When constructing a portfolio, it’s tempting — particularly for novice investors — to simply rank available funds based on their historical returns and pick the best-performing ones.
However, this approach is rife with pitfalls, chief among them being the influence of recency bias — the misguided belief that recent trends will continue into the future, which overlooks the fact that past performance is not always indicative of future results.
While the allure of strong historical gains is hard to resist, making investment decisions based solely on past performance can lead to missed opportunities and heightened risks.
“It’s important to remember that choosing winning sectors of the past is easy, but it’s much harder to know the future,” says Allen Mueller, director of financial planning at investment advisory firm 7 Saturdays Financial. “Dumping money into the winners of the last decade means you’re deliberately buying what is now expensive compared to the rest of the market, which bodes poorly for expected returns.”
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Instead of merely ranking available funds based on their historical gains, investors should also pay attention to several other crucial factors.
A fund’s investment strategy, for instance, should align with the investor’s overall financial goals and risk tolerance. Fees are another consideration that can’t be ignored, as high management or transaction costs can significantly erode long-term returns.
Historical volatility, too, should weigh into the decision-making process. A fund with wild fluctuations might offer impressive returns but could also encourage impulsive behavior, like selling off at the bottom of a market cycle, which can be detrimental to long-term returns.
However, this isn’t to say that a fund’s historical performance should be completely disregarded when it comes to an investor’s fund selection process.
Looking at past returns can provide insights into the fund manager’s skill and the effectiveness of the fund’s strategy over different market cycles. It can also serve as a useful point of comparison against other investment options and market benchmarks.
Here are eight of the best-performing Fidelity mutual funds, ranked in ascending order by their trailing 10-year annualized returns as of Aug. 31:
| Fidelity Fund | 10-year annualized return (as of Aug. 31) |
| Fidelity Select Construction and Housing Portfolio (ticker: FSHOX) | 15% |
| Fidelity Growth Discovery Fund (FDSVX) | 15.4% |
| Fidelity NASDAQ Composite Index Fund (FNCMX) | 15.7% |
| Fidelity OTC Portfolio (FOCPX) | 16.6% |
| Fidelity Blue Chip Growth Fund (FBGRX) | 16.6% |
| Fidelity Select Software and IT Services Portfolio (FSCSX) | 18.1% |
| Fidelity Select Technology Portfolio (FSPTX) | 19.6% |
| Fidelity Select Semiconductors Portfolio (FSELX) | 26.5% |
Fidelity Select Construction and Housing Portfolio (FSHOX)
A key metric closely watched by economists and market participants domestically is housing starts, which refers to the number of new residential construction projects initiated within a given period. This number is a critical economic indicator alongside other measures like inflation and gross domestic product, or GDP, shedding light on consumer confidence, employment levels and future spending.
In general, high housing starts typically signifying a robust economy and they are often correlated with increased spending on goods and services beyond just homes. Post-2008, the U.S. housing market has performed well, with homebuilder, construction and other real estate sector stocks growing. Thanks to this, FSHOX has returned an annualized 15% over the past 10 years.
Fidelity Growth Discovery Fund (FDSVX)
“Growth stocks are those that are growing or are expected to grow earnings at an above-average rate, for which investors are willing to pay a premium,” says Daniel Dusina, director of investments at wealth management firm Blue Chip Partners Inc. “The last 10 years, which consisted of ultra-low interest rates and a relatively stable domestic economy, aligned well for growth stocks.”
As an actively managed fund, FDSVX does not track a benchmark index. Instead, its managers pick a portfolio of growth stocks they believe will outperform. Historically, this has worked out for the fund. Despite having a high expense ratio of 0.83%, FDSVX has managed to slightly beat the Russell 3000 Growth Index over the past 10 years, returning 15.4% versus 15.1%.
Fidelity NASDAQ Composite Index Fund (FNCMX)
“Overall, growth and information technology have come to dominate the U.S. market over the trailing 10-year period,” Dusina says. “Funds with high exposure to tech heavyweights such as Apple Inc. (AAPL), Alphabet Inc. (GOOG, GOOGL), Microsoft Corp. (MSFT) and Nvidia Corp. (NVDA) were rewarded with market-leading returns.” A top-performing Fidelity fund with all of these names is FNCMX.
This fund tracks the Nasdaq Composite Index, the broader variant of the famous Nasdaq-100 Index. Like its less diversified counterpart, the Nasdaq Composite holds a top-heavy weighting toward large-cap, U.S. technology and communication services companies. FNCMX currently charges a 0.3% net expense ratio and has returned an annualized 15.7% over the past 10 years.
Fidelity OTC Portfolio (FOCPX)
FOCPX uses a hybrid approach. The fund targets stocks traded both on the Nasdaq and over the counter, or OTC. While the latter allows the fund to hold a higher allocation of notable non-U.S. stocks that trade OTC, the fund manager often chooses American Depositary Receipts, or ADRs, of foreign stocks that are listed on U.S. exchanges, such as Taiwan Semiconductor Manufacturing Co. Ltd. (TSM), the fund’s ninth-largest holding, at a 2.4% weight. ADRs are securities issued by a bank that represent shares held in foreign stocks listed on foreign exchanges.
That being said, the fund still has an overwhelming domestic tilt, with around 90% of its portfolio weighted toward U.S. stocks. In addition, FOCPX explicitly targets an allocation of 25% or more in technology stocks, with 43.7% of its portfolio currently held in tech. Over the past 10 years, the fund has returned an annualized 16.6%, beating the Nasdaq Composite, which returned 15.8%.
[See: 7 Best Tech Index Funds to Buy Now]
Fidelity Blue Chip Growth Fund (FBGRX)
Blue-chip stocks are a popular pick among investors. Although the definition can vary, these stocks are usually those of companies that have large market capitalizations, are financially stable and have a good reputation. For blue-chip exposure, Fidelity offers FBGRX, which holds stocks that qualify as “well-known, well-established and well-capitalized” with a medium-to-large market capitalization.
FBGRX has been around since 1987, giving it a rather long history of performance. Over the past 10 years, this fund has outperformed its benchmark, the Russell 1000 Growth Index, returning an annualized 16.6% versus 15.6%. “This growth fund has significant exposure to technology, as that is the sector in which earnings have generally grown the fastest over the last 10 years,” Dusina says.
Fidelity Select Software and IT Services Portfolio (FSCSX)
“Along with growth stocks outperforming value stocks over the last decade, we also saw a lot of tech sector development that fueled the rise in valuations,” says Anessa Custovic, chief investment officer at Cardinal Retirement Planning Inc. “For example, demand for cloud computing services skyrocketed, with a number of firms significantly benefiting from this opportunity.”
Cloud computing firms fall within the software and information technology services industries under the broad tech sector umbrella. For concentrated exposure to companies like Adobe Inc. (ADBE), Salesforce Inc. (CRM), Oracle Corp. (ORCL) and Palo Alto Networks Inc. (PANW), investors can buy FSCSX, which charges a 0.69% expense ratio. The fund has returned an annualized 18.1% over the past 10 years.
Fidelity Select Technology Portfolio (FSPTX)
For a broader approach to technology investing, consider FSPTX. This fund holds many of the same software and IT services companies that FSCSX does, but also includes allocations to hardware companies such as Apple and Microsoft, along with numerous semiconductor manufacturers such as Nvidia and ON Semiconductor Corp. (ON).
Like many of the previous funds, FSPTX is actively managed, with its manager selecting stocks that will “provide or will benefit significantly from technological advances and improvements.” The fund is benchmarked to the MSCI IMI Info Tech 25/50 Index and has slightly underperformed it over the past 10 years, with an annualized 19.6% return versus 20.2%.
Fidelity Select Semiconductors Portfolio (FSELX)
As semiconductor stocks like Nvidia reported blockbuster earnings thanks to the recent demand from artificial intelligence, or AI, applications, semiconductor funds have enjoyed continued momentum. Therefore, it’s no surprise that the top-performing fund in Fidelity’s lineup, FSELX, is entirely composed of semiconductor designers, manufacturers or sellers.
As of July 31, around 25% of the fund’s portfolio is held in Nvidia alone, making it very top heavy and lacking in diversification. After Nvidia comes NXP Semiconductor N.V. (NXPI), ON Semiconductor, Marvell Technology Inc. (MRVL) and Taiwan Semiconductor. The fund charges a 0.69% expense ratio and has a 10-year trailing return of 26.5%.
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8 Top-Performing Fidelity Funds for Retirement originally appeared on usnews.com
Update 09/06/23: This story was previously published at an earlier date and has been updated with new information.
