Mutual Fund Evaluation Fidelity

Fidelity Large Cap Stock Fund is a domestic equity fund, comprised of 91% domestics and 9% international equities. As such it is not intended to mirror the performance of either the Dow or S&P 500, but to serve as a competitor product. The foreign stocks are mostly from the UK, Canada, Israel and Ireland. The fund has very little foreign exchange exposure, with 95.91% of the stocks denominated in the U.S. dollar, and just a small amount each in the Canadian dollar and British pound. Most foreign exchange risk in this fund comes from the fact that the fund is comprised mainly of multinational companies, many of which have significant foreign exchange exposure themselves.

Fidelity is one of the largest mutual fund companies, but the Large Cap is not one of its bigger funds, with a portfolio net assets of just $2.9 billion. The expense ratio is 0.88%, and the fund was founded in 1995.

Objectives & Strategy

The stated objective of this fund is "long-term growth of capital," which implies that capital gains over the long run are the primary objective. This fits with the 100% equity composition of the fund, and implies that preference is given to stocks with capital gains potential over those whose value derives primarily from dividends. The stated strategy of the fund is to invest in growth stocks or value stocks are both.

The fund is 100% equity in terms of composition, save for a small amount of surplus capital that sits in money market or bond funds in between equity purchases. At present, this amount of 0.4% of the total value of the fund. The fund itself is comprised of a diversified selection of equity stocks, but should be considered to be part of a larger portfolio as the fund is not diversified across equity classes.

Composition

The Fidelity Large Cap fund has a diversified mix of American securities. The composition is analogous to that of the S&P 500, but there are some differences. Appendix A highlights the compositions of the fund and the S&P 500. The Fidelity fund is overweight in information technology, health care, and in financials, while being underweight in consumer staples, telecom and utilities. These differences highlight the investment philosophy of the fund. The sectors in which the fund is overweight tend to have remaining growth potential, while the sectors in which the fund is underweight tend to be in mature industries. Stocks in mature industries are more likely to be dividend-oriented, while those with growth potential tend to offer more in the way of potential capital gains, so it is the latter that fit better with the mandate of this fund.

Top 10 Holdings

The top ten holdings of the fund account for 27.04% of the total portfolio. These are predominantly financials (JP Morgan, Bank of America, Citicorp) and technology (GE, Apple, Microsoft, Google). As these are key economic drivers, and form a large percentage of the S&P 500, this is not entirely unreasonable. Other stocks in the top ten are Target, Procter & Gamble and Comcast, representing consumer products and telecommunication. These top ten do not present a high amount of diversification, and the fund would require other holdings to provide a greater degree of diversification, since 9 of the 10 stocks are from three sectors only. Other sectors would need greater representation.

Risk

No comparative analysis in investments can be done without taking into consideration the differences in risk between the assets. The typical measure of asset risk is the beta. For this fund, the beta is 1.06, which is just a shade above the S&P 500. This means that over the long run, there is an expectation that the stocks in this portfolio will outperform the S&P slightly. This risk profile reflects the slant towards growth that this fund has. The S&P 500 has more mature businesses than this fund, and the result is that it is less risky overall. That said, this fund is fairly well-diversified, and the risk is fairly low as a result, not deviating too much from the S&P 500. Some of this risk might also derive from foreign exchange rate risk, but in the case of this fund it is unlikely that this would account for the entire difference in betas.

There are a couple of other risk measures. The R2 is a measure of how closely the performance of this portfolio aligns with its benchmark. In this case, the R2 is 0.93, which indicates that the fund has not performed up to expectations relative to its benchmark portfolio. Another risk measure is the Sharpe ratio, which is a historical risk-adjusted performance measure. This is 1.37, indicating that the fund has outperformed relative to the expected performance based on its risk. The standard deviation for the fund is 11.6, which is fairly high. This calculation was done over the period that included the 2008-2009 period, which produced wild swings in market performance. The Fund Research site does not provide a standard deviation for the S&P 500 as a comparable.

The S&P 500 is an imperfect benchmark, and the beta of the Fidelity Large Cap fund indicates that it should outperform the S&P 500 over the long run. Over the past three years, the fund has barely outperformed the S&P 500, but the outperformance becomes more pronounced over the five and particularly the ten-year time horizon. Over ten years, the Fidelity Large Cap has returned 7.66% annually, where the S&P 500 has returned 6.8% annually (Fund Research, 2015). This difference, it is worth noting, is eaten up by the MER, which is almost the exact same number. While there are transaction costs associated with maintaining an S&P portfolio, it is questionable as to how much the Fidelity Large Cap has actually outperformed the S&P over the past ten years, and over the past three it has underperformed.