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Advisors Can't Rely on Fidelity Alone

From a shallow talent pool of managers, Advisor lineup offers a few stellar choices, but most funds don't stand out.

Christopher Davis, 08/09/2010

Fidelity Investments may have never become a behemoth without the rise of no-load investing during the great bull market of the 1980s and 1990s. Hot-performing funds like Fidelity Magellan FMAGX, run by the famed Peter Lynch in the 1980s, attracted the dollars of do-it-yourselfers. It launched dozens of new funds to keep the dollars coming and built a vast brokerage platform consisting of thousands more no-load funds to keep those dollars in-house. But Fidelity isn't one to let a big market go untapped, and in the 1990s and 2000s, it bulked up its lineup of load-bearing funds geared toward financial advisors. In all, there are 89 of them, covering nearly every investment category. By March, Fidelity Advisor funds had nearly $100 billion in assets. If the Advisor lineup was its own fund family, it would be the 15th largest, bigger than Hartford, MFS, and American Century.

Advisors confront the same maddening attributes of Fidelity's investment culture as retail investors. Aside from the aging Fidelity patriarch, Edward Johnson III, who has been the firm's chairman since the 1970s, the firm lacks the organizational stability of big competitors like American Funds. Turnover has been high in both the executive and portfolio-management ranks. In contrast to American, whose funds share a common investing ethos and are run by seasoned investment professionals, there's no one way to run money at Fidelity, and the quality or experience of its portfolio managers can vary widely.

The source of those negatives, though, also fosters Fidelity's biggest strengths. Because it doesn't impose rigid, one-size-fits-all constraints, Fidelity managers have wide latitude to implement their own investment strategies. Many talented investors, such as Peter Lynch, Will Danoff, and Joel Tillinghast, have emerged from this culture, which affords them the freedom to think and invest differently. Our favorite Fidelity Advisor funds are led by managers who have put this freedom to good use.

Fidelity's talent isn't distributed broadly enough for investors to rely on its Advisor lineup alone, however. While much of the lineup might appeal to investors with limited choices, only a handful is compelling enough to choose over better, non-Fidelity alternatives. Others, especially many of its core offerings in the large-blend arena, are just too bland to choose at all. In fact, our least-favorite Fidelity Advisor funds are not offerings where the managers use their freedom unwisely, but ones where we're not convinced that they have enough freedom to stand out.

Here are our favorite Fidelity Advisor funds and ones that advisors should best avoid.

Best of the Bunch

Fidelity Advisor New Insights FNIAX
Simply put, manager Will Danoff is among the best investors in the business. In his two decades at Fidelity Contrafund, which he runs in the same strategy as this fund, Danoff has smoked most large-growth funds, not to mention the broad market indexes. He has succeeded by investing anywhere company fundamentals are improving, allowing him to cast a wide net: His top holdings include both Google GOOG and Berkshire Hathaway BRK.A. Danoff manages too much money to trade based on short-term factors. (Between this fund and Fidelity Contrafund, he oversees more than $70 billion.) But focusing on the long term means he can sniff out opportunities that his shortsighted competitors miss. For a growth-leaning core holding, this fund is an outstanding choice. PAGEBREAK

Fidelity Advisor Equity Growth FAEGX
Manager Jason Weiner counts Danoff as one of his mentors, and it shows. His style is eclectic, and he's unencumbered by traditional notions of what constitutes a growth stock. Unlike Danoff, however, Weiner isn't constrained by asset size, freeing him to employ his fast-trading, sector-betting strategy. His approach can backfire; after rightly trimming his once-outsized technology stake in early 2008, for example, he wrongly loaded up on fast-growing industrials, leading to bruising losses for the year. Weiner, though, has usually gotten it right. This fund is too volatile and unpredictable to be a core holding, but it's a great complement to one.

Fidelity Advisor Growth Opportunities FAGOX
Manager Steve Wymer is a classic growth investor. Valuation typically plays second fiddle to earnings growth in his analysis, while traditional growth areas like technology and health care are his stomping grounds. But Wymer's strategy is more nuanced than it may appear at first blush. He balances fast growers with a helping of turnaround plays and steady-Eddies like Wal-Mart WMT. While many more-aggressive managers burn out quickly, Wymer has 20 years of experience under his belt, which has included top-rate returns during his 13 years at Fidelity Growth Company FDGRX. As a foil for a deep-value fund elsewhere in a portfolio, this offering is a great option.

Fidelity Advisor Dividend Growth FDGTX
Since coming aboard in October 2008, manager Larry Rakers has turned around this one-time laggard by using the same highly successful strategy he employed at prior charge Fidelity Advisor Balanced FAIGX. Although Rakers avoids making big sector bets versus his S&P 500 benchmark, his portfolio is far from an index clone. Indeed, nearly half of the fund's holdings aren't in the index. Rakers draws

upon research from Fidelity's vast analyst ranks to invest in every corner of the style box. The fund's all-cap complexion will likely make it more volatile than the large-blend competition, though it could provide just about all the U.S. equity exposure an investor needs.

Fidelity Advisor Mid Cap II FIIAX
Manager Tom Allen has evaded many Fidelity-watchers' radar screens, in part because his longest-tenured charge has been a fund designed for variable annuities. He's delivered terrific returns at that offering and has fared just as well here managing money in the same style. Allen mixes conservatism with opportunism. His valuation consciousness and high-quality focus are indicative of the former, while his tendency to dabble in small and large caps and to venture overseas typifies the latter. (Mid-caps account for just 55% of assets, while non-U.S. stocks are nearly a fourth of the portfolio.) The fund's diverse mix may not fit easily within investors' portfolios, but given Allen's talents, it's worth making room for it.

Fidelity Advisor Small Cap Value FCVAX
Manager Chuck Myers joined Fidelity's then-nascent small-cap team in 1999 and grew into a type of investor you don't see too often at Fidelity. Myers employs a fairly concentrated, Buffett-esque strategy, setting him apart from his siblings. His distinctive style means he's usually not buying the same stocks as other Fidelity small-cap funds, which makes his $2 billion load easier to manage. Admittedly, Myers' tenure here has been brief (it stretches back to just 2008), but he has a bit longer track record at Fidelity Small Cap Discovery FSCRX, where he has delivered fine results since coming aboard in 2006.

Fidelity Advisor Municipal Income FAMUX
Fidelity has built one of the very best municipal- bond operations in the business. Thanks to old-fashioned communication and cutting- edge analytical tools, its team can view the municipal-bond market through many lenses, giving the fund an edge over its rivals. Lead manager Jamie Pagliocco avoids big interest-rate bets and limits exposure to the muni arena's racier provinces--an approach that helps greatly in volatile markets like 2008's. The fund's moderate tack holds it back in racier environments, but its long-term returns are superb.

Not Worth Your Time

Fidelity Advisor Growth & Income FGITX
Manager James Catudal hews closely to the S&P 500 Index. He eschews sector bets, and his portfolio excludes few of the index's largest constituents. That benchmark-hugging style has made it difficult for the fund to stand out. Since Catudal came aboard in November 2005, it has trailed the S&P 500 by 1 percentage point annually. Catudal's nondescript strategy, combined with the fund's excessive 1.34% expense ratio, make this fund a likely underperformer over the long haul.

Fidelity Advisor Balanced FAIGX
Advisor Dividend Growth's gain was this fund's loss. When Rakers left in 2008, Fidelity replaced him with its multimanager group, led by former Fidelity Magellan skipper Bob Stansky. Stansky keeps the portfolio's sector exposure aligned with the S&P 500's and delegates stock selection to eight sector specialists. The multimanager approach is a major departure from Fidelity's single-manager approach and remains unproven.

Fidelity Advisor Dynamic Capital Appreciation FARAX
Former manager Fergus Shiel's adventuresome streak lent this fund a strategy that resembled its name. Shiel, who remains at Fidelity Capital Appreciation FDCAX, mixed large and small caps, value and growth stocks, domestic and foreign fare, and used both fundamental and technical analysis. But in March, Fidelity ditched Shiel's approach for a far blander multimanager strategy, this time with sector specialists represented by a crew of Fidelity Select fund managers. Although the managers have some latitude to tweak the sector weightings, they probably won't diverge much from their S&P 500 bogy. They're a mostly experienced bunch, but it's unclear how they'll fare as a combined entity. What's more, it's tough to make a case for this fund when you can invest alongside Danoff or Rakers, who are expert users of Fidelity's analyst research.

Fidelity Advisor Equity Income FEIRX
While relatively new to this offering, manager Stephen Peterson is about as experienced as they come. Quite unusually for Fidelity, whose average manager tenure at a fund is around three years, Peterson has led identically managed sibling Fidelity Equity-Income FEQIX since 1993. To his credit, performance over that stretch has been remarkably consistent; in only two years--2008 and 2009--has Equity-Income ever finished in the large-value camp's top or bottom quartile. There's undoubtedly virtue in avoiding extremes, but the fund's long-term record doesn't stand out.

Fidelity Advisor Diversified International FDVAX
You could do much worse. Manager Bill Bower came aboard in early 2009, but he's led sibling Fidelity Diversified International FDIVX since 2001. Bower employs a fairly eclectic, wide-ranging approach, diverging from his MSCI EAFE benchmark by investing meaningfully in emerging markets and with notably different country exposure. Bower's long-term record is solid, but a big chunk of his success came earlier in his tenure at Diversified International, when he had a lot less in assets to manage. Performance has been more tepid in recent years. It's a serviceable choice for core foreign exposure, but you could do better.

Fidelity Advisor Freedom Funds
Although Fidelity is one of the biggest and most-experienced players in the target-date arena, its Advisor Freedom lineup is hardly top rate. To be sure, the funds' glide paths are thoughtfully conceived. They've also become better diversified, with recently bulked-up stakes in foreign stocks, commodities, and TIPS. The funds' sprawling portfolios, however, are riddled with overlapping funds of mixed quality. Moreover, with merely average expenses, they have no cost advantage over the competition.

Christopher Davis is a senior mutual fund analyst with Morningstar and editor of the monthly Morningstar newsletter Fidelity Fund Family Report.

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