How Highly Does Fidelity Rate?

Since launching the Morningstar Analyst Rating nearly a year ago, Morningstar analysts have assigned ratings to 80 Fidelity offerings. The rating, which is based on analysts' assessment of the people, process, performance, parent, and price behind the funds, now covers more than 1,000 funds in the United States.

As a shop, Fidelity fared decently. Of the 80 Fidelity funds Morningstar analysts rated, 45, or 56%, garnered a positive rating--that is, Bronze or better. A hefty chunk--31 funds--landed in Neutral territory, with just four earning a Negative rating. To put that in context, its largest competitors--American Funds, T. Rowe Price, and Vanguard--scored better. In American's case, 27 of 35 funds (77%) rated by Morningstar analysts notched positive ratings. At T. Rowe, 44 of 53 funds (81%) rated positively. Vanguard shone most brightly, with 74 of 80 rated funds (92%) notching positive ratings. None of the three shops had a Negative rating in its lineup.

At Fidelity, Bonds Shine
This isn't to say there aren't areas of strength. All 13 of Fidelity's Gold-rated offerings are bond funds. In part, that's because the funds are reasonably priced. More importantly, the Merrimack, N.H.-based bond operation boasts highly seasoned, tightly knit teams in both the taxable- and municipal-bond realms. The groups use cutting-edge technological tools to stay ahead of the competition, but their success also stems from sensible, straightforward processes. Jamie Pagliocco and the entire muni-bond team have delivered terrific long-term returns at funds such as Gold-rated Fidelity Tax-Free Bond FTABX without taking on loads of leverage and credit risk. And taxable-bond specialists like Bill Irving, Ford O'Neal, and Jeff Moore have built fine records at Gold-rated funds such as Fidelity Investment Grade Bond FBNDX and Fidelity Total Bond FTBFX with well-diversified portfolios and strong security-by-security research.

Fidelity's fixed-income lineup isn't entirely gold-plated, though. Fidelity New Markets Income FNMIX, which focuses on emerging-markets debt, and high-yield offering Fidelity Capital & Income FAGIX earned Silver ratings. The firm's developing-markets team is strong and capable but includes a lot of up-and-coming analysts; even Fidelity acknowledges it's a bit of a work in progress. And given Capital & Income's focus on some of the most dicey high-yield bonds, delivering truly superior risk-adjusted returns is by no means assured. I don't want to overstate my case, however. Silver is still a very strong rating. And the managers are no slouches. In fact, John Carlson received the Morningstar Fund Manager of the Year honors in 2011.

In Stocks, a Mixed Picture
Most of Fidelity's bond operation functions relatively autonomously, with separate offices in Merrimack, N.H. By sequestering the fixed-income folks from the Boston mother ship, Fidelity has helped insulate them from the cultural faults that hurt the equity funds' ratings.

To be sure, the stock funds enjoy many of the same advantages as their fixed-income counterparts. For one, costs are generally moderate. In fact, only one fund ranked Negative on price. And they play host to many experienced and talented managers, such as Contrafund's FCNTX Will Danoff, Low-Priced Stock's FLPSX Joel Tillinghast, and Growth Company's FDGRX Steve Wymer, among others.

Yet Fidelity has undermined these managers' potential for future success by letting their funds become too large. Heavy asset bases compromise their ability to successfully imple­ment their strategies. Both Danoff and Tillinghast have coped with their respective fund's girth by moving up the market-cap ladder, for example. And while size hasn't prevented Wymer from devoting a considerable chunk of his portfolio to mid- and small caps, he hasn't been able to do so without owning a significant portion of their outstanding shares. That limits his ability to move in and out of the stocks with ease. If not for these concerns, they likely would've been Gold-rated. Even so, the funds deserve plenty of credit for staying ahead of the competition, even as it's become harder for them to do so.

Where performance deteriorates as assets grow, there's reason to be less forgiving. Fidelity Diversified International's FDIVX Bill Bower, for example, has nicely beaten the foreign large-blend average and the MSCI EAFE since taking charge in 2001, but that's almost entirely thanks to the success he enjoyed between 2001 and 2005. Returns since have been middling--a weakness that coincides with rapid asset growth in the mid-2000s. The fund also became more large-cap-focused and less concentrated and took fewer sector bets, limiting Bower's ability to replicate his earlier showing. Diversified International may fare better in the future, but there's not enough evidence to bet on it, explaining its Neutral rating.