Has This Fidelity Fund Lost Its Luster?

I have long considered  Fidelity Growth Discovery (FDSVX) a top-rate choice for aggressive growth investing. Recently, though, I've been reconsidering my enthusiasm for the fund. While many favorable attributes remain--especially its seasoned management and low costs--its changing strategy and high volatility have given me pause. I've given the fund a Morningstar Analyst Rating of Neutral. To learn more about what drove this rating, read on.

Seasoned Hand at the Wheel
Manager Jason Weiner, who joined Fidelity in 1991 as an analyst before becoming a portfolio manager in 1994, is a veteran investor. Weiner has topped his large-growth competition at practically every assignment he's had at Fidelity, including this fund, which he's run since early 2007. (He also led it successfully in the late 1990s, when it was named Fidelity Contrafund II; it later became Fidelity Discovery, before taking its current moniker when Weiner returned.)

However, Weiner has had a tough time beating large-growth benchmarks, such as the Russell 3000 Growth. Weiner does get credit for investing in his own funds, though. As of the last reporting period, he had more than $1 million invested in both Fidelity Growth Discovery and its nearly identical sibling,  Fidelity Advisor Equity Growth (EPGAX). That at least signals Weiner's high conviction in his process.

Not as Fast on the Trigger
Weiner mainly favors large- and mid-cap stocks with high earnings potential. He isn't especially sensitive to valuation. He's more apt to sell when companies fail to meet earnings expectations rather than when they get too pricey. But he doesn't ignore those prices. Weiner has attempted to curb valuation risk by moving quickly in and out of sectors--a tack that historically has led to high turnover and sizable sector bets. Getting the timing of big shifts right hasn't been easy, though. In late 2008, for example, Weiner prematurely delved into financials, while moving out of them too quickly in 2009 to enjoy the sector's resurgence.

Weiner hasn't abandoned his preference for fast-growing, higher-priced names, though he has tamed his itchy trading finger: Turnover fell to roughly 70% in 2011, just a touch above the large-growth norm of 60%--a far cry from the fund's turnover rate of nearly 200% at its 2007 peak. (With around $8 billion in tow between this fund and similarly managed Fidelity Advisor Equity Growth, he also acknowledges it's difficult to trade quickly with ease.) Now that he is holding stocks for longer periods of time, he's been favoring firms with more predictable earnings, such as top holding McDonald's (MCD). He's also reined in the fund's sector exposures relative to his Russell 3000 Growth bogy, with the exception of technology--a perennial stomping ground for Weiner.

Weiner's tweaked process should be easier to implement and likely will lead to more stability. Yet it's unclear how well he'll execute it. Overall, the strategy change is a striking turnabout for a thoughtful and experienced manager.

A Mixed Record
During Weiner's second go-round as manager, Fidelity Growth Discovery has been a strong competitor versus its large-growth rivals. From his February 2007 start through July 2012, the fund has returned 3.4% on an annualized basis, versus 1.5% for the category average. That showing, however, modestly lags the Russell 3000 Growth's 3.8% gain. Volatility over that stretch, as measured by standard deviation, was relatively high.

Meanwhile, the fund fared a bit worse than average in down markets, suffering 102% of its average rivals' losses in slumps. Conversely, it has performed a bit better than peers in upturns, returning 108% of its competitors' gains. (Versus the Russell 3000 Growth Index, upside and downside performance has been of roughly equal magnitude, with the fund reaping 106% of the benchmark's gains in rallies and 108% of its losses in slumps.)

While Weiner's history of peer-beating returns is encouraging, the accompanying volatility takes away some of its shine. Shareholders have to be willing to endure a bumpier ride than most rivals will provide. Moreover, the fact that Weiner has had a tough time keeping up with growth benchmarks further dims the fund's appeal

A version of this column appeared in June 2012 Fidelity Funds Report.