Performance and Risk analysis of Fidelity Large Cap Stock Fund
(FLCSX)
Introduction
Fidelity Large Cap Stock is basically a mutual fund and an open end kind of fund that has been incorporated in the USA. It trades in its acronym, FLSCX and its major objective is on long term expansion and growth in capital. It started its operations on 22nd June 1995 and currently has net assets worth close to $1.5 billion it has invested over 80% of its total investment in the domestic market that’s in the USA, in companies that have very large market capitalization. The major key drivers of the fund are the investments in Equity shares in the domestic market. Fidelity has average management tenure and is classified as a large size fund and falls under the large capitalization growth category. The minimum initial investment in Fidelity Large Cap Stock is $2500 while the minimum IRA is $2500. The expense ratio of FLSCX is estimated at 1%. Its latest front end and back end load were all calculated to be 0%. FLSCX is an investment vehicle that seeks and aims at capital appreciation. Its core competence is under the finance, capital and equity market where it invests at least 80% of all its assets in companies that have a growth rate that’s above average with high growth potential. These investments are mostly on common stock in either domestic or foreign markets. The top ten major companies and FLSCX respective share holdings in those companies are JP Morgan, Apple inc, Wells Fargo & Co, General Electric Co, Chevron Corp, Google Inc, Citigroup Inc, Procter & Gamble Co, Target Corp and Comcast Corp which are 3.691%, 3.325%, 2.823%, 2.650%, 2.579%, 2.179%, 1.981%, 1.957%, 1.932%. And 1.871% respectively. Investments in the financial sector leads the pack with a portfolio weight of 21.48% compared to 15.93% in the S&P rating while the investments in information technology makes up 18.4% of its total investment compared to 18.02% in S&P bracket. Healthcare accounts for 15.29% and S&P 12.53%, Energy 12.51% and 10.92% S&P, Consumer Discretionary, Industrials, Consumer Staples, Telecommunication services, materials and Utilities that’s 10.68% and 11.62%, 10.5% and 10.11%, 8.23% and 10.96%, 1.37 and 2.97%, 0.66% and 3.43%, 0.41% and 3.51% respectively.
The average annual returns for the one year was 19.74% for FLCSX compared to 16.89% among the S&P 500 group and 9% rankings in the morning star. For the three year average FLSCX manage 12.87% while S&P amounted to 12.8% and 13% ranking among the morning star groupings. For five and ten years average returns for FLSCX was 6.27% and 8.22% respectively while the S&P was 5.21% and 7.88% respectively and Morning Star rankings were 10% and 25% respectively.
In the year 2012 the total returns were 20.71%, representing an increase of 22% from the previous year’s negative returns of -1.62% i.e. the year 2011. The dividends paid for these two years were 0.195 and 0.147 per share for the years 2012 and 2011 respectively. In the year 2007 the total returns increased 1% from the previous year low of 12.96% to 13.09%. The year 2008 was disastrous for FLSCX as the returns were a negative -47.46% which resulted in the reduction of 54.6% of its net assets in that particular year. The year 2009 saw an increase of almost 100% in FLSCX returns from negative -47.46% in 2008in the current year to 50.45%. The net assets also increased by 16.6% to stand at $826.58 million from $534.49 in 2008. The year 2010 registered a reduction of 32.2% in the net returns of that period i.e. from a high of 50.45% in the year 2009. The total returns reduced further by almost 20% again in the year 2011 to stand at negative -1.62%.
The core competencies performance action or process i.e. core strengths of FLSCX, in these case is in the domestic equity investment in the financial sector The core competence starts in the long-run and derives its competitiveness from its ability to offer services at lower costs than its competitors and spawns services that are not expected by its rivals these is achieved by the company’s ability to consolidate wide technologies and enhanced service skills driven by competence and empowered employees. To identify a core competence that it provides a potential to access a wide variety of markets including overseas markets. (Prahalad and Hamel, 1990)
SWOT is the acronym for the word Strength, Weaknesses, Opportunities and Threats facing an organization. SWOT analysis compares the trends and ratios with those of rival companies or those in similar industry so as to identify the areas of weaknesses and strength. It also compares the general performances in different sections of the business. (Simmonds, 1981) For the current period the strengths plus the opportunities exceed the Threats and weaknesses by 20.83%. These is a positive achievement as when the strengths and opportunities are more than the weaknesses and threats facing the company the fund has a promising long term potential. (www.Fidelity.com)
Total returns for FLSCX against the Dividends for the years 2007-2012
- 2. Evaluate the volatility risks in the fund, providing an assessment of the funds manager’s performance based on the risk measurements for the fund. Make recommendations to the fund manager for improving the performance. Provide a rationale to your recommendation.
Beta coefficient is a favorable measure of volatility or sensitivity of a share price or value to the movement or fluctuation in the market price. It constantly measures the systematic risks which is the volatility inherent in the whole financial organization system. A beta coefficient of one suggests that the average stock carries a similar risk as the average market and will only earn the market return. A coefficient of one and below suggests an average risk that’s below average where the average compares to the overall market. A coefficient of one and above gives a suggestion of an average risk and return that’s above the average return of the market. FLSCX beta is 1.17 meaning its more than one and its risks are above the average return of the market.
R to the power of 2, is a measure of how closely the funds portfolios performance relates with the average performance of the bench mark index for instance the S&P 500. R to the power of 2 is a proportion that ranges normally between 0.00 and 1.00. An R raised to 2 of 1 suggests a perfect correlation to the benchmark index i.e. all the major portfolio’s fluctuations are usually explained by regular performance fluctuations of the index, while an R2 of 0.00 suggests no correlation. The lower the value of R2 the more the fund’s performance is influenced and affected by the factors besides the market as measured by the average benchmark index. A value of less than 0.5 in the R2 suggests that the average annual Alpha and the Beta are not accurate and are unreliable in the measure of performance. FLSCX R2 is 0.98 meaning that its performance is closely correlated with the benchmark index, though it’s not perfect.
Standard deviation is a statistical measure that shows how much a return behaves and varies over a certain period of time. A return that varies so much has a higher standard variation. Historical standard deviation is analyzed together with historical returns to show whether an investment’s risk rate or volatility would be within acceptable range if given the returns it produces. A standard deviation that’s high suggests a wider dispersion of average past returns hence a higher historical volatility. Standard deviation does not measure the performance of a firm or investment but it only indicates the volatility of its earnings over a defined period of time. FLSCX has a standard deviation of 17.83 indicating its volatility is not so high. (Dorfman, 1997)
The Sharpe ratio of FLSCX is 0.76. It’s a ratio that measures the adjusted historical performance by dividing the funds excess or surplus returns by the calculated standard deviation of the average returns. The higher the Sharpe ratio the better the funds average return per the calculated unit cost.
- Compare your assessment of the fund performance to the Morningstar rating for the fund, indicating your agreement with the rating. Provide support for your position.
The average annual returns for the one year was 19.74% for FLCSX compared to 16.89% among the S&P 500 group and 9% rankings in the morning star. For the three year average FLSCX manage 12.87% while S&P amounted to 12.8% and 13% ranking among the morning star groupings. For five and ten years average returns for FLSCX was 6.27% and 8.22% respectively while the S&P was 5.21% and 7.88% respectively and Morning Star rankings were 10% and 25% respectively. The ratings of the 1st, 2nd , and 3rd are fairly comparable with other ratings of other companies like the S&P 500 index but the 5th and 10th averages are far above others especially that of 10 years is far above and out of reach of the other indexes.
Average Annual Performance of FLSCX and other players in the industry
- 4. Assess the top 10 holdings in the fund, indicating the level of diversification in the fund. Identify a company that may impose increased risk and any changes that you would recommend in the fund composition to improve the fund performance. Provide support for your rationale
FLSCX has the greatest and most valuable shareholding in JPMorgan Chase & Co with a 3.691% stake valued at $53,657,042 million. Apple Inc is next at 3.325% valued at 48,328,557 million, followed by wells Fargo & Co, General Electric Co., Chevron Corp, Google Inc, Citigroup Inc, Procter & Gamble Co, Target Corp and Comcast Corp all at 2.823%, $41039,480 million, 2.65%, 38,514,544, 2.579%, 37481175,2.179%, 31671475, 1.981%, 28792277, 1.957%, 28440380, and 1.932%, 28088321 respectively.
T Rowe price is a competitor that has a beta of 1.4 against 1.17 of FLSCX meaning it’s average return are more slightly riskier than the risks facing FLSCX which are above the average return of the market. It has a market capitalization of 19.5 billion and poses as big threat to FLSCX.
FLSCX Share holding in Top Ten Big Companies
The current market of FLSCX Equity investments is almost entirely based in the United States of America. The market is nonexistent in Japan and other parts of the world. This kind of investment is actually based on the successes of only one country i.e. America, in the event of a gross recession most of the equity value in the top prime American companies will be wiped out and these may bring down the company. FLSCX need to diversify its investments to different parts of the world. Also the investments are mostly concentrated in the financial market, this investment should also be spread to other sectors of the economy, for instance there’s great potential in the mining, agricultural and entertainment sector .(Crouhy, Galai, Mark, 2001)
Regional diversification of FLSCX Market Globally
References
Barney, B., Wright, M., Ketchen Jr., J. (2001), The resource-based view of the firm: Ten
Years after 1991. Journal of Management; 27 (6), pp. 625–641.
Prahalad, K. and Hamel, G. (1990) The core competence of the corporation, Harvard Business Review
(v. 68, no. 3) pp. 79–91.
Simmonds K., (1981) The Fundamentals of Strategic Management Accounting, London.
Crouhy, M., Galai, D., Mark, R. (2001). The Essentials of Risk Management. McGraw-Hill.
Dorfman, S. (1997). Introduction to Risk Management and Insurance (6th Ed.). Prentice Hall.
