For Jean Park, lead manager of Fidelity Fund, condensing a complex investment process into a simpler approach is what helped put her fund among the winners of IBD's Best Mutual Funds 2022 Awards.
To be an IBD Best Mutual Fund Awards winner, a fund must be at least 10 years old and meet rigorous performance criteria within at least one of 13 fund categories. This means outperforming the category benchmark in the past one, three, five and 10-year periods ended December 2021.
Only a small number of stock funds earned recognition this year. But actively managed Fidelity Fund (FFIDX), one of Fidelity's oldest funds, did just that — in three categories to boot. It made the cut in the overarching U.S. Diversified Stock Funds category, as well as the breakout categories of Growth Stock Funds and Large-Cap Funds.
Fidelity Fund returned 33.21%, 31%, 21.41% and 17.10% in the one, three, five and 10-year periods, respectively, beating the S&P 500 in each one. With about $8 billion in assets, it is one of the largest of 31 winners in the U.S. Diversified Stock Funds category.
Park took over management of the fund in 2017. With that transition, she made sure to apply the same winning techniques she used for managing her prior funds: focusing on positive free cash flow, tax-loss harvesting and fundamentally driven stock picking for the long haul.
"I try to make it pretty simple, because there's a lot of complexity in investing," said Park. "By having a simple and repeatable process, it's something that makes it easy for me to be very consistent, and hopefully over time consistently outperform."
Park has been with Fidelity since 2006. Before Fidelity Fund, she managed Fidelity Select Leisure Portfolio (FDLSX) and Fidelity Growth Strategies (FDEGX). She then was asked to apply the same investment philosophy that had worked in the midcap arena to the larger-cap focused Fidelity Fund.
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Her primary focus has been picking quality stocks and companies with positive cash flow streams. But another strength of the fund has been its tax efficiency. It has never stranded investors with short-term capital gains, during her tenure, despite it not necessarily striving to be a tax-efficient vehicle. For an actively managed fund, it also charges below-average fees of 0.47% per year.
In the interview below with IBD, Park revealed her success tools for running the fund and its strong performance, as well as how it's positioned in today's inflationary environment and economy.
Fidelity Fund: Investment Approach
IBD: Please describe the fund's main strategy.
Jean Park: At a high level, my investment philosophy is that I like to "fish where the fish are." In other words, I like to own high-quality companies that generate positive FCF (free cash flow). I believe that stocks that generate positive FCF, if purchased at a reasonable price, are an excellent "fishing" area and have a good chance of outperforming the broader market over time.
As such, my investment strategy is focused on emphasizing higher-quality companies that generate positive free cash flow. I am constantly focused on upgrading the portfolio, and I work closely with Fidelity's extensive research department to help identify stocks and subsectors that have the best opportunities, both medium-term and long-term.
IBD: How does the fund differentiate itself from its peers in the same category?
Park: Fidelity Fund skews toward owning currently profitable, high-quality companies with above-average growth prospects. While there are many stocks with high growth potential, I care very much about downside protection, so I tend to be less interested in stocks that are not yet profitable or close to being FCF positive.
Another differentiating point is my focus on tax efficiency for fund shareholders: While the fund is not specifically designed as a tax-efficient investment vehicle, tax efficiency is something I am very conscious of for fund shareholders. As part of my process, I regularly screen holdings for tax losses to inform potential trim or sale candidates by tax-loss harvesting.
One of my personal goals is to minimize short-term capital gains for shareholders, and I am pleased to have been able to deliver. Since I started managing Fidelity Fund in 2017, I have not passed on any short-term capital gains to my fund shareholders. Having this long-term focus helps align my process with Fidelity's research team, which often makes recommendations based on expected price targets at least 12 months in the future.
IBD: What contributed to Fidelity Fund's strong performance in the past one, three, five and 10 years?
Park: During the past year (2021), the biggest contributors to relative performance were from positioning in technology and communication services. Overweights in Alphabet, Microsoft and Fortinet were the biggest drivers.
For the three years ending December 2021, the biggest contributors to relative performance were from positioning in technology (overweight), communication services, energy (underweight).
Over the past five years from January 2017 to December 2021, the biggest contributors to relative performance have been from stock selection and sector positioning in technology, communication services, consumer staples and energy (underweight).
Some of the fund's top 10 positions and longtime holdings were large contributors to performance, including overweights in Alphabet, Microsoft, and Apple. Other long-term holdings that have contributed to fund performance include Costco and Estee Lauder in consumer staples. Being underweight energy over the past five years added value.
IBD: How do you manage risk in the fund? How different is this from peers?
Park: At Fidelity, we regularly review fund risk reports, which help monitor various risk metrics and exposures. On a regular basis, I review these risk reports with our chief investment officers and other colleagues. I also believe my investment process of focusing on stocks generating positive FCF provides downside protection and mitigates the chances of waking up and having a portfolio holding down substantially.
IBD: Does the fund have a tilt, and how often does it get rebalanced?
Park: When scouting for newer fund ideas, I have had success investing in cheaper stocks where fundamentals are improving. By focusing the lens on below-average P/Es with improving fundamentals, I can bring down the blended average of the fund P/E while staying true to my investment process.
IBD: How is Fidelity Funds positioned to tackle the current environment: inflation, rising rates, sector rotation, war in Ukraine volatility?
Park: My view is that different news and information can cause short-term price movements and changes in market expectations, but that in the long term, stocks will respond to fundamentals. There are many stocks with positive FCF generation and improving fundamentals that I am excited to buy. At current writing, the magnitude of the macroeconomic concerns continues to ebb and flow, and the sources of concern will likely change over time, with new worries that may cause short-term technical dislocations in stock prices. However, I feel confident my investment process will allow me to quickly pick up on those price movements and take advantage of opportunities to upgrade the portfolio.
Stock Market Outlook
IBD: What is your market outlook for the next 12 months?
Park: I am cautiously optimistic about the stock market despite the continued concerns of the pandemic, supply chain issues and now geopolitical instability related to Russia's invasion of Ukraine. Compared to a year ago, when vaccination rollout was in early stages, the macroeconomic backdrop is much more positive. Vaccination rates are increasing around the world, and as a society, we have found ways to adapt and resume economic activity.
The reason for my optimism on the stock market is that I believe the United States is very resilient and that the government will continue to find ways to support this economic recovery over the longer term. Employment trends are improving, many consumers are in better financial shape than before, and the higher-income consumer has largely flourished financially.
U.S. home prices and stock prices have appreciated over the longer term thanks to lower interest rates. This backdrop should allow the companies with the strongest fundamentals to continue to grow earnings at a healthy pace, which should allow stock prices to follow.
