How Fidelity Growth Company’s big Nvidia bet affects its valuation

Key Morningstar metrics for Fidelity Growth Company

• Morningstar Medalist: Silver
• Process column: Above average
• Human column: High
• Parent column: Above average

Fidelity Growth Company’s FDGRX exceptional management remains a major asset, but the fund is vulnerable if chip supplier Nvidia NVDA – a key position here – fails to live up to the market’s lofty expectations.

Steve Wymer has run this fund for more than 25 years, earning a place not just as one of the industry’s longest-serving large-growth managers, but also as one of its most talented. Despite the fund’s huge asset base, Wymer has executed its process without missing a beat, consistently outperforming its peers in the Morningstar high-growth category.

The foundation has been increasingly defined by Nvidia, the leading provider of graphics processing units that has recently become one of the world’s most valuable companies. Since becoming the portfolio’s top holding in 2016, the stock has risen more than 100 times in market value, largely thanks to its recent stellar performance. Through its outperformance and despite Wymer reducing it, the stock’s share of the portfolio has doubled over the past two years to around 16% of assets by September 2024. That’s a huge position size in absolute terms and relative to the stock’s 11 %-13% share of relevant major growth indices.

The stock is riskier than most. Although the company is in exceptional financial health, its valuation today depends on the nascent and skyrocketing artificial intelligence GPU end market, where the emergence of alternatives or intensified competition are plausible concerns, according to Morningstar’s equity research team. Nvidia’s business has historically been prone to boom-and-bust cycles that have shaken its share price.

But this foundation has never presented itself as tame. Wymer has long been willing to embrace unprofitable companies that he believes have exceptional growth potential — particularly in the biotech industry — which could expose it to steeper declines than the Russell 1000 Growth Index (the category’s benchmark) during market pullbacks. Although many of the budding hopefuls have fizzled out over the years, Wymer has shown a knack for spotting and successfully investing early in big winners.

The weight of the fund is a disadvantage because it limits Wymer’s ability to flexibly trade or hold large positions in names he prefers without exceeding ownership limits. Yet the fund, which has long been closed to most new investors, remains exceptional.

Fidelity Growth Company: Performance Highlights

Since Wymer took charge in January 1997 through November 2024, the fund achieved slightly more than 13.0% annualized, far outpacing the Russell 1000 Growth Index’s 10.4% and average high-growth peers.

Wymer’s penchant for fast growth and his willingness to stick with relatively expensive fares have increased the fund’s volatility, measured by standard deviation, relative to peers and the benchmark. Still, the fund has typically delivered benchmark-beating risk-adjusted results.

The fund’s relative performance has been remarkably consistent under Wymer. Since his inception, its monthly rolling three-year returns have beaten 90% of the time and have placed in the category’s top quartile almost as often.

Typically sensitive to the market’s daily gains and losses, the fund tends to stumble more than most during drawdowns but excel on the upside. That partly explains its success in 2023 and 2024 to date through November, where its 36% return comfortably beat the index’s 32%. But it was the big gain for Nvidia, the strategy’s biggest holding, that accounted for much of its outperformance. A handful of other highflyers, such as Deckers Outdoor DECK and On Holding AG ONON, also helped out.

On the other hand, the strategy’s biotech share of the index has underperformed over the past half-decade, as the industry has posted meager returns — or losses in the case of smaller-cap biotechs like the ones this fund trades.