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By Greg Carlson | 02-14-2012 12:00 PM

Large Caps Ready to Cast a Line

Economic sensitivity and uncertainties have created a growth-challenged environment, but large-cap firms could be fishing for mid-cap names to stimulate growth, says Fidelity's John Roth.

Greg Carlson: Hi. I'm Greg Carlson. I'm a mutual fund analyst with Morningstar. I'm joined today by John Roth, the manager of Fidelity New Millennium and Fidelity Mid-Cap Stock. Thanks for joining us today, John.

John Roth: Pleasure to be here.

Carlson: Now, John, just to spell it out for the folks watching, you've run Fidelity New Millennium since 2006?

Roth: Yes.

Carlson: And you took over Fidelity Mid-Cap Stock about a year ago?

Roth: Yes.

Carlson: Now, New Millennium is a fund that's traditionally been fairly all-cap. It has kind of bounced between mid-cap growth and large-cap growth categories, whereas Mid-Cap Stock is more focused and has a very clear mid-cap mandate. Can you talk about how you view the differences between the two funds and how you balance those two mandates?

Roth: Yeah. New Millennium is an all-cap fund; it's considered to be go-anywhere. So, I look at the entire market, but at the same time, I am trying to beat the S&P 500. My mandate is to beat the S&P 500, and I can look at the whole market to find opportunities to do that. I invest in large-, mid-, and small-cap firms.

Mid-Cap is a very dedicated mid-cap fund. So, when I think about suitable investment for the Mid-Cap fund, I'm really focused on those in the $1 billion to $10 billion market-cap range. I find that there's a lot of synergies in managing both products because I think it's really important when evaluating the mid-cap space to understand what large-cap companies are doing. Acquisitions are an option for large-cap companies to grow, and when they look for acquisitions, they'll look into mid-cap space because those tend to be big enough to really drive the growth needle for a larger company.

I think it's particularly interesting today because I think we're in more of a growth-challenged market, but at the same time, a lot of large-cap companies have very strong balance sheets with a lot of cash. I think there will be opportunities for mergers and acquisitions to drive growth in the large-cap space, and these companies will be fishing in the mid-cap sector.

And conversely, I think it's important to look at small-cap companies because they're going to be the next hopefully companies that grow up to come into the mid-cap space. I feel like covering the whole market with New Millennium really helps me with Mid-Cap, and focusing on the mid-cap sector for the Mid-Cap Stock fund helps me get the best quality mid-cap names into New Millennium. So, I really enjoy managing both products.

Carlson: Now New Millennium is in the large-cap growth space now, but it still owns a fair amount of mid-caps. So, you end up with a decent amount of overlap between the two funds, correct?

Roth: Yes. Between the two funds, each fund has roughly 200 names in it, and there's about a 100-name overlap between the two.

Carlson: If something is, say, a small-cap which you do buy at times, is it more likely to end up in one fund or the other?

Roth: It depends. So, in New Millennium, I can own companies that have market caps as low as $100 million or $150 million. In that case, I would probably just own that in New Millennium. Now, ideally, if the stock continues to grow, once it becomes a $500 million, $600 million, or $700 million-cap firm, then it becomes suitable to putting it in the Mid-Cap fund. So, the home run scenarios are the stocks that start small, wind up in New Millennium, become larger, and then can wind up in both funds. Then hopefully, they can graduate out of the mid-cap space. Those are few and far between, but that would be the idea.

Carlson: Just expanding a little bit more on the positioning of New Millennium, that is a fund that was run for a long time by Neal Miller. You took over from him in 2006, when he retired. Under his watch, that fund really bounced around a good bit. Over the last three years, the fund has been pretty much in the large-cap growth space. Do you expect that to continue over long-term?

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