Here we offer up the market perspectives of four well-known managers whose funds we hold in various model portfolios, notes Jack Bowers, mutual fund expert and editor of Fidelity Monitor & Insight.
A year ago, Fidelity managers were talking about the pandemic, and how they were positioning their funds for a “post-pandemic” world. While the country’s ability to cope with the virus has certainly improved, and many mutations later it appears to be less dangerous, needless-to-say, the contagion remains in our midst, while still wreaking havoc abroad.
At the same time, the economy and the investment landscape have changed dramatically. For one thing, Russia invaded Ukraine, oil and gas prices surged, inflation accelerated, and the Fed woke up, ended quantitative easing, and soon thereafter raised interest rates.
With stocks sharply lower in January and February (and some recovery occurring in March), the S&P 500 retreated 4.6% in the first quarter, and the Nasdaq Composite dropped 9.0%. Of course, more bloodletting has occurred.
Their comments (made shortly after the first quarter) make it clear that the investment landscape remains clouded by uncertainty, though they are optimistic that new investment opportunities will emerge.
What follows are a few important managers’ thoughts in the aftermath of the worst first-quarter for stocks since the pandemic initially shuttered the economy two years ago. (Their remarks have been edited for space and clarity.)
Fidelity Blue Chip Growth (FBGRX)
Manager, Sonu Kalra
At the end of March, we are cautiously optimistic that the stock market will climb a “wall of worry” in 2022... (though) the wall looks high at quarter’s end. Yet we are hopeful that COVID-19 will enter the endemic stage and the world will start to get back to some type of normalcy. Also, we believe we may be at or close to peak inflation readings, even though inflation could remain above historical trends.
On the valuation front, stocks are now trading above our calculation of fair value (NOTE: This was said prior to April’s and May’s declines) and certain parts of the market look frothy to us. That said, we believe we should continue to see higher corporate profits in 2022.
If the supply chain normalizes and inflation readings begin to decline, we believe we could see growth stocks start to perform better. We have started to take advantage of some of the opportunities we see in growth stocks that historically looked expensive but have recently declined in price. We will continue to monitor the situation closely and position the fund accordingly.
Overall, we believe the market is underestimating latent pent-up consumer demand, which could lead to outsized earnings growth over the next 12 to 18 months. As such, we’ve positioned the fund to benefit from continued economic improvement, with overweighted positions in cyclical sectors, such as consumer discretionary.
(There), the fund held stocks of leading companies in e-commerce, travel and leisure, and electric vehicles. For example, the fund maintained an overweight position in Tesla (TSLA) at year’s end. We think Tesla could continue to surprise investors with its global expansion in the coming years, although we [remain] cautious about this stock’s valuation because it already embeds a tremendous amount of future success.
Fidelity Contrafund (FCNTX)
Manager, Will Danoff
Rising interest rates act to dampen equity valuations because the present value of future cash flow falls. Thus, if rates continue to rise, stock prices are at risk. In addition, rising rates increase costs for borrowing, so demand for housing and other products may slow. The potential slowing of demand could hurt earnings growth, which could also depress equity valuations.
To position the fund for higher rates, we recently increased exposure to financials, which stood at 15% on March 31 (our second-largest overweight), up from 12% six months ago (a slight over-weight).
Outsized holdings here include Berkshire Hathaway (BRK.B), Bank of America (BAC) and Morgan Stanley (MS). Each of these companies has a strong capital position, a disciplined management team and the potential to benefit from an economic recovery.
The fund’s allocation to technology stocks dipped to a slight underweighting due to the sector’s weak result the past three months and some paring we did, mostly within the software & services industry.
Fidelity Low-Priced Stocks (FLPSX)
Manager, Joel Tillinghast
As for March 31, we see ongoing risks to the macro environment — but we continue to feel confident about the attractive valuations for the stocks held in the fund.
We don't know whether inflation will be transitory or longer lasting, but we are mindful of its effect on companies as we consider investments. The past 12 months or so, we’ve been positioning the fund in firms that can promptly increase their pricing and maintain sales volume as they face higher costs for raw materials, labor and transportation.
For the most part, the undervalued, well-managed companies the fund owns have continued to grow and build value, and it was nice to see more investors recognize them the past three months.
Owing in part to that style tailwind, and also due to strong security selection, the portfolio had a strong first quarter of 2022 and trailing 12 months, outperforming its benchmark over both timeframes. As a reminder, our style of investing requires some patience, as we wait for the market to better appreciate the companies we own.
Fidelity Equity-Income (FEQIX)
Manager, Ramona Persaud
The response to the COVID-19 pandemic was an unprecedented “whatever it takes” approach by global central banks and governments, which, when combined with recovering global economies, has driven higher inflation expectations and resultant long-term yields.
It remains to be seen if [they] will remain elevated. The past three months, we looked to add to defensive sectors, including consumer staples, when stock prices looked attractive to us. On March 31, (it was) the fund’s largest sector overweight.
We maintain caution with our investments here, as staples brand power may be eroding. That said, valuation sensitivity rises when quality is at risk, which is a consideration in our positioning in this sector. At quarter end, the fund holds several well-known large-caps players in the space, including retail giant Walmart (WMT) … consumer products maker Procter & Gamble (PG) and Coca- Cola (KO).
Health care was the fund’s largest sector allocation on March 31, representing about 18% of our assets. We had a slight overweight here because we believe companies in the sector provide a consistent combination of value, quality and income — characteristics we think can help fulfill our three primary goals: produce investment return, minimize downside capture and produce yield.
