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A Superb Large Growth Fund For Your Watchlist

Managed by Morningstar's 2017 Domestic-Stock Fund Manager of the Year, Silver-rated Fidelity Growth Company has crushed its actively-managed competitors.

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The following is our latest Fund Analyst Report for  Fidelity Growth Company (FDGRX). Morningstar Premium Members have access to full analyst reports such as this for more than 1,000 of the largest and best mutual funds. Not a Premium Member? Gain full access to our analyst reports and advanced tools immediately when you try Morningstar Premium free for 14 days.

Manager Steve Wymer has consistently executed a unique approach at Fidelity Growth Company since 1997. Despite the potential for volatility, this closed fund earns a Morningstar Analyst Rating of Silver.

Wymer’s ability to spot promising growth companies early on (including down the market-cap spectrum) and patiently hang on has led to long-term rewards. He first bought NVIDIA (NVDA) in 2008 when it was a mid-cap name. It has been a top-10 position since 2013 and was the fund’s biggest winner in 2017 and over the past five years. The position has been as high as 8% of assets, indicating Wymer’s willingness to bet with conviction on his top ideas.

While the fund benefited in 2017 from its bets on technology stocks, including (AMZN) and Facebook (FB), Wymer also differentiated the fund through out-of-benchmark picks such as Shopify (SHOP), purchased after its 2015 IPO. And in a year when the fund’s double-digit exposure to biotech didn’t give the fund the lift that it has seen in some markets, successful stock picks within that industry (such as  Alnylam Pharmaceuticals (ALNY) and Bluebird Bio (BLUE)) did boost results, speaking to the skill of Fidelity’s healthcare team. Overall, the fund gained about 38% in 2017, staying more than 7 percentage points ahead of its Russell 3000 Growth benchmark.

A willingness to hold on to strong secular growers that have seen big stock moves does come with some price risk. The portfolio in aggregate doesn’t always look extremely high-quality on traditional metrics such as return on invested capital and return on assets given Wymer’s tolerance for owning names that may not yet be profitable. These types of investments can lead to volatile spells. It lost more than the benchmark and its average large-growth Morningstar Category peer in the July 2015-February 2016 market pullback.

But the types of stocks that make the fund volatile are often the same ones that have fueled its superb long-term track record: Its 11% annualized gain during his tenure through 2017 outpaces the benchmark by more than 3 percentage points and crushes most of its active competitors.

Process Pillar: Positive | Katie Rushkewicz Reichart, CFA 12/29/2017
Manager Steve Wymer favors firms with above-average top-line growth prospects, particularly those in fast-growing niches with distinctive products or pricing power. Within technology and healthcare--typically big components of the fund--he focuses on firms with strong product cycles. Occasionally a catalyst, such as new management or a spin-off, will fuel his interest, though he generally prefers firms with long-term-focused management whose interests are aligned with shareholders'. He'll invest across the growth spectrum, including blue chips and more-aggressive growers, and likes spotting up-and-coming firms early on, which leads to a lower average market cap than peers and the Russell 3000 Growth Index. Wymer is unable to take big positions in smaller firms, though, given the fund's heft. Even so, several names he invested in early on when they were much smaller, such as Regeneron Pharmaceuticals (REGN), have ended up being huge contributors to the fund's record in recent years. Wymer manages the fund's size by spreading bets across more than 300 stocks. Even as the fund has grown (it is closed to new investors), it has remained similarly constructed, with the top 10 names typically consuming 25% to 35% of assets, and the top 50 names around 60%. Good execution of this growth-oriented strategy through the years and strong stock-picking, particularly within the fund's favored hunting grounds of healthcare and technology, lead to a Positive Process rating.

The fund holds more small- and mid-cap fare (25% of assets as of October 2017) than its average large-growth peer. At times, the portfolio looks pricier than the benchmark, reflecting Steve Wymer's patience for sticking with highfliers whose growth prospects remain strong. That can open the door for more volatility, though, particularly in down markets. The portfolio typically skews toward growth mainstays, including technology (43% of assets as of October) and healthcare (17%). Within those sectors, Wymer has clear industry preferences. The result has been bigger helpings of software-services, Internet-related, and semiconductor firms over traditional enterprise software companies, where he sees lower growth. Nvidia, the top holding as of April at almost 8% of assets, has been a major winner for the fund over the past year, though the fund has owned it since 2008. Wymer thinks it has strong competitive advantages within machine learning and artificial intelligence.

Within healthcare--a big driver of performance during the past few years--the fund's biotech stake came down to 14% from 17% in mid-2015. Still above-average compared with the benchmark and peers, the stake includes established, longtime favorites such as Regeneron and a host of small-cap names. The fund owns some private firms within healthcare and a few others, including Uber, though in total these consume a small portion of assets.

Performance Pillar: Positive | Katie Rushkewicz Reichart, CFA 12/29/2017
The fund has been very successful under Steve Wymer, earning it a Positive Performance rating.

Since he took charge in January 1997 through December 2017, the fund has gained almost 11% annualized, beating the Russell 3000 Growth Index and average large-growth peer by more than 3 percentage points annualized. It has less of an edge on a risk-adjusted basis but still comes out well ahead. Wymer's penchant for fast-growers and his willingness to hang on to relatively pricey fare has upped the fund's volatility relative to peers and the benchmark, as measured by standard deviation. The fund has fared a bit worse than the benchmark in down markets during his tenure, losing 107% as much. But Wymer has made up ground on the upside, gaining 116% as much in rising markets, and the fund has posted benchmark-beating Sharpe and Sortino ratios. The fund has been remarkably consistent under Wymer. Since his start, its rolling three-year returns have beaten the bogy 95% of the time, and they've rarely landed in the category's bottom quartile. Investors haven't always hung on to reap the gains: The fund's dollar-weighted returns during the trailing 10 years through November were 400 basis points worse than its total returns.

In 2017, the fund was up about 38%, outpacing nearly all of its peers thanks to strong stock-picking in technology, particularly top holding Nvidia.

People Pillar: Positive | Katie Rushkewicz Reichart, CFA 12/29/2017
Steve Wymer has run this fund since January 1997, making him one of Fidelity's longest-tenured managers. He started at the firm in 1990 as an analyst and previously managed a few industry-focused funds, including Fidelity Select Chemicals (FSCHX) and Fidelity Select Automotive (FSAVX)--cyclical areas that don't receive a lot of attention here.

Wymer has access to Fidelity's large analyst team, which totals more than 100 globally; a fair amount of turnover occurred in 2016-17 within the consumer, energy/utilities, and cyclical teams, but Fidelity’s tech and healthcare teams (integral to this fund) have historically been quite strong. The analysts are an important resource in monitoring his portfolio of more than 300 stocks. He works closely with a smaller subset of analysts, which can vary depending on the portfolio's positioning and product cycles of the growth-oriented companies he seeks out. Lately, he's also worked closely with Kyle Weaver, Wymer's successor at the smaller  Fidelity Advisor Growth Oppportunities (FAGAX). (Wymer moved off the fund in late 2016.)

Wymer has masterfully drawn on his own experience and the insights of Fidelity's analysts to produce a competitive long-term record despite running more than $75 billion across accounts as of September 2017, earning the fund a Positive People rating. He invests more than $1 million in this fund.

Parent Pillar: Positive | Katie Rushkewicz Reichart, CFA 04/18/2017
Long one of the industry's biggest asset managers, Fidelity has faced pressure as investors have pulled money from the active U.S. equity funds for which the firm is best known. While significant outflows could gravely impact some firms, Fidelity is shielded by its diverse mix across asset classes (including its own competitively priced index funds), success in other business lines, and private ownership that helps it escape quarterly earnings scrutiny.

The asset-management division remains well-staffed amid cost-cutting across the firm. Still, the firm could stand to rationalize its active-equity fund lineup: There are many redundant or mediocre funds alongside the standouts run by longtime star managers and up-and-comers. Retaining talent remains critical, particularly following the unexpected retirement announcement of a talented young small-cap manager. To its credit, Fidelity has handled equity manager transitions better than in the past. Meanwhile, Fidelity's fixed-income division remains among the industry's best, with a team-oriented approach assuaging key-person risk. Fidelity's target-date funds have improved, and the firm's technology and trading resources remain topnotch.

Even as it has raced to address competitive headwinds by unveiling a handful of factor-based exchange-traded funds, Fidelity remains capable on the actively managed side, earning a Positive Parent rating.

Price Pillar: Positive | Katie Rushkewicz Reichart, CFA 12/29/2017
This fund has a performance fee, so its expense ratio can change based on how its three-year returns look relative to the Russell 3000 Growth Index. (For every percentage point of out- or underperformance, the expense ratio is adjusted by 0.02%, up to a maximum of 0.20%.) The fee rating is determined without considering the performance adjustment. The fund's expense ratio for the no-load and K shares are below average relative to similarly sold peers, so it receives a Price rating of Positive.

The fund's expense ratio has ranged from 0.77% to 0.96% during the past decade, the latter being hard to justify (even with good performance) given its large asset base.

Katie Rushkewicz Reichart does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.