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All Contents © 2017The Kiplinger Washington Editors
By Nellie S. Huang, Senior Associate Editor
| November 2017
Boston-based Fidelity is the second-biggest player in the 401(k) space, managing 20 funds that rank among the largest mutual funds in 401(k) assets, according to BrightScope, a firm that evaluates workplace savings plans.
Of those funds, four are index funds that mirror major market benchmarks, such as Standard & Poor’s 500-stock index. Another eight are target-date funds: portfolios of stocks and bonds designed to get more conservative over time.
We tackle the remaining eight funds, rating each “buy,” “sell” or “hold.” Symbols and expense ratios refer to the fund’s Investor share class, which may be different from (and more expensive than) the share class in your 401(k). Returns and data are as of Oct. 31; three- and five-year returns are annualized.
Expense ratio: 0.55%
One-year return: 16.8%
Three-year return: 7.4%
Five-year return: 10.5%
Value of $10,000 invested 10 years ago: $18,048
Top three stock holdings: Apple (AAPL), Autodesk (ADSK), Alphabet (GOOGL)
Investors looking for a one-stop portfolio that holds stocks and bonds can sleep easy with this solid, consistent fund. Balanced typically holds 60% of its assets in stocks and 30% in bonds. But the fund’s lead managers—Robert Stansky and Ford O’Neil—have some flexibility to adjust the mix, and they have done so in recent years. At last report, stocks accounted for 67% of the fund’s assets, well above the average of 60% for most balanced funds (as of September 30).
Heading up the stock side of the fund, Stansky leads a team of 11 managers, with each focusing on a specific sector. Much of the fund now sits in growth stocks that look reasonably priced, such as health care, financial and technology companies (which combine for nearly half the fund’s stock assets).
On the fixed-income side, O’Neil emphasizes U.S. government bonds and high-quality corporate debt. Such bonds don’t yield much these days, resulting in a meager 1.4% yield for the fund overall. But holding high-quality bonds should help keep the fund steady if the stock market starts to falter.
Overall, Balanced has fared exceptionally well. Its annualized returns have beaten 94% of its rivals over the past five years, and 78% over the past decade. Balanced is outperforming so far in 2017, too, a trend we think is likely to continue.
Expense ratio: 0.69%
One-year return: 34.1%
Three-year return: 13.6%
Five-year return: 18.7%
Value of $10,000 invested 10 years ago: $26,815
Top three holdings: Apple (AAPL), Alphabet (GOOGL), Amazon.com (AMZN)
As its name implies, Blue Chip Growth homes in on large, high-quality companies that are growing at above-average rates. Under manager Sonu Kalra—a rising star who took over the fund in July 2009—performance has been superb. The fund has beaten its primary benchmark, the Russell 1000 Growth index, in all but two calendar years since 2009 (underperforming in 2011 and 2016). The fund is also crushing its bogey this year, returning 32%, versus a 25% gain for the Russell index.
Much of the fund’s gains in recent years has come courtesy of large technology stocks and firms that sell consumer goods. About two-thirds of the fund consists of such stocks, led by companies such as Amazon.com, Apple, Adidas (ADDYY), Home Depot (HD) and Tesla (TSLA).
Granted, the market has favored such growth stocks for years, putting the wind at the fund’s back. If market sentiment shifts toward bargain-priced value stocks, the fund’s growth-stock mandate would be a disadvantage.
Our advice: Invest for the long term with this fund. But be prepared for some bumps along the way.
Expense ratio: 0.68%
One-year return: 31.2%
Three-year return: 13.2%
Five-year return: 16.5%
Value of $10,000 invested 10 years ago: $22,587
Top three holdings: Facebook (FB), Berkshire Hathaway (BRK.B), Amazon.com (AMZN)
Few managers have run the same fund for more than a quarter century, delivering superb results along the way. Will Danoff, who took over Contrafund in September 1990, is one of them. Had you been lucky enough to invest $10,000 on his first day at the fund, it would be worth more than $299,000 today—about $156,000 more than a comparable investment in a fund tracking the S&P 500.
Contrafund is now one of the biggest mutual funds in the country, and its hefty size makes it harder for Danoff to invest nimbly. Performance has been uneven in recent years, a key reason we have a “hold” on the fund.
Even so, Danoff is one of Fidelity’s most successful investors, and we advise sticking with him. A meticulous stock picker, he meets with hundreds of companies every year, taking copious handwritten notes about each firm. His goal: to find companies with growing earnings and solid management teams that are likely to produce market-beating returns.
If you’re considering this fund, don’t expect it to deliver the market-crushing returns of Danoff’s early years. But we still think he’ll be able to edge bogeys such as the S&P 500.
Expense ratio: 1.05%
Value of $10,000 invested 10 years ago: $11,510
Top three holdings: Bayer (BAYRX), Hoya (TYO), Orix (IX)
Diversified International’s one-year return may look terrific. But it isn’t so hot compared with other funds that invest in large, growing foreign companies. The fund has lagged 80% of its peers over the past year—a subpar record that doesn’t appear to be an anomaly.
Although we don’t expect funds to outperform all the time, Diversified hasn’t come close. In six of the past 11 calendar years (including so far in 2017), the fund has posted below-average or average returns. Over the past 10 years, under manager Bill Bower, Diversified’s annualized returns have lagged behind 59% of its peers.
Yet even though Diversified has fallen behind the average fund that invests in large foreign growth stocks, it has outpaced the broader foreign-stock indexes over the past decade. And it has done so without taking excessive risks. You may be able to find better choices outside of your retirement plan. But if it’s a toss-up between Diversified and a foreign-index fund, we think Fidelity’s fund will come out on top.
Expense ratio: 0.77%
One-year return: 40.2%
Three-year return: 16.1%
Five-year return: 19.7%
Value of $10,000 invested 10 years ago: $27,141
Top three holdings: Nvidia (NVDA), Apple (AAPL), Amazon.com (AMZN)
The bad news with Fidelity Growth Company is that it’s closed to new investors outside of retirement plans. The good news: You can buy shares through a 401(k), and we highly recommend doing so if possible. Manager Steven Wymer, who has been at the helm since 1997, has delivered a stunning 10.9% annualized return since then, beating the 8.2% return of the S&P 500.
Wymer says he looks for stocks with “open-ended growth opportunities” over a three-to-five-year time frame. That now leads him to internet retailers such as Amazon.com and Wayfair (W). He also likes some biotech companies that are making drugs for rare diseases and unmet medical needs. And he sees value in Chinese online companies JD.com (JD) and Vipshop Holdings (VIPS), which he expects to profit handsomely in the fast-growing Chinese marketplace.
Wymer’s tilt toward small and midsize stocks has helped his fund vault past rivals. Growth Company held 27% of its assets in these stocks at last report, compared with 19% for the typical large-company growth fund. Going small can goose returns, but it also enhances volatility, resulting in returns that can be more uneven than those of the average fund in this group.
Our advice: Buy shares, if you can, and hold for the long term.
Expense ratio: 0.67%
One-year return: 22.0%
Three-year return: 8.3%
Five-year return: 13.4%
Growth of $10,000 invested 10 years ago: $21,523
Top three holdings: UnitedHealth (UNH), Best Buy (BBY), Ross Stores (ROST)
Names can be misleading in the fund world, and Low-Priced Stock is a case in point. Years ago, the fund invested in small-company stocks trading for less than $15 a share. The fund drifted toward midsize firms as its assets grew. Now, with a whopping $40 billion under management, the fund has veered into the upper echelons of the market, holding a mix of small-, midsize- and large-company stocks.
That isn’t necessarily a deal-breaker for us. But the fund’s go-anywhere style and ballooning size may be making it tough to beat market bogeys. Over the past one-, three- and five-year periods, the fund trailed returns of the S&P 500, the S&P Midcap 400 and the Russell 2000 on an annualized basis. Low Price’s shifting style and weak performance prompted us to remove it in 2015 from the Kiplinger 25, the list of our favorite no-load mutual funds.
Why are we recommending that 401(k) investors hang onto it? Because we still have confidence in manager Joel Tillinghast, who has run the fund since it launched in 1989. This is a manager, after all, who has delivered a 13.8% annualized return since the fund launched, crushing the Russell 2000 index by an average of four percentage points a year (through October 31).
Although small companies aren’t his primary focus anymore, we think he can still find bargains across the market spectrum. And we like his eclectic style: Top holdings now include the Canadian grocery chain Metro (MTRAF), disk-drive maker Seagate Technology (STX) and health insurer UnitedHealth.
Our bottom line: Give Tillinghast another chance to resume his market-beating streak.
Expense ratio: 0.81%
One-year return: 38.9%
Three-year return: 16.7%
Five-year return: 22.5%
Value of $10,000 invested 10 years ago: $28,741
It’s hard to quibble with a fund that has delivered a 39% return over the past year. But those returns haven’t come without considerable risk. The fund must invest 80% of its assets in stocks that are listed on the Nasdaq exchange (which teams with risky technology companies) or that trade over the counter. That mandate makes it one of Fidelity’s most aggressive diversified stock funds—whose returns can soar in a strong market and tumble in a downturn.
A recent manager shift gives us pause, too. Gavin Baker, who delivered standout results since mid 2009, left Fidelity in September. Sonu Kalra, who ran OTC before Baker, stepped in as lead manager and is now grooming comanager Chris Lin, who runs Fidelity Select Computers (FDCPX), to take over as sole manager of OTC.
With Kalra steering the ship for now, we’d advise sticking with the fund. At OTC from early 2005 through mid 2009, he posted annualized returns that beat the S&P 500 by an average of 5.5 percentage points per year. Manager shifts can be treacherous for investors. But in this case, we think there’s good reason to watch and wait.
One-year return: 17.9%
Three-year return: 8.0%
Five-year return: 10.8%
Value of $10,000 invested 10 years ago: $18,833
Top three holdings: Alphabet (GOOGL), Apple (AAPL), Microsoft (MSFT)
Launched in 1947, Puritan is one of the oldest U.S. mutual funds. And it is still chugging along nicely. It holds a mix of stocks and bonds, and returns have averaged 6.5% over the past decade, beating 85% of balanced funds.
Puritan isn’t as buttoned-down as its name suggests, though. At last report, the fund held a relatively high 70% of its assets in stocks (compared with 67% for Fidelity Balanced). And Puritan looks spicier on the fixed-income side, which accounts for 28% of fund assets. About 7% of its IOUs are high-yield “junk” bonds, and 11% are foreign bonds, including some emerging-market debt.
That profile makes the fund riskier than the average balanced fund, according to Morningstar. And returns may fall behind other balanced funds in a stock-market sell-off or a downturn in junk bonds.
Still, we think the fund is in good hands. Stock picker Ramin Arani and high-yield manager Harley Lank have both helped run the fund for more than a decade. Michael Plage, who oversees investment-grade bonds, joined in 2015. All three should continue to be solid stewards for investors who want an all-in-one mix of stocks and bonds, with a bit more panache than usual.
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