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All Contents © 2019The Kiplinger Washington Editors
By Nellie S. Huang, Senior Associate Editor
| October 30, 2018
Fidelity, no surprise, is a heavy hitter in 401(k) plans. Eighteen Fidelity funds rank among the 100 most-popular funds in workplace retirement plans, according to financial consulting firm BrightScope.
Of those, four are index funds – funds that replicate the performance of a market benchmark such as the Dow Jones Industrial Average or Standard & Poor’s 500-stock index. Six are target-date funds and eight are actively managed.
We will look at some of the best Fidelity funds for your 401(k), and weed out some lesser options. We assign a “buy,” “sell” or “hold” rating to each of the actively managed portfolios and to the target-date series. Symbols and expense ratios refer to each fund’s investor share class. But your workplace plan may offer a different (and less expensive) share class.
Returns and data are as of Oct. 25, 2018. Three- and five-year returns are annualized.
Expense ratio: 0.55%
One-year return: 4.1%
Three-year return: 7.7%
Five-year return: 7.7%
Value of $10,000 invested 10 years ago: $29,060
Top three stock holdings: Apple (AAPL), Microsoft (MSFT), Amazon.com (AMZN)
A balanced fund typically holds 60% of its assets in stocks and 40% in bonds. Balanced-fund managers can shift those proportions depending on their overall view of the economy and markets.
At Fidelity Balanced, lead managers Robert Stansky on the stock side and Ford O’Neil on the bond side are favoring stocks these days: Balanced’s portfolio currently has 68% of its assets in stocks, and 32% of assets in bonds and cash. Stansky steers a team of managers who look for growing firms with shares trading at reasonable prices – at the moment, that means a focus on technology, healthcare and financials, which combine to make up about 45% of assets. O’Neil focuses mostly on Treasuries, investment-grade corporate debt and mortgage-backed securities.
Balanced is solid and consistent. The fund outpaced its peer group – formally known as allocation funds that invest 50% to 70% of their portfolio in stocks – in all but two of the past 10 full calendar years, and so far in 2018 as well.
Expense ratio: 0.72%
One-year return: 14.7%
Three-year return: 14.7%
Five-year return: 14.1%Value of $10,000 invested 10 years ago: $51,980
Top three stock holdings: Amazon.com, Apple, Alphabet (GOOGL)
Big companies – members of the S&P 500 index or the Dow Jones Industrial Average – or midsize firms with at least $1 billion in market value are eligible for Fidelity Blue Chip Growth. (About 12% of the fund’s assets are in mid-cap stocks.) Businesses must be growing at a brisk rate. Manager Sonu Kalra focuses on companies with an estimated long-term earnings growth rate of at least 10% per year.
Recent years have been good for FBGRX. Kalra, a veteran Fidelity manager and analyst who also comanages OTC Portfolio, took over Blue Chip Growth in mid 2009, a few months after the bull market began. Since then, the fund has returned an annualized 17.7%, which outpaces the 14.6% annualized gain in the S&P 500. Gains have been consistent: Kalra outpaced the S&P 500 and similar funds that invest in large, growing companies, in six of the past eight full calendar years. A heavy tilt toward technology stocks has helped – the fund has 31% of assets invested in that sector.
With the U.S. economy at the tail end of an expansion, Kalra is focusing on businesses he thinks can grow regardless of the economic environment. Tech firms will continue to improve productivity, he says. So Kalra added to his stake in Microsoft, the country’s second-largest provider of cloud services, behind Amazon.com. He also recently bought shares in athletic-gear powerhouse Nike (NKE) and in Kering (PPRUY), a luxury goods firm that counts Gucci among its brands.
Expense ratio: 0.74%
One-year return: 10.6%
Three-year return: 13.0%
Five-year return: 12.1%
Value of $10,000 invested 10 years ago: $41,250
Top three stock holdings: Amazon.com, Facebook (FB), Berkshire Hathaway (BRK.A)
Manager Will Danoff is a rock star in the mutual fund world. Since he took over Fidelity Contrafund 28 years ago, the fund has returned 13.2% annualized, well ahead of the 10.2% gain in the S&P 500. That edge adds up over time. A $10,000 investment at the start of Danoff’s term in 1990 would be worth $323,400 today. A similar investment in an S&P 500 index fund would be worth just over $153,150.
Danoff looks for firms with improving growth prospects. Despite the aging bull market, he still expects growth companies to do well. Contrafund is loaded with tech stocks (27% of assets are devoted to that sector), which have been volatile this year. But Danoff remains optimistic. People spend more time on the internet thanks to their superpowered smartphones, he says. And companies are investing more money on cloud computing infrastructure. Danoff expects those trends to continue. “We are in a pro-growth regime, with taxes falling and interest rates low, so growth companies should continue to perform well,” he says.
Expense ratio: 0.94%
One-year return: -9.0%
Three-year return: 1.8%
Five-year return: 2.3%
Value of $10,000 invested 10 years ago: $22,220
Top three stock holdings: Prudential (PRU), Keyence (KYCCF), SAP (SAP)
It’s hard to get excited about Fidelity Diversified International. For starters, foreign stocks have lagged their U.S. counterparts over the past decade. The past year has been no exception. The MSCI EAFE index of large, foreign companies in developed markets has lost 1.1% over the past 12 months, while the U.S. market has gained 7.9%. Fidelity Diversified International trails both, with a 9.0% loss.
To further muddy the waters, over the long haul, manager William Bower sports a mixed record, beating the benchmark (barely) but lagging the average return for similar funds that invest in large, growing companies in foreign developed markets. Over the past 10 and 15 years, Bower beat the MSCI EAFE by an annualized average of less than one percentage point per year. The fund lags 70% of its peers on a 10-year basis; 55% over the past 15 years.
If Diversified International is the only foreign-stock fund that your workplace retirement plan offers, stick with it, especially if your 401(k) savings are your only investments. That’s because maintaining a well-diversified portfolio matters. You don’t want to get caught empty-handed when foreign markets rebound – as they will eventually. Also, stocks in developed markets are currently cheap relative to U.S. stocks. In Japan, the United Kingdom and Europe, stocks trade at roughly 13 times expected earnings over the next 12 months. Meanwhile, stocks in the U.S. trade at 16 times expected earnings.
That said, an index fund focused on foreign stocks in developed countries, if one is available in your plan, can serve you well, too.
Expense ratio: 0.85%
One-year return: 11.8%
Three-year return: 16.2%
Five-year return: 14.6%
Value of $10,000 invested 10 years ago: $54,910
Top three stock holdings: Nvidia (NVDA), Amazon.com, Apple
It has been 12 years since Fidelity Growth Company closed to new investors, but that isn’t a problem for 401(k) plan investors. If the fund is offered in your workplace savings plan, you’re free to invest in it, even if you’re new to the fund. And you should consider yourself lucky. Since it closed to new investors, Growth Company has returned 11.5% annualized, which outpaces the S&P 500 by an average of 3.2 percentage points per year.
Manager Steven Wymer hunts for firms with good long-term growth prospects and holds on for years. He first bought Amazon.com shares in 1999. Apple has been in the fund since 2004. And Nvidia – which makes graphics chips for PCs, laptops and mobile devices, among other things – has been in the fund since 2008.
Bear in mind that a fund that invests in growing companies tends to suffer when the market heads south. In 2008, Growth Company lost 40.9%; the S&P 500 registered a 37.0% loss.
Still, many 401(k) savers have the benefit of a long-term time horizon, and smart investors will buy and hold. Wymer’s 10.8% annualized return since he took over the fund in early 1997 trounces the 8.1% annualized gain in the S&P 500 over the same period.
Expense ratio: 0.62%
One-year return: 0.8%
Three-year return: 7.0%
Five-year return: 7.0%
Value of $10,000 invested 10 years ago: $39,440
Top three stock holdings: UnitedHealth Group (UNH), Ross Stores (ROST), Best Buy (BBY)
Fidelity Low-Priced Stock changed its stripes – just a tad – in late 2017, but the main stock picker remains at the helm and is still working his magic. In its early days, Low-Priced Stock focused on promising stocks that traded for $15 or less per share at the time of purchase. But assets have grown under manager Jeff Tillinghast’s able direction. Now, with a little less than $36 billion in assets – making it one of the biggest funds in the country – the fund’s price threshold is $35 or less.
Under Tillinghast, Low-Priced Stock is a reliable, above-average performer with an impressive long-term record. Over the past decade, the fund’s 14.7% annualized return squeaked past the 14.4% annualized gain in the S&P 500 and the 13.9% return in the Russell 2000 index, the benchmark for small-company stocks. Finding the appropriate benchmark for this fund is challenging: FLPSX can invest in companies of any size, and more than half of the fund’s assets are invested in midsize and small companies. In addition, about 34% of assets are invested in foreign stocks.
Tillinghast manages roughly 95% of the fund’s assets; the remaining 5% is divided and run separately by five other managers. They are disciplined value-oriented investors who are drawn to high-quality companies with stable earnings-growth prospects and shares that trade at a discount. In mid-2018, the fund managers added utility companies, including PPL (PPL), a Pennsylvania firm, PG&E (PCG) in San Francisco, and China Resources Gas Group, a Hong Kong-based gas distributor. Shares in the firms had fallen to attractive levels, says Tillinghast, “creating opportunities.”
Expense ratio: 0.88%
One-year return: 14.4%
Three-year return: 17.1%
Five-year return: 16.1%
Value of $10,000 invested 10 years ago: $64,460
Top three stock holdings: Apple, Amazon.com, Alphabet
It’s only been since September 2017 that Sonu Kalra, who also manages Fidelity Blue Chip Growth, and comanager Chris Lin stepped in to take over for manager Gavin Baker, who left unexpectedly. We advised investors to watch and wait on Fidelity OTC Portfolio last October. We’re on board now. Since Kalra and Lin took the helm, they have steered the fund to a cumulative 15.3% return, which outpaces the S&P 500 by five percentage points and beats other funds that invest in large, growing companies by 2.7 percentage points. Of course, we’d rather judge by a longer track record. But Kalra is a seasoned Fidelity stock picker. He has run this fund before, very successfully, and he has proved himself at Blue Chip Growth.
The name OTC refers to the fund’s mandate to invest 80% of its assets in stocks listed on the Nasdaq exchange or that trade “over the counter” (in other words, not on a formal exchange). The fund aims to beat the Nasdaq Composite index. Over the 14-month period since the managers took over the fund, OTC Portfolio edged past the Nasdaq Composite index by less than one percentage point. Like the index, OTC Portfolio is heavy with tech stocks. Nearly 61% of the fund’s assets are invested in that sector. Although that lean helps to fuel the fund’s high-octane returns, it can also result in a bumpy ride. Over the past year, OTC Portfolio has been 33% more volatile than the S&P 500.
One-year return: 4.7%
Three-year return: 8.0%
Five-year return: 8.0%
Value of $10,000 invested 10 years ago: $29.030
Top three stock holdings: Alphabet, Apple, Microsoft
In the past, we’ve been huge fans of this balanced fund, which holds a mix of stocks and bonds for years. So why do we rate Fidelity Puritan a “hold” instead of a “buy”? Longtime manager Ramin Arani is retiring at the end of 2018. Dan Kelley is taking over Arani’s stock-picking duties. Kelley has been a fund manager before – most notably at Fidelity Trend. But even when transitions are carefully choreographed, we’ve learned, there are always a few stumbles as the new manager settles in. So, we’re in wait-and-watch mode with this fund.
If you already own shares in this fund, stay put. Otherwise, your plan may offer a different balanced fund that we rate highly or a balanced index fund, such as Vanguard Balanced (VBINX).
The fund managers on the bond side at Puritan, Michael Plage (who joined in mid-2015) and Harley Lank (mid-2003), aren’t newbies, but at last report, they managed just 30% of the fund’s assets. Though they played a role in racking up impressive returns with Arani since joining, given recent market volatility, we’d be cautious about adding new money to this fund until after Kelley, who takes over in 2019, proves he has found his footing.
Target-date funds are designed to be a one-stop solution that hands the decision-making to a pro. All you have to do is choose the fund with the target year that is closest to when you plan to retire. After that, an expert handles all the decisions, from how much you should own in foreign stocks and U.S. shares, to the size of your bond and cash positions. As you grow older and get closer to your target retirement year, your all-in-one portfolio shifts to a more conservative mix of assets.
A few years ago, we were cool on Fidelity’s Freedom target-date funds because of poor performance. But after several changes, this fund series is starting to shine. Six years ago, the firm added funds run by star managers such as Will Danoff, Joel Tillinghast and Steven Wymer. Later they bumped up the stock allocation throughout the series, after studies showed that investors in target-date funds are less likely to react to short-term market moves (in other words, they are less likely to sell in a panic when the market is falling). Recently, to protect against the risk of rising inflation, the managers added a fund that invests in Treasury Inflation-Protected Securities (TIPS), and modestly reduced the exposure to stocks and bonds.
Before 2013, Fidelity Freedom funds posted annual returns that ranked among the bottom half of their peer groups – they were average or below-average year after year. Since 2013, however, the funds in the series have posted calendar-year returns that rank in the top quartile of their respective peer groups. That’s progress enough to gain our vote of confidence.