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All Contents © 2016The Kiplinger Washington Editors
Fidelity is home to some of the greatest stock fund managers of all time. At the top of the list is Peter Lynch, who during his tenure at Fidelity Magellan from 1977 to 1990 delivered a 29.1% annualized return. He beat out all other stock funds and bested Standard & Poor’s 500-stock index by an average of 13.5 percentage points per year. Since then, other stars have shone brightly, including Contrafund’s Will Danoff, Low-Priced Stock’s Joel Tillinghast and Growth Company fund’s Steve Wymer.
The firm’s string of famous managers may explain why 22 of its funds land on a list of the 105 most popular mutual funds in employer-sponsored retirement savings plans. We set out to identify the best funds on the list. In the case of Fidelity, there are four index funds, nine actively managed funds and nine funds in the firm’s Freedom target-date series, all of which hold a mix of actively managed funds and index funds. We focused our analysis on the actively managed funds and the Freedom target-date series, since we recently named our favorite Fidelity index funds.
We rate the nine actively managed funds and the collection of target-date funds Buy, Sell or Hold based on our analysis of the funds' performance and prospects. A Buy rating indicates the best Fidelity funds for your retirement savings from among the group of funds analyzed.
The list of funds, based on 401(k) assets under management, was generated for Kiplinger by BrightScope, a financial-information company that rates retirement-savings plans. The funds are listed in alphabetical order. We used data for the Investor share class for each fund, but your retirement plan may have access to a lower-cost share class, such as a K-class or a class called a collective investment trust (a pool of assets organized as a trust) that is run with a similar strategy to that of the mutual fund. Funds that are nominally closed to new investors may be open to participants in a 401(k) plan. Returns are as of October 17.
By Nellie S. Huang, Senior Associate Editor
| October 2016
Expense ratio: 0.55%
Assets: $28.8 billion
One-year return: 4.6%
Three-year annualized total return: 6.7%
Five-year annualized total return: 10.1%
Ten-year annualized total return: 6.1%
As this fund’s name implies, its assets are balanced between stocks and bonds. The fund typically holds a mix of roughly 60% stocks and 40% bonds. We say roughly because lately, the stock portion of the fund has been a bit higher. It hit 67% in late 2015, according to Morningstar, and currently sits at 64% of assets. But that helps explain the fund’s three-year record, which outpaced 94% of its peers (funds that normally invest 50% to 70% of their assets in stocks and the rest in bonds).
Don’t be turned off by the long list of 11 managers. Fidelity veteran Robert Stansky makes the call on the amount of the fund’s assets that goes into stocks and bonds. And he heads the stock-picking team of nine sector-focused managers, each of whom runs his own slice of the fund. They home in on high-quality, growing large-company stocks trading at reasonable prices.
Ford O’Neil takes charge of the bond side. Lately, he’s been tilting more toward investment-grade corporate bonds, but he also owns Treasuries and asset-backed securities. The bond side of the fund has a duration—a measure of interest-rate sensitivity—of 5.1 years. A duration of 5.1 years implies that if interest rates rise by one percentage point, the fund’s bond portfolio will lose 5.1% of its value. Bond prices and interest rates move in opposite directions.
Expense ratio: 0.82%
Assets: $19.4 billion
One-year return: 3.1%
Three-year annualized total return: 10.1%
Five-year annualized total return: 15.0%
Ten-year annualized total return: 9.2%
As this fund’s manager since 2009, Sonu Kalra’s tenure isn’t especially long. But he has been investing in the kinds of stocks this fund typically holds since 2002—first as manager of Fidelity Select Computers, then, starting in 2005, as manager of Fidelity OTC.
Investors who hold this fund should understand that its holdings definitely tilt toward growth companies but aren’t necessarily classic blue chips. Although Kalra owns a number of large, well-known firms, he also has investments in emerging growers, including electric-car maker Tesla Motors and ride-sharing company Uber Technologies, which has not yet gone public. As a result of some of these bold bets, Blue Chip has had a rockier ride than its peers: Since Kalra took over in July 2009, the fund has been 11% more volatile than the typical large-company growth fund. But investors have been well rewarded. During Kalra’s term, the fund has returned an annualized 16.7%, beating its peer group by an average of 3.6 percentage points per year.
Expense ratio: 0.71%
Assets: $108.4 billion
One-year return: 3.3%
Three-year annualized total return: 8.6%
Five-year annualized total return: 13.5%
Ten-year annualized total return: 8.2%
Contrafund is one of the biggest stock funds in the country, with more than $108 billion in assets. The fund’s enormous size is a concern because it limits manager Will Danoff’s flexibility to move in and out of positions. That’s the reason we have a hold on Contrafund.
That is not a knock on Danoff, whom we consider one of the best stock pickers in the business. Although he’s had a few bumps (who hasn’t?) since taking over Contra in September 1990, he has delivered an annualized return of 12.7%, one of the best records of any diversified U.S. stock fund over the past quarter-century or so. Although the “Contra” in the fund’s name suggests that it takes a contrarian approach and holds out-of-favor stocks, Danoff is really a growth-stock investor who seeks companies with expanding earnings, capable management teams and an edge over competitors. His notion of contrarian investing is to find companies with growth potential that is underappreciated by others—for example, a firm with a new product set to hit the market. Facebook, Berkshire Hathaway and Amazon.com were the fund’s top three holdings at last word.
Expense ratio: 1.00%
Assets: $20.4 billion
One-year return: -3.0%
Three-year annualized total return: 1.1%
Five-year annualized total return: 7.5%
Ten-year annualized total return: 2.3%
This fund’s 1.1% annualized return over the past three years is not exactly enticing. But it beats the fund’s bogey, the MSCI EAFE index, which tracks foreign stocks in developed countries, by an average of 2.3 percentage points per year. The long-term record is decent, too. Since Bill Bowers took over the fund’s management in 2001, Diversified International has returned 6.2% annualized, beating the EAFE index by an average of 1.4 percentage points per year. But he’s occasionally delivered periods of so-so performance. Over five of the past 11 calendar years, including so far in 2016, Bowers has posted returns that ranked average or below average among his peers (funds that invest in large foreign companies). Still, for exposure to stocks of large foreign companies, Diversified International is a reasonable choice.
Expense ratio: 0.87%
Assets: $37.8 billion
One-year return: 4.1%
Three-year annualized total return: 9.6%
Five-year annualized total return: 15.1%
Ten-year annualized total return: 10.0%
Growth Company has been closed to new investors for a decade. But that rule doesn’t apply if the fund is offered in your employer-sponsored retirement-savings plan. If so, back up the truck and load up on more shares. Manager Steven Wymer has been running the fund for nearly 20 years, and his record is tough to beat. Since the start of 1997, Wymer’s stock picking has delivered a 9.6% annualized return, which beats the S&P 500 by an average of 2.1 percentage points per year.
This aggressive stock fund is great for long-term investors who can stomach occasional short-term hiccups (such as the six-week period at the start of 2016, when the fund lost 16% because of its hefty exposure to biotechnology stocks). Wymer looks for companies in fast-growing industries with strong revenue growth and a dominant position in their business. His top three holdings recently: Nvidia (a maker of computer-graphics chips), Amazon.com and Apple.
Expense ratio: 0.88%
Assets: $39.6 billion
One-year return: 1.4%
Three-year annualized total return: 5.0%
Five-year annualized total return: 5.0%
Ten-year annualized total return: 7.6%
It’s hard to argue with Joel Tillinghast’s long-term results. Since he opened Low-Priced Stock in 1989 as a fund that would primarily invest in stocks that sold for $15 or less at the time of purchase, he has delivered a 13.5% annualized return. Only one other diversified stock fund has done better over that time. Tillinghast beat both the S&P 500 and the Russell 2000, which tracks small-company stocks, by an average of 4.3 percentage points per year. (Six comanagers joined Tillinghast in 2011; each runs roughly 1% of the fund’s assets.)
But as is the case with Contrafund, we are wary of Low-Priced Stock’s size. It is the biggest actively managed medium-capitalization stock fund in the country (Morningstar categorizes Low-Priced as a mid-cap fund, but in fact it invests in companies of all sizes). An enormous asset base can hinder performance when a manager buys and sells stocks, especially small caps and mid caps. It’s hard to know if Low-Priced’s girth is responsible, but performance so far in 2016 hasn’t been so hot: In the first nine months of the year, Low-Priced Stock’s 5.3% return lagged 93% of its peers.
Low-Priced Stock has already adjusted its original mandate as assets have grown. It now invests primarily in stocks that sell for $35 or less at the time of purchase. It invests in more large companies than it used to. And it has ventured overseas, with foreign stocks accounting for 34% of its assets at last word.
Expense ratio: 0.73%
Assets: $7.4 billion
One-year return: 5.4%
Three-year annualized total return: 6.2%
Five-year annualized total return: 13.3%
Ten-year annualized total return: 6.9%
An untimely bet on energy stocks dampened this fund’s results in 2015, when it lost 3.1% and lagged 73% of funds that invest in fast-growing midsize companies. But manager John Roth likes to invest in out-of-favor stocks and industries, so his fund’s performance is sometimes out of sync with the market and its rivals. This year, for instance, his energy bet has paid off handsomely. In the first nine months of 2016, the fund returned 11.2%, placing it in the top 4% of its peer group.
Roth calls himself an opportunistic investor with a bias toward growth stocks. But he’ll snap up a good bargain if he sees a good prospect. His eclectic approach stems from his wide-ranging experience at Fidelity, which included stints running sector funds that focus (separately) on chemicals, utilities, consumer goods and media concerns.
We have confidence in Roth. He also runs Fidelity New Millennium (FMILX), a member of the Kiplinger 25. Since he took over Mid-Cap Stock in early 2011, it has outpaced the typical fund that concentrates on growing midsize companies. However, it has lagged the S&P MidCap 400 index by an average of 0.4 percentage point per year.
Expense ratio: 0.91%
Assets: $13.6 billion
One-year return: 7.8%
Three-year annualized total return: 12.5%
Five-year annualized total return: 15.8%
Ten-year annualized total return: 11.5%
Many actively managed funds have a tough time beating their benchmark. Not Fidelity OTC. Since mid 2009, when manager Gavin Baker took over, the fund has returned 17.5% annualized. That beats the Nasdaq Composite index—the bogey OTC aims to beat—as well as the S&P 500.
Baker has a unique mandate: He must invest at least 80% of the fund’s assets in stocks that are listed on the tech-heavy Nasdaq exchange or that trade over the counter. That’s a big reason the fund had, at last report, 49% of its assets invested in technology stocks, and more than 30% invested in small and midsize companies. Not surprisingly, OTC tends to be volatile; it has been 20% jumpier than the Nasdaq index over the past five years.
Baker looks for growing companies that he thinks will beat analysts’ quarterly earnings expectations. It’s not an easy task, says Baker, but he has done well so far. Apple, Amazon.com, and Alphabet were the fund’s top three holdings recently.
Expense ratio: 0.56%
Assets: $25.7 billion
Three-year annualized total return: 6.9%
Five-year annualized total return: 10.4%
Ten-year annualized total return: 6.2%
Like sibling Fidelity Balanced, Puritan typically holds a mix of 60% stocks and 40% bonds. But the similarities end there. For starters, Puritan has different managers than Balanced. Lead manager Ramin Arani picks the stocks, while Michael Plage and Harley Lank select the bonds.
And the fund tends to be bold on both the stock and the bond side. The fund recently had as much as 73% of its assets in stocks, on the high side compared with the typical balanced fund. (The stock allocation is now down to 64% of assets.) Moreover, Arani favors fast-growing companies. Among Puritan’s top holdings lately were Alphabet, Apple and Facebook. On the bond side, the fund takes on more credit risk than other balanced funds. More than 20% of the fund’s bond assets—nearly double that of its typical peer—was devoted to high-yield bonds (securities with below-investment-grade quality ratings).
Over time, Puritan has been a touch more volatile than its average rival. But the fund has turned in better results. Since Arani became lead manager in 2007, Puritan has returned 5.8% annualized; the typical balanced fund returned 4.0%.
We haven’t been enamored with Fidelity’s target-date series in recent years—and neither, apparently, was Fidelity. The firm spent three years overhauling the series, a process it completed in 2015. Fidelity’s efforts appear to be working slowly.
Take Fidelity Freedom 2050 (FFFHX). After below-average to average results in each year from 2011 through 2014, the fund ranked in the top 13% of its peer group last year, losing 0.2%. In the first nine months of 2016, the fund’s 7.3% return ranked among the top 38% of its category.
Fidelity gets credit for trying to turn around its target-date funds. It revamped the lineup of underlying funds, including the creation of a line of funds designed exclusively for the Freedom funds and run by such star managers as Will Danoff, Joel Tillinghast and Steve Wymer.
We’re not ready to endorse the Freedom funds yet. If you want a target-date fund and this is the only series available in your retirement-savings plan, go for it. The funds are not terrible. But we want to see more evidence that Fidelity’s moves to improve the Freedom funds really are working before we recommend the series.
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