Fidelity Low-Priced Stock Fund (FLPSX) has had the same lead manager since inception over 29 years ago. The fund currently has $31.5 billion in assets, and sports a relatively low 0.62% expense ratio and 11% turnover. The fund follows a broad and somewhat unusual strategy, described by the issuer as follows:
Normally investing primarily in common stocks. Normally investing at least 80% of assets in low-priced stocks (those priced at or below $35 per share or with an earnings yield at or above the median for the Russell 2000 Index), which can lead to investments in small and medium-sized companies. Earnings yield represents a stock’s earnings per share for the most recent 12-months divided by current price per share. Potentially investing in stocks not considered low-priced. Investing in domestic and foreign issuers. Investing in either “growth” stocks or “value” stocks or both.
The fund’s prospectus benchmark is the Russell 2000 Index, which includes stocks of companies with market capitalization below $7.15 billion (dollar-weighted average of $2.3 billion and median of $0.78 billion). Despite the selection of a small-cap benchmark (perhaps retained for historical reasons), the fund is centered on mid-cap equities, and especially those with value characteristics. Therefore, a fund or ETF implementing a mid-cap value rather than a small-cap index is a more appropriate reference.
Although Fidelity Low-Priced Stock has a long history, for the purpose of this analysis we will use an 11-year period beginning in 2008, close to the October 2007 market peak. This period spans the financial crisis and is more relevant for recent and prospective investors. Here is how the fund and several of its mid-cap value competitors performed according to conventional statistics:
Although the fund produced the lowest nominal return, it also had the lowest standard deviation and beta (measures of return volatility), which resulted in competitive risk-adjusted returns (measured by Sharpe and Sortino ratios). The iShares S&P Mid-Cap 400 Value ETF (IJJ) had a slightly higher return but the highest standard deviation. The iShares Morningstar Mid-Cap Value ETF (JKI) had the highest return and moderate volatility, which resulted in risk-adjusted returns identical to those of FLPSX. The Fidelity® Mid Cap Enhanced Index Fund (FMEIX), which the issuer suggests as an alternative to FLPSX, generated a return in the middle of the evaluation set, but with a second-lowest volatility. Finally, the Vanguard Mid-Cap Value Index Fund Investor Shares (VMVIX) had the second-best return with average volatility. Clearly, the main value added by the fund was the reduced volatility but not an exceptional return.
Fidelity Low-Priced Stock currently holds over 40% in large-cap and 36% in foreign stocks, in addition to 6% in cash. This implies that a single-index benchmark may not the best fit for the fund, although it is useful for simplified classification purposes. Given the eclectic composition of the fund, we will allow up to six ETFs to construct a reference portfolio using the simplest variant of Alpholio™’s patented methodology (to learn more, please visit our FAQ). The reference portfolio tracked the fund’s returns reasonably well over the same analysis period:
However, since mid-2013 the fund failed to outperform it:
The sheer size of the fund may have made competing in the small- and mid-cap domains more difficult. The inverse of turnover ratio indicates that the fund tends to keep its holdings for an average of nine years; it currently has well over 800 different positions, with top ten constituting about 28% of its portfolio. It also worth noting that the fund added two new managers in 2011.
Here is the static composition of the reference ETF portfolio:
The fund had average effective exposures to the Invesco BuyBack Achievers™ ETF (PKW), WisdomTree Europe SmallCap Dividend Fund (DFE), Invesco S&P 500 Equal Weight Technology ETF (RYT), iShares U.S. Healthcare Providers ETF (IHF), First Trust Consumer Discretionary AlphaDEX Fund (FXD), and iShares U.S. Insurance ETF (IAK).
This reference portfolio is quite different from a typical small-cap or mid-cap value index, which underscores the difficulty with categorization of the fund. For instance, currently the fund’s biggest holding (almost 7% weight) is the stock of UnitedHealth Group Inc. (UNH), a company with an approximately $233 billion market cap. While this may be a result of significant appreciation of a position established a long time ago, investors who choose the fund today based on its benchmark or category may be quite surprised with the actual contents of their portfolios.
Consequently, the fund’s active share is currently close to 96%. While a high (generally, greater than 60%) active share is necessary for outperformance of an actively managed fund, it is not always sufficient. In the fund’s case, it suggests a mismatched benchmark rather than different weighting of securities within the benchmark, a domestic small-cap index.
Historically, the fund has held a substantial amount of cash in search of attractive investment opportunities. While understandable, such an active management approach can cause a considerate departure from the target cash allocation in the investor’s overall portfolio. Despite its low turnover, in each of the past two years the fund had significant capital gain distributions, which made the fund less suitable for taxable accounts.
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