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The End of the Star Manager at Fidelity?

The firm that gave birth to the celebrity manager takes a new tack.

Christopher Davis, 02/07/2012

No fund shop is more responsible for the idea of fund manager as star than Fidelity. In the 1960s, it played host to the first celebrity manager, Gerald Tsai, a gun-slinging investor who stood out in an era when mutual funds were frequently led by stodgy committees. And it would be tough to imagine Fidelity becoming a powerhouse in the 1980s without perhaps the most famous star manager of all, Peter Lynch, whose tremendous success at Fidelity Magellan FMAGX remains that fund's biggest claim to fame.

Of course, managers won't become stars unless they alone have free rein over their portfolios. Plenty of managers still do today at Fidelity. The most notable, Fidelity Contrafund's FCNTX Will Danoff and Fidelity Low Priced Stock's FLPSX Joel Tillinghast, boast remarkably good records and command vast sums. Yet Danoff and Tillinghast, who both joined Fidelity in 1986, came of age in an earlier era. The firm has birthed many talented managers in the ensuing years, but few have been as distinctive in approach. And fewer still have come close to matching their success.

Fidelity's recent embrace of multimanager funds represents a significant move away from the star manager culture. This line of attack, which divvies up portfolios among sector specialists and keeps sector weightings aligned with a market benchmark, isn't management by committee. Each manager runs its sleeve independent of the others. But it marks a real departure from the one-manager, one-portfolio approach that's long been the Fidelity way.

Fidelity first adopted the multimanager approach in 2007 for the annuity version of Fidelity Contrafund (which is formerly managed by Danoff and misleadingly still bears the Contrafund label) and in 2008 for Fidelity Balanced FBALX and for a chunk of the Fidelity Freedom funds. Somewhat ironically, the firm enlisted one of Lynch's successors at Magellan, Bob Stansky, to oversee the specialists, who have responsibility to pick stocks within their areas of expertise at all three offerings.

The multimanager model has since spread. In 2009, Fidelity took it to the small-cap arena, instilling a different squad at Fidelity Stock Selector Small Cap FDSCX. It also rolled up nine sector-fund portfolios for Fidelity Stock Selector All Cap FDSSX. In 2010, it created yet another team, this time focused on value stocks, to run half of Fidelity Value, and in 2011, it dispatched this group to take over struggling Fidelity Large-Cap Value (now named Fidelity Stock Selector Large Cap Value FSLVX), leaving existing manager Bruce Dirks with only oversight responsibilities. By my count, investors hold approximately $60 billion in funds that are at least partly multimanaged. (That's still a relative pittance next to the nearly $600 billion that Fidelity manages in stock and balanced funds.)

With a little more than three years under its belt, it's still premature to pass judgment on the oldest multimanager group. But it's not too soon to evaluate its capabilities or whether its strategy is likely to deliver over the long haul, especially given the multimanager model's growing prominence.

Are the Managers Any Good?
Most diversified funds require managers to invest in sectors as different as technology and utilities, and pulling that off successfully is no mean feat. By dividing portfolios along sector lines and putting specialists in charge of each sleeve, Stansky argues that each manager in his group invests where most capable.

There's something to Stansky's argument. Nearly all of his team's 10 members enjoy strong records in their appointed sectors. Bob Lee, for example, has invested in consumer staples stocks since 2006, building a solid record at Fidelity Select Consumer Staples FDFAX. And while John Avery's overall record at Fidelity FFIDX has been middling, Morningstar attribution data suggests he has handily outperformed the S&P 500 Index in industrials and materials, his two specialties in the multimanaged funds.

Christopher Davis is a senior fund analyst with Morningstar and editor of Morningstar's Fidelity Fund Family Report, a monthly newsletter that offers independent, no-holds-barred guidance on the pros and cons of this dominant fund family. He welcomes e-mail but cannot give investment advice. Click here for a free issue of the Fidelity Fund Family Report.
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