Fidelity OTC Fund’s Aggressive, Hot Stock Picks Outperform| Investor’s Business Daily

The $31.6 billion Fidelity OTC Fund (FOCPX) is one of Fidelity’s best mutual funds of 2022. One reason for that is manager Chris Lin’s go-getter approach.

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“It’s a way for clients to get exposure to fast growth and an aggressive style in investing,” Lin said. “It’s one of the most aggressive products at Fidelity. It skews much more to higher-growth names.”

Yet the fund’s bite is not nearly as bad as its bark. Over the three years ended Nov. 30, the fund gained 122% for every 100% gain by the S&P 500, according to Morningstar Direct. In down markets, the fund lost just 89% as much as the broad market.

That risk control is intentional. The fund “invests in growth companies, but with an eye toward durability,” Lin said. “As a portfolio manager, (I’m) also a risk manager, so I would not describe the fund as high risk.”

Best Mutual Funds of 2022: Angling To Repeat

That should be reassuring to actual and prospective shareholders at a time when the market — at least this year through Dec. 23— was turning in another stellar performance. Over the prior three year, the S&P 500 was galloping ahead at a 27.27%annual pace. The fund’s 39.32% annual pace left the broad market in its dust.

Lin makes no predictions about the new year. He emphasizes that he invests stock by stock rather than based on macro trends. “I see a lot of people with a lot of money eager to deploy it,” he said. “And when they do, it often may lead to securities” that Lin considers overpriced.

By The Numbers: One Of The Best Mutual Funds

This growth fund became an IBD Best Mutual Funds Awards winner by topping the S&P 500 in 2020 and in the prior three, five and 10 years ended Dec. 31.

It’s trying for a repeat appearance. This year through Dec. 23, OTC Fund was up 25.55%, nosed out by the S&P 500’s 27.59% but topping the 20.28% posted by its large-cap growth mutual fund rivals tracked by Morningstar Direct.

Lin is 40 years old. He has held the reins of OTC Fund since Sept. 16, 2017. He discussed his investment approach with IBD from his home office in suburban Boston at the end of November.

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Lin’s ‘Simple’ Approach

IBD: Please summarize your investment approach, Chris.

Chris Lin: My process is based on the fact that to me most asset mispricings are a function of underestimating or overestimating the durability of an asset’s growth.

IBD: What’s the most complicated part of your pursuit of growth stocks?

Lin: I quip that all I do is seek good businesses when business is bad. And I try to avoid bad businesses when business is good.

People ask me to describe how I invest. It comes down to asking three questions. Do people need it? Can anyone do it? Is it reasonably priced? My friends go, “Is that it?” Yup, that’s it. It’s simple. It’s figuring out the answers that’s difficult.

IBD: As of Sept. 30 you had nearly 10% stakes in Microsoft (MSFT), Apple (AAPL) and Alphabet (GOOGL). You also had a 7% position in Amazon (AMZN) and a nearly 5% position in Meta Platforms (FB), the former Facebook. So the “OTC” in your fund’s name does not mean you focus on obscure stocks?

Lin: Eighty percent or more of the fund must be on some OTC exchange. The largest of those is the Nasdaq. And not surprisingly the fund’s benchmark is also the Nasdaq Composite.

IBD: In the case of Alphabet, am I right in imagining that you don’t mind the company giving business lines like self-driving car technology developer Waymo, Google Cloud and YouTube time to mature?

Lin: I’m interested in the big picture. And the big picture is that information is becoming more valuable in people’s lives. No rival is even close to delivering as much information to users as Google. That’s very powerful. Its competitive moats are very durable. And the stock is trading at a reasonable price.

They have eight one-billion user products (Android, Google Search, Chrome, Maps, Gmail, YouTube, Google Play and Google Drive) with extremely powerful network effects. Consumers love them. And they are free.

For such durable businesses, I’m willing to pay an above-market-rate.

Microsoft Resembles Alphabet

IBD: Is Microsoft a similar situation?

Lin: It is a similar thesis at a high level. Its ecosystem is incredibly durable. They own the operating environment for a lot of software developers. They own the cockpit in the plane developers fly.

Azure is the crux of the whole thing. Windows and Office are still powerful. But Azure is the strategic priority. It continues to grow quickly and incredibly profitably.

The same way that information is increasingly important in people’s lives, software is too.

IBD: Is the crux of ServiceNow‘s (NOW) success the way it has made itself important to customers in more and more enterprise departments?

Lin: They’ve done well for a couple of reasons. One is that they provide software for managing workflow. Its first form was in IT operations management. That’s where you take it for granted until it goes down.

Now they’re expanding into IT service management. They’re very good at selling software.

They’re just an execution machine. They are the (New England Patriots coach) Bill Belichick of IT management. Especially when the Patriots had Tom Brady at quarterback, the Patriots were a machine at marching the ball down the field. Well, selling software is not easy either. But ServiceNow is a machine at selling software.

Gartner’s Role In One Of The Best Mutual Funds

IBD: Does Gartner’s (IT) appeal boil down to its ability to perform customized research for customers for less than it would cost customers to create their own in-house research expertise?

Lin: That is one aspect. The other is that Gartner is the scoreboard for enterprises that want to evaluate technical research and products.

A company does not know whether it wants new software A, B or C. Gartner tells you which is good, which is bad, which is expensive, which is cheap.

IBD: Is Lululemon Athletica (LULU) simply about rising demand for fashionable exercise apparel?

Lin: It’s pretty straight forward. They’ve done well because that market is bigger than anyone thought. Health and wellness are increasingly important to most people’s lives.

It’s a phenomenal brand. And they’ve controlled distribution.

IBD: Controlling distribution prevents other retailers from discounting their merchandise?

Lin: Yes, controlling the brand equity. Also, having a direct relationship with the consumer allows LULU to know their tastes, preferences, habits, and so on. That data is important.

IBD: Adobe (ADBE) is vital to anyone in digital publishing and marketing. And they are shifting to an increasingly subscription-based revenue model, right?

Lin: Adobe is one of the best businesses you’ve ever seen. They sell software to help creators. So more people can be creators, which increases their total addressable market.

Another reason they’re amazing is that smartphones are a huge driver. Now it takes just seconds to create content.

Third, there have been powerful network effects. Their ecosystem is powerful. They are the standard. Creators have all agreed that if they’re exchanging information, they do it via Adobe.

And they were the first to transition from on-premise software to SaaS. Software as a Service is subscription based. It runs in the cloud. So they shifted to recurring revenue. Pioneers on a lot of fronts.

Airbnb Helps One Of The Best Mutual Funds

IBD: Why do you like lodging booking site Airbnb (ABNB), which climbed after going public in late 2020, then fell most of the first half of this year before rallying?

Lin: There is a lot of volatility in high growth names with rich valuations. When their risk premium changes, they can be volatile.

This company saw a market with latent capacity. They executed on monetizing it. There was also latent demand for lodging for businesses and families that was not hotel oriented. Airbnb solved the coordination between that latent capacity and latent demand. And you know what? We like brands that become verbs.

Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about retirement planning and actively run portfolios that consistently outperform and rank among the best mutual funds.

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