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By Greg Carlson | 01-28-2014 11:00 AM

Roth: Ante Has Been Raised Across the Market

Investors need to be disciplined and selective in the search for underappreciated growth opportunities, says John Roth, a manager on three Fidelity Morningstar Medalist funds.

Greg Carlson: Hi, my name is Greg Carlson. I'm a fund analyst with Morningstar.

I'm joined today by John Roth of Fidelity Investments.

Thanks for joining me today, John.

John Roth: Thanks for having me, Greg.

Carlson: John, you've managed [Bronze-rated] Fidelity New Millennium since 2006, and [Bronze-rated] Fidelity Mid-Cap Stock since 2011. Millennium is a little bit more of an all-cap fund.

Roth: Yes, that's correct.

Carlson: And then, finally, you became a co-manager last year on [Silver-rated] Fidelity Advisor New Insights, which has been run for a long time by Will Danoff, who also manages Fidelity Contrafund.

Roth: Yes.

Carlson: Could you talk a little bit about your philosophy and how that feeds into how the funds did last year?

Roth: In general, we have a fairly opportunistic approach in Fidelity New Millennium and also New Insights as well. It's looking across the market to see where there is opportunity, and we use fundamental analysis to figure out places where we have a different view than the market and try to concentrate on those opportunities.

The fund has flexibility in terms of cap, so it can go from small cap to large, and it has some flexibility in terms of how it's positioned, growth versus value. If you look at it today, it's been in large-cap growth stock for a while, but it's investing across the entire market to look for opportunities.

The last couple of years have been good for the market. One of the things that you've got to think about is, what drove the market performance. Two-thirds of the performance in the last couple of years has been multiple expansion, which means that expectations are moving up, versus earnings growth.

As I look at the landscape today, with an average valuation of 15.5 times, the S&P doesn't look expensive, but as you dig a little bit deeper, you find that growth stocks have moved up in price, and as you go down in cap, things will be getting more expensive as well.

We're trying to be opportunistic to look for areas where that's not all priced in, so you might see a little bit of a shift from faster growers to more value-like stocks, as we concentrate and say, these are the growth stocks that we really think are going to continue to make it as the ante has moved up across the space. I think you temper expectations a little bit for the next couple of years, because we've had such a good run over the last five.

Carlson: What worked particularly well, and what didn't work particularly well last year for you?

Roth: Last year, the technology stocks worked well. If you look at the attribution in the fund, the fund has owned Tesla, which is a very interesting company. I've owned it since 2011. And they were actually able to bring out and develop their first car, the Model S … or their second car, I should say, but their first pure electric vehicle that they designed from a blank piece of paper to production.

It's been successful, and they've actually started to make money earlier than people thought, and so the stock has done well. That helped.

Internet services has been strong. Software companies that are cloud-based have been strong; they've helped the fund's performance. Those are the big areas.

But again, we're being cautious around, how much is really left? And if we own a growth stock, it's because we still think that the market is underestimating the ultimate opportunity there. But as the ante gets raised across the market, you have to be more selective.

Carlson: Talk a little bit more about Tesla. It's a stock that generates some controversy from time-to-time.

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