviero, is unwilling to pay much of a premium for a dollar’s worth of earnings, or sales, etc, as his counterpart -- Jean Park -- has been willing to do at Growth Strategies.
For example, whereas Jean has essentially been willing to pay $20.40 for
stocks that have earned $1.00 a year, Tom’s been paying a comparatively
Of course, Jean’s willingness to pay up is based on her expectations that the pace of future earnings will accelerate — that’s less the case for “cheaper” value stocks.
Viewed another way, Growth Strategies one-year forecasted P/E is 17.0 versus a more modest 13.4 for Value Strategies.
And, as for one-year forecasted earnings-per-share growth, Jean’s portfolio stands at 24.2 versus 13.7 for Tom’s value fund.
Of course, value funds’ holdings are typically less “pricey” than comparable growth funds.
So while we don’t anticipate any significant changes to their investment strategies, we believe that as growth stocks continue to disappoint on sales and earnings, investors will gravitate to more attractively priced areas of the market.
And, when they do, Tom’s table is already set for them. Here’s what we mean: with a portfolio turnover of just 9%, Tom’s been holding many of the same stocks for years. In fact, by this metric, about 10 years!
Says the longtime manager: “I’m inclined to ride out short-term ups and downs. If I believe in something and it goes down, I’ll buy more.”
Although our outlook for value-oriented funds has improved relative to growth, prudent risk management demands that we maintain exposure to both areas.
As for Growth Strategies, unless the market truly turns against manager Jean Park, her talents as a stock picker are likely strong enough that she’ll continue to do well for her shareholders — that’s why we continue to rate her fund buy, while also adding to our position in Fidelity Value Strategies.
By John Bonnanzio of Fidelity Monitor & Insight
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