In a world that believes in index funds as the be-all and end-all, Fidelity Large-Cap Growth Enhanced Fund (MUTF:FLGEX) is not your average blue-chip index fund. It’s a semi-active “enhanced” index fund, attempting to outperform its underlying Russell 1000 Growth Index.
In March 2009, FLGEX had a market value of approximately $200 million — now there’s nearly a billion dollars ($913 million) invested at the fund. That’s a lot of growth in eight years, showing the increasing investor interest in both large-cap stocks and index funds during the current bull market.
But in the 10-plus years since FLGEX’s inception, has the “enhanced” large-cap fund really met its goal to deliver index-beating returns to its investors?
With the fund currently returning 11.4% year to date versus 15.4% for the iShares Russell 1000 Growth ETF (NYSEARCA:IWF), looks like the answer is “not yet.”
FLGEX Falls Short
Geode Capital Management, the group that has run the fund since April 2007, is trying to beat the Russell 1000 Growth Index, made up of the large-cap growth segment of the U.S. equity market, “using computer-aided, quantitative analysis to select stocks that may have the potential to provide a higher total return than that of the Russell 1000 Growth Index.”
True to the fund’s name and promise, FLGEX counts large-cap heavyweights Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT), Amazon.com, Inc. (NASDAQ:AMZN), and Facebook Inc (NASDAQ:FB) among its top five holdings, as of March 31. And the fund’s top ten holdings, which take up nearly 28% of the fund, closely mirror the top names of the Russell 1000 Growth Index itself.
But if you want to look for the top 10 latest performers of the Russell 1000 Growth Index, you’ll have to look elsewhere. You won’t find Nvidia Corporation (NASDAQ:NVDA) — the index’s top performer for May with a 1-month return (through May 31) of 38.5% — in the fund’s top 10 names for instance.
FLGEX has 34% of its portfolio allocated to information technology, 30.25% to consumer discretionary and 17.54% to healthcare. Compare that to the top Russell Growth sectors of technology, consumer discretionary and healthcare.
In all, not many surprises to be found in the fund’s make-up.
The team may change the fund’s portfolio after the underlying Russell 1000 Growth Index, along with the other Russell U.S. indexes, is reconstituted after market close Friday, June 23. Reconstitution is an annual process done by FTSE to ensure the Russell indexes accurately reflect the US equity market and its various segments.
Will that be enough to push the enhanced fund into outperformance territory? That remains to be seen.
Investing in this semi-active, semi-passive fund will mostly likely generate index-matching and even index-lagging returns just by virtue of the fund’s fees. (Even as low as they are—at 0.39%.)
That’s why in my February 2016 issue of Fidelity Investor, I downgraded my rating for FLGEX from a buy to a hold — and it has remained a hold recommendation since.
Then as now, I felt that the fund was not living up to its “enhanced” label. You don’t own a Fidelity growth fund to track the market or an index. You own them to beat such benchmarks.
FBGRX: A Better Way
Fidelity’s lineup of large-cap growth funds provides numerous routes up the large-cap mountain, some of which are listed as “similar fund picks” on Large-Cap Growth Enhanced’s fund profile page—including actively managed Blue Chip Growth Fund (MUTF:FBGRX). I’d consider this the superior buy.
Here, manager Sonu Kalra invests in blue chip companies that have above-average potential for growth. Among other components, Sonu’s investment style focuses on earnings growth, free cash flow, market leadership and barrier to entry/competitiveness.
Also among his top holdings are blue-chip companies are names that veer away from the top holdings of the index like Tesla Inc (NASDAQ:TSLA), which was the fund’s biggest individual contributor in Q1 thanks in part to news that Tencent Holdings Limited (OTCMKTS:TCEHY) had taken a 5% stake in the firm.
And Sonu has conviction in his top holdings, with nearly 40% of the fund invested in them.
His 239.8% return since taking the helm of this fund in July 2009, versus 188.5% for the S&P 500 Index and 193.5% for Large-Cap Growth Enhanced over the same time period, reflects his stock-picking strength and acumen.
I consider FBGRX as a growth-oriented play in a financial portfolio. In short-term market moves, I’d expect it to lose as much as a blended large-cap index like the S&P 500 in downdrafts.
Flip side: I’d expect it to significantly outperform the S&P 500 index over every meaningful investment timeline. And Sonu’s done it, with the fund has besting the index in the one-, three-, five- and 10-year time periods.
Blue Chip Growth began trading in December 1987 and has a market value of $15.5 billion, proving that there’s still interest in trusting your portfolio to solid active management.
And with the strong active management found at Fidelity, especially among their large-cap growth managers, there’s ample reason to as well.
Jim Lowell is the editor of Fidelity Investor. Click here for Jim’s latest special report and discover Fidelity’s Top 20 Favorite Stocks — the most-owned, and most-liked, by Fidelity’s top managers.