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Summary Is this a good time to invest in a growth-oriented fund? What are some risks in the current financial environment? What is the future outlook for U.S. corporations? Investors come in different categories. Some are willing to take high risk and hope to get high returns – these investors would gravitate towards hedge funds, short selling, and high yield junk bonds. There are some others who are risk averse and their primary goal is the preservation of capital. For these investors, the natural choice would be bank CDs, bonds with AAA ratings and money market funds. The Fidelity Spartan Mid Cap Index Fund Investor Class (MUTF: FSCLX ) offered by Fidelity would be ideally suited for growth-oriented investors who are willing to assume a higher level of risk for higher returns. FSCLX replicates the Russell Midcap Index which measures the performance of the mid-cap segment of the U.S. equity market. The fund provides investors with a broad diversification to the mid-cap sector of the U.S. equity market. Typically, mid-cap companies outperform large cap stocks and experience a higher level of revenue and earnings growth rate. These companies have transitioned from being small-capitalization firms to becoming medium caps with an average market capitalization of $12 billion and the highest being $29 billion. They have proven themselves with established products, seasoned management and a track record of increasing revenues and profits. As these mid-cap companies continue to gain market share in the U.S. and globally, they are more likely to generate higher returns to investors than large companies with saturated markets. According to the Fidelity Chart, an investment of $10,000 in FSCLX in September 2011 would be worth $19,110 during July 2015. This represents a return of 17.5% during approximately a time frame of four years. The following are some key statistics for FSCLX NAV Gross Exp Ratio Turnover Net Assets 52-week High/Low $16.43 .33 8% $ 1.4 B $ $15.79 – $18.40 This fund was created during 2011 and the performance measures are as follows for FSCLX and the Russell Midcap fund: (click to enlarge) Data Source: Fidelity Data Source: Russell.com FSCLX – Sector Diversification: (click to enlarge) Data Source: Fidelity Risk Measures: The standard deviation which measures the variability of returns is 10.08% for this fund. The companies within the fund face myriad risks such as increased competition, operating and financial leverage, regulatory/political risk, strikes, lawsuits, etc. Most of the company specific risks would be diversified away since the fund is well diversified in 10 sectors with a total of 831 holdings. The losses sustained by some companies would be offset by the strong financial performance of other companies within the fund. However, the market risk is high and the fund will react unfavorably to any news regarding U.S./global economic slowdown, inflation, oil prices, currency risk, interest rates, etc., with possibly double digit declines in the Net Asset Value (NAV) of the fund. The Sharpe ratio is 1.94 which indicates the fund is able to generate higher returns relative to the risk. Impact of Chinese economic slowdown: The stock market has been very volatile during the last few weeks, with the share prices of stocks and most of the funds and ETFs going down significantly. This deep loss in investments has been primarily attributed to the Chinese economic slowdown. The biggest fear is that this slowdown might adversely impact the U.S. economy which will have a domino effect on U.S. corporate profits. Some interesting excerpts on this subject from Ben Stein, a CBS contributor: “August is the cruelest month. A good chunk of my savings disappeared as the stock market convulsed, and we’re down at some points by well over 10 percent. Why did it happen? The pundits and analysts appeared and said it was because of the Chinese devaluation and possible serious weakness in China. This, in turn, would devastate U.S. exports, supposedly, to China and sink the ship of our prosperity.That was, and is, nonsense. The U.S. economy’s output is roughly $18.4 trillion per year. Total exports to China are very roughly $120 billion per year. That’s a lot of hamburgers, but it’s roughly seven-tenths of one percent of the U.S. economy. If our exports to China fell by 20 percent – a large number – that would have only trifling effect on the U.S. economy – very roughly one-tenth of one percent of U.S. output, trivial even for an economy as big as ours”. Future Outlook: In summary, for the next few weeks the markets will continue to be volatile. The Federal Open Market Committee (FOMC) will have a meeting on September 16/17 to determine the direction of interest rates. The markets will be closely watching the Fed’s decision on interest rates as well as any new developments on the global economic front. The stock market will continue to experience wide fluctuations in share prices, NAVs of mutual funds and ETF prices in the near term. FSCLX will be more volatile as mid-cap funds have historically experienced greater variations in NAVs than large cap stocks. However, the good news is that the U.S. economy has been showing signs of strength, with an increase of 3.7% in the GDP growth rate in the most recent quarter, a booming housing market and a reduction in unemployment levels. It is hoped that all these factors will stabilize our financial markets which would perform well in the long run. FSCLX would be a good investment choice for investors who hold a well-diversified portfolio. The NAV is around $16 and is attractively priced and affordable for investors who would like to buy a round lot of 100 shares. The minimum investment is $2,500. The fund has low expense and turnover ratios. The Russell Midcap fund has a PE ratio of 21 and has sustained an average earnings per share (EPS) growth rate of 12% during the last five years. The dividend yield for the fund is around 1.64%. It is well diversified in 10 sectors with more exposure to the financial sector which constitutes 21% of total holdings. The future outlook for U.S. financial companies and non-financial corporations looks promising. According to a recent report by the U.S. Department of Commerce on U.S. Corporate profits: ” Profits from current production increased $47.5 billion in the second quarter of 2015, in contrast to a decrease of $123.0 billion in the first. Profits of domestic Financial Corporations increased $33.9 billion in the second quarter of 2015, in contrast to a decrease of $23.4 billion in the first. Profits of domestic Non-Financial Corporations increased $16.5 billion this quarter, in contrast to a decrease of $70.5 billion last quarter”. On a final note, it takes a lot of courage to invest in the stock market during turbulent times, especially high-risk, growth-oriented funds like FSCLX when everyone is selling and markets are continuously going down. FSCLX is trading at 11% below its all-time high and this could possibly be a buying opportunity for investors who felt disappointed they missed the boat when markets were at trading at the peak at the beginning of this year. As the U.S. economy continues to show signs of strength, this fund will likely provide higher rewards to investors who can tolerate price fluctuations and have the forbearance to hold on to the investment for a longer time frame. Disclosure: I am/we are long FSCLX. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Disclaimer: The article represents the opinion of the author and does not constitute investment advice to buy or sell. Check with your financial advisor before you buy or sell funds. Scalper1 News
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