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Fidelity® Strategic Disciplines


Fidelity® Tax-Managed U.S. Equity Index Strategy Portfolio Management Team*

By Michelle Morgan, Portfolio Manager, Strategic Advisers LLC — March 31, 2020

Q1 2020 Highlights


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


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.


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

COVID-19 Outbreak Concerns Drive U.S. Market Lower

Q1 2020 Market Highlights

  • U.S. stocks, as measured by the Fidelity U.S. Large Cap Index℠, fell 19.3%% during the quarter.
  • While all 11 market sectors had negative performance in the first quarter, Technology, Health Care and Consumer Staples sectors performed the best.
  • Recent market volatility has provided increased opportunities to tax-loss harvest within accounts, which can potentially improve after-tax performance.

During the first quarter, U.S. stocks, as measured by the the Fidelity U.S. Large Cap Index℠, fell 19.3% 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%1, outperforming the market by a wide margin.
  • Value stocks dramatically diverged from growth stocks, underperforming the market and declining by 26.7%.2 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%3.

The volatile markets provided increased opportunities to tax-loss harvest within accounts

Investment Objective

The Fidelity® Tax-Managed U.S. Equity Index Strategy seeks to pursue the long-term growth potential of U.S. large-cap stocks and to deliver enhanced after-tax returns through active tax management.4

Client portfolios generally reflected the performance of the Fidelity U.S. Large Cap Index on a pre-tax basis during the first quarter of 2020.

Losses were harvested across multiple sectors, but Energy, Financials and Industrials represented the greatest source of opportunity. While these were also the worst performing sectors in the first quarter, each of the 11 market sectors had negative performance. We were able to tax-loss harvest specific stocks that performed poorly within these sectors and in the overall market. When necessary, stocks were sold at gains to help rebalance portfolios back to the appropriate risk and return characteristics of the U.S. large-cap stock market.

While we seek to actively tax-loss harvest, we also want to maintain the characteristics of the benchmark— Fidelity U.S. Large Cap Index. Therefore, we may not take advantage of every loss if it does not improve the risk of the portfolio.

It is important to note that when including fees, the Fidelity® Tax-Managed U.S. Equity Index Strategy (the “Strategy”) will generally lag the index on a pretax basis. Through rebalancing, deferral of gains where possible, and tax-loss harvesting over the quarter, the Strategy has the potential to deliver enhanced returns on an after-tax basis. The extreme volatility this quarter helped the strategy deliver enhanced returns over the index on an after-tax basis, net of fees.

Taking advantage of market volatility

Q1 2020 Outlook

  • We believe that the U.S. economy is at the onset of a recession. Historically, stocks experienced greater volatility during recessions, followed by strong recoveries as the economic backdrop improved.
  • Increased market volatility may improve the opportunities to enhance after-tax returns.

We invest with a long term view and continue to rebalance portfolios in an effort to keep pace with the index on a pre-tax basis. As well, we remain focused on pursuing enhanced after-tax returns through techniques such as tax-loss harvesting. Market volatility—while unsettling— helps us actively engage in tax-loss harvesting on your behalf. Based on our current view of the business cycle, 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. This environment may provide us with additional opportunities for tax loss harvesting.

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.