Human nature being what it is, the temptation is always great to buy last year’s “winning” funds and to sell your losers, suggests mutual fund expert Jack Bowers, editor of Fidelity Monitor & Insight.
But as with other things in life, bowing to temptation can lead to a bad outcome! In that spirit, this month’s model portfolio trades have us adding to two funds that struggled mightily in 2016.
In fact, Fidelity Growth Strategies (FDEGX), with a gain of 2.7%, and Fidelity Contrafund (FCNTX), with a gain of 3.4%, both trailed their respective benchmarks by 4.6 and 9.6 percentage points apiece.
This begs the question: Why buy more of each? Let’s look at each fund.
Manager Jean Park holds quality companies, but does not overpay to own them; she’s sensitive to valuations and to risk.
Her investment process screens for stocks with high free cash-flow yields, and lower-than-market price-to-earnings ratios.
But, they do Since arriving to the fund in August 2013, this approach has served her shareholders well: Jean’s mid-cap growth fund steadily ground out index-beating returns.
But that suddenly changed in the last quarter with the Trump victory. Quality was out and investors ’ appetite for riskier fare quickly took hold.
A stark example of that turn is this: The fund lost ground to its benchmark in nine of the market’s 11 sectors (consumer staples and health care accounted for the lion’s share of its underperformance).
Looking ahead, we certainly don’t expect Jean’s investment process to change, but we do think that the market’s appetite for lower-quality stocks may peter out.
This fund is another case of a manager who found his “best of breed” stocks out of favor for much of 2016, only to see investor disinterest in them accelerate in the last seven weeks of the year. (Again, post-Trump victory.)
But as we consider Manager Will Danoff’s long-employed and highly successful strategy of owning shares of “durable” above-average earners — including Facebook, (FB) Alphabet (GOOGL) and Amazon (AMZN) — what’s not for us to like over the longer term?
Indeed, we share Will ’s confidence that “well-positioned firms with defensible and cash-generative business models will appreciate over time" Bottom line: We’re sticking with Growth Strategies and Contrafund.
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