Fidelity OTC Portfolio's Q2 2025 Performance: A Test for the Concentrated Growth Strategy in a Volatile Market

The Fidelity OTC Portfolio (FOCPX) has long been a magnet for investors seeking aggressive growth through a concentrated bet on high-conviction stocks. However, Q2 2025 has proven to be a harsh teacher for this strategy. As of mid-May 2025, the fund ranked in the bottom 2% of its large-growth Morningstar Category, underperforming both the Russell 1000 Growth Index and the Nasdaq Composite by 4 and 3.5 percentage points, respectively. This underperformance has raised questions about the viability of its concentrated growth approach in a market defined by policy uncertainty, inflationary pressures, and volatile asset prices.

The Concentrated Growth Strategy: Strengths and Vulnerabilities

FOCPX's strategy, led by portfolio manager Chris Lin, is built on a high-conviction, low-diversification model. As of March 31, 2025, 63% of the fund's assets were allocated to its top 10 holdings—well above the typical 50% concentration of peer funds. This approach has historically delivered strong returns, with a 14.0% annualized gain since Lin took the helm in October 2018. However, the fund's reliance on a handful of stocks has also exposed it to outsized risks when those holdings falter.

Three of FOCPX's top 10 holdings—Apple, Alphabet, and Marvell Technology—experienced sharp declines through mid-May 2025. Apple fell 15%, Alphabet dropped 13%, and Marvell Technology plummeted 40%. These losses were not isolated incidents but symptomatic of broader macroeconomic headwinds. The fund's heavy allocation to these names amplified their drag on performance, underscoring the double-edged nature of concentrated portfolios: they can soar in bull markets but falter when key holdings face headwinds.

Macro Headwinds: Tariffs, Inflation, and Policy Uncertainty

The Q2 2025 market was shaped by a toxic mix of policy uncertainty and inflationary pressures. The U.S. government's implementation of record-high tariff hikes—its largest since the 1930s—triggered a selloff in global equities at the start of the quarter. While the U.S. dollar's subsequent weakening provided a rebound for non-U.S. assets, the damage to domestic growth stocks lingered. The Fed's 3% inflation forecast and its decision to hold rates amid a tight labor market further clouded the outlook for risk assets.

For FOCPX, which leans heavily on the technology sector (over 25% of assets), these conditions were particularly challenging. Tech stocks, often priced for perfection, struggled as investors recalibrated for slower earnings growth and higher discount rates. The fund's aggressive positioning in high-growth tech names left it exposed to valuation corrections, especially as policy-driven volatility kept markets on edge.

Strategic Reassessment: Balancing Aggression with Resilience

Despite the recent underperformance, FOCPX's long-term record remains robust. Lin's stock-picking acumen and the fund's “Above Average” People and Process ratings suggest the strategy has merit. However, the Q2 2025 experience highlights the need for a nuanced approach. Concentrated portfolios thrive in environments where a few stocks can dominate returns, but in a world of persistent macro risks and rapid sector rotations, diversification—even at the expense of some growth potential—may become a necessity.

For investors, the key takeaway is to align FOCPX with their overall portfolio strategy. The fund's volatility makes it a poor standalone holding but a compelling satellite asset for those seeking to amplify growth in a diversified portfolio. Investors with a higher risk tolerance and a long-term horizon may still find value in its strategy, but those prioritizing stability in the current climate should consider hedging with more balanced funds or defensive sectors.

Conclusion: A Test of Strategy and Patience

The Fidelity OTC Portfolio's Q2 2025 performance is a cautionary tale for concentrated growth strategies in volatile markets. While its historical returns are impressive, the fund's recent struggles underscore the perils of overreliance on a handful of stocks amid macroeconomic turbulence. For now, FOCPX remains a high-conviction bet, but investors must weigh its aggressive positioning against the realities of a market increasingly defined by uncertainty. As the Fed's policy path and global economic dynamics evolve, the fund's ability to adapt—or its willingness to diversify—will be critical to its future success.