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Fidelity Strategic Disciplines

 

A Message from the Fidelity® U.S. Large Cap Equity Strategy Portfolio Management Team*

By Barry Golden, Portfolio Manager, Strategic Advisers LLC — March 31, 2020



First Quarter 2020: Market Summary

THE COVID-19 OUTBREAK LED TO MARKET VOLATILITY

Global stocks fell amid concerns surrounding the impact of the COVID-19 outbreak on corporate earnings.

U.S. ECONOMY STANDS AT THE ONSET OF RECESSION

We believe the U.S. economy is likely to contract, as efforts to manage the spread of the virus have led to a sharp drop in demand for goods and services from consumers and businesses.

WATCHING FOR EARLY SIGNS OF MARKET STABILIZATION

We’re closely watching efforts to manage the spread of the virus and for signs of economic activity, as positive developments may lead to greater stability in stock and bond markets.

COVID-19 Outbreak Concerns Drove U.S. Markets Lower


We seek to diversify the portfolio across large cap styles (value, core & growth). We believe this diversification may help to provide stability and capital appreciation over the long-term.

During the first quarter, U.S. stocks fell 19.6%1 amid concerns that the COVID-19 outbreak would lead to slower economic growth. Efforts to suppress the spread of the virus like social distancing, travel bans and school closings, came with uncertain timelines. This helped contribute to the decline.

During this sharp decline we saw growth and large company stocks provide some stability within U.S. markets:

  • In sharp contrast with the broader stock market, growth stocks fell by only 14.1%2, outperforming the market by almost 7.0%.
  • Value stocks dramatically diverged from growth stocks, underperforming the market overall and declining by 26.7%3. Value stocks tend to struggle at the onset of recessions, as investors express near-term doubts about the outlook for some of these companies.
  • Finally, larger companies often perform better than smaller ones during recessions and other periods of market stress. Over the quarter, large companies outperformed small companies by a notable 10.4%4.

We believe markets may remain volatile as the COVID-19 outbreak leads to uncertainty surrounding the pace of economic growth and the outlook for corporate profits. We are committed to closely following the COVID-19 outbreak, as well as the overall economy, for signals that the worst of these economic disruptions may be behind us.

The Fidelity U.S. Large Cap Equity Strategy struggled in this market environment


The Fidelity® U.S. Large Cap Equity Strategy seeks capital appreciation and to outperform the S&P 500® Index over a full market cycle.


The Strategy fell during the quarter on a pre-tax and after-tax basis. It modestly trailed the S&P 500 Index over this time, net of fees.

Within the portfolio, growth stocks lost the least, followed by core and value. During the first quarter:

  • Our allocation to communication services companies and stock selection within that sector helped performance. Some of these companies made it easier for businesses and consumers to cope with social distancing measures.
  • While stocks in the materials sector largely struggled due to the outlook for slower economic growth, we had less exposure to these stocks than the broader market, which helped results. Moreover, the companies we selected through our research efforts generally performed better than the broader sector, further helping performance.
  • As to our challenges, we had more exposure to financials firms, which declined further than the broader stock market. Lower interest rates have made the near-term profit outlook more difficult for many of these firms. We were also unfortunately positioned in stocks that performed worse than the overall sector this quarter.
  • Within consumer staples, while the sector generally did well this quarter, the group of companies that we had invested in lagged those represented in the benchmark.

Positioned for an eventual market recovery

Q1 2020 Outlook
FIDELITY® U.S. LARGE CAP EQUITY STRATEGY

  • The portfolio managers behind the strategy continue to seek long-term opportunities for investors, despite near-term economic concerns.
  • For taxable accounts, market volatility can lead to opportunities for tax-loss harvesting, which can yield tax savings for investors.

The portfolio managers behind the strategy are continuing to follow their process, focusing on long-term results for investors. They are evaluating each of their respective investments and took a variety of actions during the quarter:

  • Reduced exposure to companies laden with maturing debt or whose business models we believe may not weather this environment.
  • Reduced exposure to parts of their portfolios that performed relatively well during the quarter, like certain consumer staples companies.
  • Looked for opportunities in companies that they believe may have fallen too far during a volatile quarter, or could fare well in a broader stock market recovery. These could be:
    • Restaurant chains with strong brands and low levels of debt.
    • Industrials companies that have strong brands and high market share, and could recover with the broader economy.
  • Sought to avoid companies that could be exposed to lower spending on advertising, such as certain technology firms.

Markets tend to recover before the economy

We understand that for many investors, recent market volatility may be unsettling. However, this strategy may help to provide stability and growth for investors over the long term, due to its diversification across large-cap styles (value, core & growth).

Looking back to previous recessions, some of the strongest market returns have often occurred when news headlines seemed the bleakest. The recovery can be swift and catch investors off-guard. Therefore, we believe that investors will be better served by sticking with their long-term investment plan.