Mutual Fund Site

Regular visitors know that we are fairly bullish on domestic equity funds heading into 2011. Of the different mutual funds we have looked at, most of them have been decent enough for most investors and we can see where they might fit in a moderate-type of investment portfolio. Of course, there are always risks with any mutual fund and this plays into whether we can find something valuable in them to recommend as part of the investment itself. Not so with the Fidelity fund (FFIDX), an actively managed large cap domestic equity fund with a growth/blend focus.

Like the folks at Morningstar, we see too much uncertainty around this domestic equity fund. We see a fund manager who has taken some big bets in individual securities (we will talk about top holdings a little further one) with a track record that leaves us questioning the overall strategy.

A Fidelity Fund That Surprises Us

Fidelity funds are among the most progressive in the world with some of the best performing equity managers on its payroll. There is little questions that Fidelity has a knack for picking winners, sticking with them and reaping the rewards over time. That is perhaps what surprises us so much with this Fidelity fund, managed by John Avery who has been overlooking the fund since 2002.

This fund has a turnover of 77%, a little on the high side given the lack of performance seen here. Although many large cap domestic equity funds have struggled, this fund’s positive 1.44% return fails to impress. Compared to other large cap blend funds, it has actually underperformed.

Our view is supported by Morningstar’s 3-star rating (which itself is not an entirely bad thing) across the board (3-years, 5-years, 10-years and Overall ratings) as well as its above average risk rating. Although Morningstar rates the fund as providing above average returns over the long term, we see a fund that maintains the status quo and actually makes a strong case for index funds.

While Morningstar currently rates it as adopting a Large Cap Blend style, we see it more as a Large Cap Growth focus given its history and holdings. So we will compare its sector holdings to other Large Cap Growth funds, and this is perhaps where our curiosity first stemmed because the fund’s largest position is in Financial Services at 17.11% vs the category’s average of 11.24%. Why?

Its second largest sector is Consumer Goods at 14.55% of assets versus the category average of 8.8%.

We will mention its third largest sector (Hardware at 14.3% vs the category average of 17.5% only because its largest single security is Apple, by far one of its biggest performance contributors).

But let’s get back to the Financial Services focus. With an exposure that is roughly 52.2% higher than the average fund, we have to wonder what is so “awesome” about this sector. Its two largest Financial Services securities (in the top 10) are Wells Fargo at 2.4% of holdings (OK, we get that) and JP Morgan at 2.25% of holdings (OK, we get that one too, although may not agree with it). In neither case has the fund added to its positions.

Moving on to Consumer Goods, its largest holding in the Top 10 is Proctor & Gamble at 1.84% of holdings. P&G is a well-respected company with a good dividend yield of 3.2%. The fund has reduced its holdings here. (As a side note, Nestle, a foreign equity that is also a consumer goods player, offers a dividend yield of 3.0% and offers some protection against currency fluctuations. As well, Nestle is a fairly new holdings, while P&G has seen its allocation reduced by the fund.

On the Hardware front, the fund’s largest holding is Apple at 5.04% of assets. And this is what we will talk about in the following section.

Apple at 5.04% of holdings, YTD Return of 37.25%

Everyone knows Apple. As popular as it is to own an iPad, iPhone and iPod, it is equally popular to hold Apple stock. And for good reason; Apple has returned over 37% on YTD basis, so it is no slouch. The Fidelity fund like this stock so much that is continues to add to its position (increasing it by 10% up until June 30). With innovation and popularity on its side, it seems there is no stopping Apple. But there are some flaws with its product, including heavy bandwidth usage for data, which puts strain on the carrier. By holding so much Apple stock, we see this as something of a risk for the fund.

Wells Fargo at 2.4%, YTD return of -3.11

We like Wells Fargo as we see that it holds the key to being a successful retail bank for a huge percentage of the population. Like a lot of regional banks, Wells has taken a quality approach to lending and will find tremendous success in its cross-selling activities. While commercial loans remain sensitive, this is one financial services firm we are happy to see in the portfolio. The fund has neither added to nor taken away from this particular holding.

Occidental Petroleum at 2.48%, YTD Return of 2.62%

As an Energy player, Occidental has seen a tremendous amount of success with a huge boost in earnings of 56% over 2009. This can be attributed to many factors, including operational growth, exploration growth and techniques, project sharing as well as acquisition. With a mild dividend yield of 1.8%, this is not a key security, yet it is the next-largest holding in the fund next to Apple. It plays a critical role, even though the fund has neither added to nor taken from its position.  The fund has seen more success from another energy holding, Chevron, which is the fourth-largest equity holding in the fund and has delivered 11.24% YTD returns. Energy remains a large component to this fund’s history as this is where the fund previously focused much of its resources.

About The Top Holdings

The fund holds 121 individual securities, which is a fairly large basket. While we have already mentioned out Apple concerns — being about concentration of risk and not about the stock itself — we do wonder why the fund is performing so poorly. We attribute it to a couple of factors: a wonky sector weighting and high turnover (which drives up costs and cuts into overall returns). This, in our mind, translates into a lack of focus, which is not a new comment to be said about this fund — Morningstar also makes note of some of the erratic behavior this equity fund has displayed in the past (feel free to write to me about specifics).

Who Should Own This Fund

We would like to see some direction from this large cap domestic equity fund before we recommend it for anyone. However, there is something to be said about this fund going against the current. Unlike others that take a huge Telecoms position, this fund has virtually ignored the sector. Also, its big Apple weighting will obviously appeal to Apple believers, but we suspect those folks are owning the individual stock itself and not bothering with the rest of the assets held here.