Morningstar Magazine - February/March 2018 - 65

Overall, the fund had about 35% of assets in
stocks that fall within Morningstar's largecap range, compared with 26% for its benchmark.
However, its $15 billion average weighted
market-cap is comfortably in mid-cap territory.
(Small caps are only 3% of the portfolio, in line
with the benchmark.)
Puzzling It Out

While the fund has consistently fallen in the
mid-cap growth section of the Morningstar Style
Box over Park's tenure, the portfolio overall
leans closer to the blend or core section of the box
than its benchmark and typical category
peer. That's a reflection of Park's attention to value,
which sometimes demands a creative approach
to tapping into growth trends.
"I think of it like a puzzle," Park says. If an industry
trend is promising but that fact is already
reflected in stock prices, then she looks elsewhere
in the market for related trends. Her 2017 entry
into Carter's CRI is an example. "I'd been spending
a lot of time thinking about demographic
shifts. Millennials are buying homes, but the
valuations of homebuilders were anticipating a lot.
Who else would benefit?" That line of thought
led her to the children's apparel maker.
Park sells when a stock's valuation fully
reflects its growth prospects, or when there are
better relative opportunities. Other sales
are driven by changing corporate strategies, and
sometimes a realization that the original investment thesis was incorrect.
"O'Reilly Automotive ORLY is a pain point
for me," Park says. "It had high free cash flow,
high ROEs, growing comps. I was suspicious
of what was happening in the consumer
discretionary sector, but O'Reilly seemed safe
from Amazon.com AMZN. After Amazon
bought Whole Foods, however, it was like
a switch flipped."

An Even Keel

That misstep aside, the fund's performance
overall under Park is promising, says Morningstar's
Reichart. Its record was so-so under previous
managers, while its 12.4% annualized return during
her tenure (from mid-August 2013 through
December 2017) is well ahead of the 10.9% mid-cap
growth average. The fund did not best the
tough-to-beat Russell Midcap Growth over that
time; it trailed by an annualized 43 basis points.
Park's emphasis on risk is evident in the results.
The fund's three- and five-year Morningstar
Risk scores, which encompass her nearly four-year
tenure on the fund, rate Low within the
mid-cap growth category. That's a significant drop
from the fund's 10-year score of Average,
which incorporates outsized losses in 2008 and
2011. In contrast, under Park, the fund
was in the black in 2015, and in the top quintile
of the category, when its average peer was
in the red.
Risk control is where the fund stands out
relative to its benchmark, as well. From September
2013 through December 2017, it earned 93%
of the Russell Midcap Growth Index's upside, but
only 87% of its downside. (The fund's downside
protection was even greater relative to peers;
it suffered only 75% of the mid-cap growth average
downside.) While that left the fund a bit
behind its benchmark on an absolute basis, it
came out ahead on risk-adjusted measures such
as the Sharpe and Sortino ratios.
The fund is likely to lag in rallies, and indeed,
it ranked in the bottom half of its category for 2017,
although its 21.5% return was decent. (Funds
in the top quartile of the category last year were
up more than 30%.) But, as Park says, "the
fund shines most in a downturn. My job is to make
sure the fund is aligned with its strategy, and to
leverage our strengths."

(The fund's tracking error is around 3%.) Its limited
cash stake makes it easy to factor into assetallocation decisions.
Because Park is also mindful of tax implications
when timing trades, the fund is suitable
for taxable accounts. Its 15.1% annualized five-year
return through December drops only a bit, to
15.0%, after taxes on distributions. While some
of the fund's shareholders invest via tax-advantaged accounts, Park notes that a tax-aware
approach aligns with Fidelity's long-term approach
to equity analysis, which involves forecasting
12 to 24 months out. "Research shows that high
turnover is not where the alpha is," Park says.
The fund has other advantages that improve
its chances of maintaining a competitive
edge. For one, with "a good chunk" of her own
assets in the fund-in the $500,000 to $1
million range, per the most recent SEC filing-
Park's interests are aligned with shareholders.
That bodes well because Morningstar has
found that manager investment correlates
with fund success rates. Funds with high manager
investment are more likely to both survive
and outperform peers.
Second, although Park recently took over the
large-cap Fidelity Fund FFIDX (employing
a similar approach, benchmarked to the S&P 500),
her assets under management in this strategy
are not approaching capacity. At under $3 billion,
this fund remains nimble for a mid-cap fund.
Factor in a below-average expense ratio relative to
other mid-cap no-load funds, and the fund is set
up well for success. K
Laura Lallos is the managing editor of Morningstar magazine.

Easy to Use

O'Reilly was a significant detractor from
performance, but Park took the opportunity to
harvest a tax loss. "To keep me honest,
I periodically look at stocks where I've lost money,"
laughs Park. "O'Reilly was on that list, and
it prompted me to revisit the thesis."

Given Park's attention to valuation and risk,
the fund might serve as a core mid-cap holding for
investors with a growth orientation. It also
slots neatly into the mid-cap growth space
of a broader portfolio, given its close alignment
with the Russell Midcap Growth Index.

global.morningstar.com/Morningstarmagazine

65


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