Best-Performing Fidelity Mutual Funds
Editor's note: Many investors might look to a single fund family to populate their portfolio, either out of compulsion -- if, for example, their 401(k) plan offers only funds from one brand -- or convenience. This review of top-performing Fidelity funds is the first in a series that will look into picks and pans from the most well-known shops.
The Fidelity mutual fund empire encompasses some $1.3 trillion in assets, held in 430 funds that target dozens of asset classes. Although you're probably familiar with many fine funds among the Fidelity ranks, we decided to take a closer look at the full list to seek out both hidden gems and little-known sinkholes.
We found plenty of each. To generate our list of picks and pans, we ranked the funds by five-year returns through June 30 and compared each one with its benchmark. But to understand what to make of our results, it's helpful to know a bit about how Fidelity approaches fund management in general.
Christopher Davis, an analyst for Morningstar, says the Boston-based shop tends to allow managers of its stock funds to pursue their own investment processes and philosophies to a greater extent than some other fund companies. "They don't really have a cohesive investment culture," he says. (Davis says Fidelity's investment-grade bond funds, which are run from Merrimack, N.H., and are generally team-managed, tend to be more consistent.)
That can be great for investors when a manager such as Will Danoff, who has run Fidelity Contrafund (symbol FCNTX) for 22 years, takes the wheel. But it can mean a greater vulnerability to manager flameouts, too.
Consider the numbers: Among the 46 diversified U.S. stock funds we evaluated, over the five years through June 30 performance ranged from a fund that beat its benchmark by an average of 5.9 percentage points per year to one that lagged its bogey by an average of 6.4 points per year.
Management isn't blind to the issue. Brian Hogan says that when he took over as head of Fidelity's stock division in April 2009, he made consistency a priority. "We'd just been through a period in which our performance had not been particularly consistent," Hogan says, referring to the 2007-09 bear market. Since then, the firm has made sizable investments in research and has placed new emphasis on helping managers understand their weaknesses. "It's like a batting coach -- you want to help the batter understand if there are certain types of balls he can't hit," Hogan says.
Still, ask Hogan what Fidelity does best and he'll point to its star managers -- people like Danoff and Joel Tillinghast, who has managed Fidelity Low-Priced Stock (FLPSX) with excellent results for more than 20 years (both Contrafund and Low-Priced Stock are members of the Kiplinger 25, the list of our favorite no-load mutual funds). For better or for worse, investing in a Fidelity stock fund means you're taking a gamble on the skill of the manager, and your returns will wax or wane with his or her acumen.
U.S. Stock Funds from Fidelity
Across all of Fidelity's diversified U.S. stock funds, Fidelity Small-Cap Discovery (FSCRX) ranked tops compared with its benchmark over the five years through June 30, beating the Russell 2000 index of small companies by an average of 5.9 percentage points per year. Over the five-year period that ended August 21, the fund returned 9.2% annualized, topping 99% of its peers (funds that invest in small companies with a blend of growth and value characteristics). John Bonnanzio, editor in chief of Fidelity Insight, a newsletter that tracks Fidelity funds, rates Small-Cap Discovery a "Buy." He says Chuck Myers, who has managed the fund since 2006, "tends to keep sector weighting closely aligned with the Russell 2000, adding value mainly through good, old-fashioned stock selection."
At the bottom of the group is Fidelity Growth & Income Portfolio (FGRIX). It trailed its benchmark by 6 percentage points per year on average over the five years through June 30. Over the past ten years through August 21, it has fared worse than 99% of similar funds, returning 1.2% annualized. But the fund, which seeks stocks that pay dividends and stand to appreciate in price, gained a new manager in February 2011, when Matthew Fruhan took over, and he appears to be turning things around. Bonnanzio says Fruhan's peer-beating performance at two other funds he runs, Fidelity Mega Cap Stock (FGRTX) and Fidelity Large Cap Stock (FLCSX), gives him confidence that the turnaround at Growth & Income will have staying power.
We also ranked Fidelity's ten largest U.S. stock funds so that we could make judgments among the names investors know the best. Fidelity Contrafund, which has $82.2 billion in assets, took first place by topping Standard & Poor's 500-stock index by an average of 2.7 percentage points per year. Contrafund invests primarily in large companies, such as Apple and ExxonMobil, that Danoff believes are capable of generating above-average earnings growth. Bringing up the rear of the fleet was Fidelity Magellan (FMAGX), which trailed the S&P 500 by 3.6 points per year, on average.
Magellan, Fidelity's one-time flagship, is a shell of its former self. It held $100 billion in assets in 2000, compared with $14.6 billion today. The fund is still synonymous with the legendary Peter Lynch, who captained Magellan from 1977 to 1990 with spectacular results. "Expectations for the fund have been very high," says Matt Sauer, editor in chief of the newsletter Fidelity Independent Adviser, which tracks the fund family. "It competes against its own history."
As with Growth & Income, Magellan's bum returns largely reflect a different leader. Former manager Harry Lange made misguided bets on financial stocks, such as American International Group and Wachovia (now part of Wells Fargo), in 2008, contributing to a 49.4% plunge that year (compared with a 37.0% loss for the S&P 500). Fidelity replaced Lange with Jeffrey Feingold in September 2011. Over the past year through August 21, the fund returned 20.1%, trailing 84% of funds that invest in large, growing companies, and lagging the S&P 500 by 8.5 percentage points. Although Feingold could right the ship yet, we see no reason to rush into the fund now.
International Stock Funds from Fidelity
Emerging markets stole the show in this category. Fidelity China Region (FHKCX) took first place, beating its bogey, the MSCI Golden Dragon index, by 2.8 percentage points per year on average over the five years through June 30. Fidelity Emerging Markets (FEMKX) came in last, lagging the MSCI Emerging Markets index by an average of 4.2 points per year over the same period.
Yet neither deserves a place on your buy list. China Region, which primarily invests in Chinese, Taiwanese and Hong Kong companies, has seen two manager changes in the past five years. (One, in January 2010, occurred after manager Wilson Wong was fired for breaching the internal ethics code of FIL Limited, an affiliate of Fidelity's that was sub-advising the fund at that time. Wong's ethics violations didn't effect clients' money, says FIL spokesman Peter Yandle.) Current manager Bobby Bao has yet to complete one full year with the fund. And manager Robert von Rekowsky has handled the Emerging Markets fund since 2004, so its sorry results have no other shoulders to rest upon.
Bond Funds from Fidelity
Two very different funds made the list among Fidelity's fixed-income offerings. Leading the pack was Fidelity New Markets Income (FNMIX), which invests in the government debt of developing nations, primarily bonds denominated in U.S. dollars. At the bottom was Fidelity Ultra-Short Bond (FUSFX), which holds mainly short-term investment-grade debt and yet managed to shed 1.6% annualized over the past five years.
How did such a safe-sounding fund lose money? From about 2003 to 2007, Ultra-Short Bond loaded up on mortgage-backed securities, including investments in subprime mortgages, in addition to IOUs backed by credit card and auto-loan debt. The fund lost 5.1% during 2007 and 7.8% in 2008, when management sold most of its problem investments and moved largely to cash. In June of this year, the Financial Industry Regulatory Authority, one of the securities industry's regulators, fined Fidelity $375,000 for failing to adequately explain the risks of the fund in fact sheets and other marketing materials from 2006 to 2008. Spokesman Jeff Cathie says Fidelity "takes its compliance obligations very seriously" and that the firm "has taken several steps to address the advertising issues" for which it was censured. Even so, it's difficult to imagine investing in Ultra-Short Bond. Consider Fidelity Conservative Income Bond (FCONX) as an alternative if you're looking to take on slightly more risk than you would in a money market fund. The Conservative Income fund yields 0.6%.
By contrast, the record at New Markets Income -- a member of the Kiplinger 25 -- is something worth crowing about. Manager John Carlson has been at the helm since 1995. Over the past ten years through August 21, the fund returned an annualized 13.2%, besting 87% of funds that invest in emerging-markets debt. Morningstar's Davis says it's particularly notable that Carlson has generated those gains while sticking with U.S. dollar-denominated debt, as more developing nations have shifted to issuing bonds in their own currencies in recent years, narrowing Carlson's universe of potential investments. "Today it's often the least-creditworthy countries that issue their debt in dollars, so it requires some careful management skills" to avoid problems, Davis says.
Sector Funds from Fidelity
Last, we considered Fidelity's sector funds, as well as funds that invest in a blend of stocks and bonds. Funds in the latter group all performed within about one percentage point of their benchmarks, but deviations from the average were far more extreme at many of the sector funds. As with Ultra-Short Bond, long-term numbers at Fidelity Select Consumer Finance (FSVLX) suffer from miserable results during the financial crisis, including a mind-boggling 59% loss in 2008. "It was a horror show," Davis says.
Before December 2010, the fund was called the Fidelity Select Home Finance Portfolio, and it invested in the stocks of mortgage lenders. Today, the re-branded fund holds a basket of financial-services companies, such as Visa, Capital One, MasterCard and SLM Corp. (also known as Sallie Mae). It has returned 24.7% so far this year through August 21. We see no reason to hold the fund's past against it at this point, but at the same time, few investors likely have need to make a bet on such a narrow sector.
It's a similar story for Fidelity Select Environment and Alternative Energy Portfolio (FSLEX). Although the fund shed less than its benchmark -- it lost 2.6% annualized over the five years through June 30, compared with an annualized 8.6% loss for the FTSE Environmental Opportunities and Alternative Energy index -- it's difficult to see that as a good enough reason to buy now. How the industry fares is in part tied to the politics of energy policy. And it can be difficult even for experts to pick winners in the sector. Says Fidelity Independent Adviser's Sauer, "The time for this fund is going to come; it just may not be now."