Fidelity American Growth Fund: Our number one fund pick for exposure to US growth stocks in 2023

• While the US has managed to avoid a recession thus far, we expect growth to be modest in the months ahead. 

• Even though conventional wisdom suggests that growth stocks tend to perform poorly as economic growth slows, businesses with quality attributes such as competitive advantages, strong pricing power, and robust balance sheets can still do well in a downturn.

• For 2023/24, we have chosen the Fidelity American Growth A-USD fund as one of our recommended funds for US equities. 

• This fund seeks to deliver long-term capital growth by investing in companies which are benefitting from secular growth trends. Within an overall growth context, the portfolio managers are also valuation sensitive and aim to find the best risk/reward to implement the growth theme. 

• The Fidelity American Growth fund has displayed its ability to deliver consistent outperformance over its peers while also being relatively more resilient during down markets.  

Growth stocks can still thrive in a slowing growth environment

The US economy continues to defy all expectations of a recession. 

According to the latest figures published by the Bureau of Economic Analysis, the US economy grew at a rate of 2.1% in 2Q23, following the first quarter’s expansion of 2.0%. The increase in the second quarter was largely driven by strong consumer spending and business investment. July saw consumer spending rising further to 0.8% month-on-month, ahead of the median consensus forecast of a 0.7% gain. Adjusted for inflation, consumer spending rose 0.6% in July – the largest gain since January - not too shabby for an economy that is supposed to enter a recession. 

The strength of the US consumer is underpinned by a robust labour market, which has been red hot despite the Fed’s best efforts to cool it down. While the labour market has shown some signs of loosening lately - with a jump in the unemployment rate and slowing wage growth - it remains tight relative to pre-pandemic levels (Figure 1).

Figure 1: Consumer spending in the US likely to be supported by tight labour markets. 

Even though the economy has held up much better than expected, headwinds are still clearly present, at least in the near to mid-term. The Conference Board’s Leading Economic Index, a composite index of 10 leading indicators is still deeply negative as of August 2023, indicating growth will likely be below trend in the months ahead. 

Core inflation, measured by the core PCE price index was at 4.2% in July, more than double the Fed’s target. During the Jackson Hole Economic Symposium earlier in August, Fed Chair Jerome Powell reiterated for the umpteenth time that rates could still go higher and will likely be held at restrictive levels for an extended duration. While the US economy may be able to avoid a recession, growth is likely to be modest – an environment that does not favour growth stocks. 

Figure 2: Leading indicators are still pointing towards a slowdown 

Even though conventional wisdom suggests that growth stocks, especially those that are highly valued and unprofitable tend to perform poorly when economic growth slows, investors should not avoid them entirely. Businesses which exhibit quality attributes, such as those with competitive advantages (e.g a global business model), strong pricing power, and robust balance sheets can still do well in a downturn. Growth stocks may be down, but they are certainly not out. 

Introducing the Fidelity American Growth Fund

After a rigorous selection process, we have shortlisted the Fidelity American Growth A-USD fund as one of our recommended funds for US equities this year. The Fidelity American Growth Fund replaces our previous recommended fund (2022) - the Allspring US Large Cap Growth Fund. 

The Fidelity American Growth Fund seeks to deliver long-term capital growth by investing in equities of companies that are headquartered or do most of their business in the US. Although the fund has a flexible investment style as it takes into account the prevailing and expected macroeconomic conditions, its core investment approach is to identify companies that are most likely to benefit from secular growth trends. 

The portfolio managers’ investment philosophy is that markets are driven by long-term cycles and themes, and businesses that are exposed to such themes grow their sales and earnings faster than the market. Within each of these themes - mobility, automation, demographics and electrification - they seek to identify companies that demonstrate pricing power as they are likely to outperform as they can protect/increase margins and reinvest at a higher rate of return. Within an overall growth context, the portfolio managers are also valuation sensitive and aim to find the best risk/reward to implement the growth theme. 

The fund is benchmark agnostic and references the S&P 500 Total Return Net Index for comparative purposes only. There is no restriction for the fund to invest in any comparative market index sector/holdings. As a result of this unconstrained approach, the fund’s exposure may differ substantially from the benchmark. The fund holds a high conviction portfolio of between 60-80 stocks at any time.

Table 1: Sector exposure vs benchmark 

Table 2: Top 10 holdings

Consistent with the current environment of slowing growth and elevated inflation, the fund is defensively positioned, with sizeable overweights to traditionally defensive sectors such as healthcare and consumer staples (Table 1). Top holdings include the likes of Astrazeneca, Horizon Therapeutics as well as Johnson & Johnson (Table 2). 

Johnson & Johnson is one of the world’s largest and most diversified healthcare products company, which should benefit from a recovery in elective medical procedures in the “post-Covid” era. Growth during this period is also expected to be resilient, underpinned by its pharmaceuticals and consumer health segment while is long-term growth is expected to be driven by its innovative Medtech business.

Aside from healthcare and consumer staples, the fund also has an overweight in financials, with a focus on sub-industries that are mostly unrelated to credit. The fund is currently overweight reinsurers due to the improving price cycle in the market, which is not affected by the current problems faced by banks. Reinsurers also have little to no credit risk as they invest in very short dated safe instruments. The fund is also overweight payment providers, due to the lack of credit exposure and also because of the long-term secular advantage of these businesses, as digital payments becomes more ubiquitous.

Relatively strong performance vs its peers 

Over the past five years, the Fidelity American Growth Fund has outperformed its peer group by providing investors with an annualised return of 8.2%, compared to the 6.5% returns by the latter. On a calendar year basis, the fund also managed to outperform its benchmark in three of the past five years between 2018 and 2022. 

While its returns may only be slightly better compared to the peer average, what is impressive is that the fund delivered this performance with a maximum drawdown of just -34.1% over a five year period, as compared to a maximum drawdown of close to -39% by its peer group, a testament to the portfolio managers’ stock picking skills and their quality focused investment philosophy. In addition, its downside volatilities across both a 3-year and 5-year horizon have also come in below peer averages.

Table 3: The fund has generally outperformed its peers across various time periods

Final thoughts 

In a nutshell, even as economic growth is expected to come in below trend, high quality growth stocks still have plenty of potential to deliver sizeable returns in the future, more so if your investment horizon is further. For a portfolio to be truly globally diversified, it should have a sizeable allocation to US equities regardless if its constructed using a GDP or a market cap weighted approach. 

Investors looking for a piece of American growth stocks should consider the Fidelity American Growth A-USD Fund, our recommended fund for US growth stocks in 2023/24.