The Fidelity Blue Chip Growth Fund (FBGRX) has been a leading performer in Morningstar’s large-growth category. Established nearly 30 years ago, the fund seeks to provide long-term capital growth by investing approximately 80 percent of assets under management (AUM) in blue chip common stock. The fund attempts to outperform the returns of the Russell 1000 Growth Index, the underlying benchmark, before fees and expenses. This fund is a core holding in many portfolios and has been under the direction of Sonu Kalra since July 2009.
Investment Strategy
Kalra prefers to invest in companies with the potential to grow their earnings at least 10 percent per annum over the longer term. Kalra also focuses on improving returns on equity and invested capital, product life cycles, and management changes, favoring firms with sustainable business models. Kalra supplements his traditional investments with cyclical picks, smaller-market-cap companies and select private equity investments. FBGRX is more growth-oriented than its underlying benchmark, exemplified by holdings like Uber, which has rapidly grown into a top 30 holding. While these nontraditional investments boost performance, they also increase volatility.
Sometimes funds are accused of being “closet indexers” due to their high overlap with their benchmark, but that cannot be claimed of FBGRX. Kalra has increased the number of holdings due to the strong IPO market and in an attempt to balance the fund and keep top holdings from becoming too highly concentrated as a percentage of assets. The fund typically overlaps the underlying benchmark index by approximately 50 percent.
Kalra has beaten the large-cap growth category for every year except 2011, when he underperformed by a mere 0.3 percent. He has yet to face a major market downturn while managing the fund, but when he oversaw the Fidelity OTC Portfolio (FOCPX), the fund experienced a 46 percent loss during 2008, about 6 percent worse than the category of large growth and 4 percent worse than the Nasdaq 100.
Portfolio Composition and Holdings
As of the end of October 2015, this four-star rated Morningstar fund had $21 billion in AUM spread across 390 individual holdings. The portfolio has a 91 percent exposure to domestic equities and an 8 percent exposure to foreign issues with a concentration in Developed Europe and Emerging Asia. The fund is overweight its benchmark in consumer cyclical and technology shares and underweight basic materials and industrial stocks. Although the fund does hold shares of some well-known names in financials and health care, it is also underweight these sectors.
The portfolio features an average market cap weighting of $53 billion and has 50 percent of assets in giant-cap shares as well as 30 percent in large-caps, 12 percent in mid-cap shares, 7 percent exposure to small-cap shares and a small 1 percent position in micro-cap stocks. FBGRX has a price-to-earnings ratio of 23.5 and a price-to-book ratio of 3.27.
Slightly more than 30 percent of assets are allocated to the top 10 holdings. In descending order, they are Apple (AAPL), Alphabet Class A (GOOGL), Amazon (AMZN), Facebook (FB), Alphabet Class C (GOOG), Gilead Sciences (GILD), Salesforce.com (CRM), Home Depot (HD), Visa (V) and Allergan PLC (AGN). These holdings reflect Kalra’s previous experience running the tech-heavy Fidelity OTC Portfolio (FOCPX), with a strong preference for Internet companies versus technology benchmark mainstays such as IBM, Microsoft and Oracle, which FBGRX lacks. The fund’s growth-oriented stance is enhanced by its above-average stake in biotechnology shares and its position in Uber.
Historical Performance
FBGRX has averaged better than 20 percent annualized gains and beaten its underlying benchmark by an annualized 2.7 percent over the past 5 years. FBGRX has also outperformed 92 percent of its large-growth category peers during this period. Kalra has demonstrated adroit overall stock-picking skills. While positions in Biogen (BIIB), CF Industries (CF) and Keurig Green Mountain (GMCR) have proved to detract from overall performance in the past, the fund’s positions in Alphabet, Amazon, Facebook, Starbucks (SBUX) and Avago Technologies (AVGO) far surpassed losses.
As of the end of November 2015, FBGRX has delivered 1-, 3- and 5-year total returns of 5.6 percent, 20.4 percent and 14.44 percent, respectively, significantly above the category averages of 3.41 percent, 15.55 percent and 11.82 percent.
The fund has outperformed the category average by more than 50 percent year-to-date. The mutual fund has earned a high Morningstar return rating and an above-average risk rating. FBGRX has a 3-year beta and standard deviation of 1.03 and 11.61, compared with category averages of 1.0 and 11.46.
Expenses, Fees and Distribution
FBGRX has a current expense ratio of 0.88 percent. The ratio is subject to change based on performance criteria, such as how well the fund performs against the underlying Russell 1000 Growth Index benchmark. The no-load fund does not have any 12b-1 fees. FBGRX has an initial investment minimum of $2,500. The fund had a long-term capital distribution of $0.187 per share on December 11, 2015, and $3.44 in September 2015. Calendar-minded investors should be aware that FBGRX has historically made large capital gains payouts in September, rather than December as is typical with most funds.
Outlook
FBGRX should continue to outperform despite China’s headwinds, pressure on commodity prices and changes in the currency market due to central bank interventions. Strength in the U.S. economy, a strong labor market and continued consumer confidence should bolster the economy’s growth sectors. A concentration in new and expanding markets, such as cloud services and direct-to-mobile services, has positioned FBGRX nicely for 2016.