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Fidelity Small Cap Discovery Downgraded as Myers Exits

The departure of a long-tenured manager is a big loss for the fund; we lowered our rating to Bronze from Gold.

Katie Rushkewicz Reichart, CFA, 02/06/2017

The following is our latest Fund Analyst Report for Fidelity Small Cap Discovery Fund FSCRX

Manager Chuck Myers will step down at the end of 2017. While there's a reasonable transition plan and successor in place, his departure is a big loss. We have downgraded the fund's Morningstar Analyst Rating to Bronze from Gold.

From Myers' 2006 start through January 2017, the fund's 10.8% annualized gain led nearly all small-blend Morningstar Category peers and beat the Russell 2000 Index by 3.5 percentage points. With a mostly sector-neutral approach, Myers' stock-picking shone through. His Buffett-inspired approach's focus on valuations and margin of safety provided downside protection.

This type of transition isn't new for successor Derek Janssen, who joined Fidelity's small-cap team in 2007. Janssen joined Myers as a comanager at  Fidelity Small Cap ValueFCPVX in 2013, running a sleeve of assets until becoming lead manager in 2015 so Myers could focus his attention here. Janssen joined this fund as a comanager in 2016 when Myers took a six-month sabbatical. Janssen will take on more responsibility here as the year progresses while simultaneously handing off Fidelity Small Cap Value to a first-time manager.

Janssen doesn't have a long track record of his own, but he's made thoughtful decisions at Fidelity Small Cap Value. His approach is similar to Myers', with a higher-quality bent and a focus on factors such as CEO ownership of shares and capital allocation. Janssen made some stock-specific changes upon taking over Small Cap Value but kept portfolio construction and the fund's risk profile similar. Its bottom-quartile finish in 2016 (despite a 21% gain) isn't overly concerning considering the strategy isn't built to lead the way in a strong market.

Janssen's biggest adjustment will be a new benchmark, the Russell 2000 Index; it holds fewer financials and more healthcare and technology than the Russell 2000 Value Index. This fund is also twice the size of Fidelity Small Cap Value. But on the plus side, it's closed to new investors, and Janssen has a year to adjust to his new role.

Process Pillar: Positive | Katie Rushkewicz Reichart, CFA 02/01/2017
Chuck Myers and successor Derek Janssen use a value-oriented strategy that isn't commonplace at growth-driven Fidelity. They focus on out-of-favor stocks with low expectations and are willing to hold on to them for years while waiting for price appreciation. Taking a page out of Warren Buffett's book, they invest only in businesses they understand and incorporate a margin of safety into their stock picks. Myers has executed this approach well in various market environments. Janssen worked alongside Myers at Fidelity Small Cap Value in 2013-16 and learned Myers' process, which helps the fund maintain a Positive Process rating despite Myers' upcoming departure.

Sector weightings are kept within close range of the Russell 2000 Index so that stock-picking drives performance (though industry weightings, including in REITs, have deviated more). However, that hasn't made the fund a benchmark-hugger, as its relatively high active share indicates. The fund is relatively compact, with 55-75 stocks, so it was encouraging that following significant asset growth it closed to new investors as of Jan. 31, 2013.

Katie Rushkewicz Reichart is a senior mutual fund analyst with Morningstar.

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