Morningstar Magazine - February/March 2018 - 64

Investors

Fidelity Growth Strategies FDEGX
Category

Mid-Cap Growth

Expense Ratio

0.89%

Morningstar Rating

QQQ

3-Yr Annlzd Return

8.79%

3-Yr % Rank in Cat

64

Source: Morningstar. Data as of 12/31/2017.

Katie Rushkewicz Reichart, a director
with Morningstar Research Services, agrees that
Fidelity's fundamental research provides an
advantage. The group overall did see a fair amount
of turnover in 2016-17 on the consumer,
energy/utilities, and cyclical teams. Reichart notes,
however, that "Fidelity's equity analyst
team is particularly strong in technology and
healthcare, which this fund benefits from given
its growth mandate."
Improving the Odds

over the long run. Under her direction, the fund
has earned a place on the Morningstar Prospects
list, a list of up-and-coming or under-the-radar
investment strategies that Morningstar Manager
Research analysts believe may prove worthy
of full coverage in the future.
Where the Fish Are

The strategy starts by screening a universe
of about 1,000 mid-cap stocks for those
with above-average free-cash-flow yields. Citing
data that indicates that companies in the
Russell benchmark with the highest free-cash-flow
yields have outperformed from 1990 to 2016,
Park says that it makes sense to "fish where the
fish are." The screens also select for what she calls
"alpha factors" that will improve the odds of
outperformance: consistent and above-average
returns on capital, favorable capital allocation, and
valuations below or in line with historical
averages. As that last factor underscores, this is
not an aggressive growth play.
The screens are the starting point. From there,
Park seeks out companies with unique competitive
advantages, in industries with favorable
structures, and where management incentives
are aligned with shareholder interests.
Here's where she leverages the work of the
analyst team she grew up in, first covering
financial services and then consumer discretionary
names, before being tapped to run a sector
fund, Fidelity Select Leisure Portfolio FDLSX,
in 2010.
"The research department at Fidelity is a big
part of the process," Park says. "We have
comprehensive coverage, an army of analysts
who are industry experts."

64

Morningstar February/March 2018

That research team is largely aligned by industry
group, and the analyst expertise is picking
stocks, not sectors. Accordingly, this fund does not
deviate dramatically from its benchmark's
sector weights, though it can make active bets
of plus or minus 500 basis points. To figure
out where to tilt, Park monitors the benchmark
by valuation.
The fund shifted from being underweight
to overweight in technology in 2014 because the
sector screened as the cheapest on a freecash-flow basis. As of Oct. 31, the fund's
technology stake was about 3 percentage points
higher than the Russell Midcap Growth's
23.6% stake. Tech still screens well, Park says,
as do financials and healthcare.
But again, the fund is tilted in these directions,
not top-heavy. Likewise, Park does not make
big bets on individual stocks. Roughly 200 stocks
qualify for the portfolio based on the initial
free-cash-flow-yield screen. From these, she aims
to hold 100 to 150 names. At the end of October,
the fund held 102 positions, all under 3% of assets.
"I'm playing to statistics, rather than to any
one or two stocks," Park says. "I'm trying to exploit
natural tailwinds in the way I do portfolio
construction. I like to have a lot of bets because
I'm leaning on cheaper and high quality
[to drive performance] over time." Indeed, the fund
has lower price multiples than its benchmark,
combined with higher returns on equity and
returns on invested capital.
In keeping with the approach to sector and
stock stakes, the fund's cash stake is generally
around 1%. Rather than attempt to market-time,

Park focuses on relative opportunities. Her early
experience as a high-yield analyst informs
her perspective: "Where liquidity was in the
market, bond prices would move hugely,
from 100 cents to 60 cents, then back to par two
weeks later. When you see that early on
in your career, you learn the market can be fickle."
Weighing Options

By both Fidelity's and Morningstar's performance
attribution analysis, technology has been
the biggest positive contributor to the fund's
performance over the past three years,
and video game publisher Electronic Arts EA has
been a key pick over that time.
"It showed up on the radar in 2014, with one
of the highest free-cash-flow yields. It screened
beautifully," Park says. New management
focused on pruning the lineup of games, and the
company's formerly erratic return metrics
improved. Since it was added to the portfolio,
the stock has risen from the $40 range to more
than $100 per share.
"The trouble with finding great stocks is that
they grow their way out of the portfolio, and I am
very focused on staying in mid-cap growth
territory," Park says. Electronic Arts outgrew the
Russell Midcap Growth Index in June, and
Park had trimmed the position below 1% as of
October. Similarly, value-priced Avago was added
in 2013 but has been cut after combining with
Broadcom to become a semiconductor powerhouse; Broadcom AVGO has surged.
Park is not doctrinaire about market cap, however.
She recently added a small position in largecap Applied Materials AMAT. She'd been watching
the stock while monitoring her positions in
KLA-Tencor KLAC and Lam Research LRCX and is
enthusiastic about semiconductor capital
equipment companies.
Applied Materials is not so far out of mid-cap
range that Park was willing to forgo the additional
opportunity. "We use quantitative risk metrics
to monitor the portfolio, and by avoiding
the riskiest assets, those with low to negative free
cash flow, we have a beta below 1. Our semiconductor-equipment exposure bucked the beta."



Table of Contents for the Digital Edition of Morningstar Magazine - February/March 2018

Contents
Morningstar Magazine - February/March 2018 - Cover1
Morningstar Magazine - February/March 2018 - Cover2
Morningstar Magazine - February/March 2018 - 1
Morningstar Magazine - February/March 2018 - 2
Morningstar Magazine - February/March 2018 - Contents
Morningstar Magazine - February/March 2018 - 4
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