Record-setting markets continue to favor more risky growth sectors like technology and biotechnology. And while many of the managers I recommend know how to selectively squeeze more profits from these high-flying sectors, there’s one fund that is going against the buy-at-any-price S&P 500 herd — and the time to buy that fund is now. Right now.
I often tell my readers at Fidelity Investor that it’s the fundamentals — earnings, interest rates and economic data — that really matter. And based on the economic data we’ve seen so far, the market looks set to deliver more gains so long as the economy remains in expansion mode.
Economic data, like last week’s job openings (JOLTS) report, show consumers remaining at or near full employment and seeing their wages rise (albeit tepidly). As long as the consumer stays in good spending shape, the market should have room to run.
That said, the overall market has gone an anomalously long time without a healthy 10% correction, and there’s no question that valuations in some sectors are very heated. Selective buying — or rather, investing in managers who know how to buy selectively and avoid overvalued stocks — is the key to intermediate-term success.
While we’re overdue for a pullback at large, several overlooked, underappreciated and lower-priced sectors offer better values with less risk. To name two: energy and banking. Even if we don’t get the aforementioned pullback anytime soon, now is a buying opportunity.
With all that in mind, there are a few good reasons why Fidelity Mega Cap Stock Fund (MUTF:FGRTX) — run by the value-savvy and bear-market-tested manager Matt Fruhan — is the fund I suggest buying. Matt’s discipline drives him to shop for bargains — when markets are at nose-bleed levels, this can mean his fund’s performance trails in the near-term.
But the kinds of stocks he buys are highly liquid, most often solidly dividend-paying, blue-chip, U.S. multinational battleships. His top ten names (which account for 32% of his current 103 holdings) is a Who’s Who of bellwether blue-chips: JPMorgan Chase & Co. (NYSE:JPM), Bank of America Corp (NYSE:BAC), Microsoft Corporation (NASDAQ:MSFT), Citigroup Inc (NYSE:C) and Apple Inc. (NASDAQ:AAPL), among countless others.
With an ultra-low expense ratio of 0.68%, or $68 annually per every $10,000 invested, this actively managed fund is a bargain in and of itself. FGRTX’s turnover rate — 25% — lets you know you’re in the hands of a manager who buys with conviction for the long haul rather being driven to short-term temptation.
When the market goes “Boom!” FGRTX won’t go bust. And when others turn from dancing in the street to panicking, you might find Matt Fruhan smiling.
FGRTX is a first-rate counterbalance to lofty market times, and an excellent complement to any portfolio that is overly skewed by the broader S&P 500 Index. His hunting ground is the S&P 100 and the Russell Top 200. As such, his fund can be paired with other great dividend funds like Fidelity Strategic Dividend and Income (MUTF:FSDIX) or a non-Fidelity fund like Vanguard Dividend Growth (MUTF:VDIGX) or T. Rowe Price Dividend Growth (MUTF:PRDGX).
FGRTX’s mega-cap focus means it won’t mirror the S&P 500 index like most other large-cap stock funds, index funds and exchange-traded funds do. Currently, the valuations among FGRTX’s elephants in the S&P 500 room are more attractive than the more growth-oriented side of the S&P 500. His biggest sector over-weights relative to the S&P 500 are the relatively beaten up Financials sector (he’s got 21% vs. 14% for the S&P 500), and the decidedly beaten down Energy sector (11.5% vs. 5.7%).
As we head toward year-end, I think the rally in financials still has legs. We have a moderately rising rate environment, which is good for banks. The FOMC, minutes from our Federal Reserve’s last rate-hike confab, showed that the Fed remains likely to raise rates when they convene on Dec. 13, with fund futures suggesting an 87% chance of them doing so. Moreover, banks are still able to make a profit, even in this low-rate environment.
But when it comes to investing in those big-cap financials, you have to be knowledgeable, selective and even courageous, and Matthew Fruhan is all that and then some.
I also think global growth has taken a moderate upturn, which benefits the energy sector, which ultimately fuels such growth.
Currently, I think both out-of-favor sectors provide attractive prices — but only time will tell if those prices reflect attractive values. The man I trust to sort the wheat from such chaff? Matt Fruhan. The fund I think you should buy now to harvest gains down the road: FGRTX.
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.