Morningstar senior analyst Chris Davis gives a progress report on Fidelity's equity fund enhancement initiatives, notes areas for further improvement, and offers his take on the cream of the crop.
Christine Benz: Hi. I’m Christine Benz for Morningstar.
Fidelity has been working to improve its equity fund lineup in recent years, hiring analysts and also building out its value fund lineup.
Joining me to share a progress report is Christopher Davis; he is a senior fund analyst with Morningstar.
Chris, thank you so much for being here.
Christopher Davis: Thanks for having me, Christine.
Benz: So, Chris, Fidelity has been making lots of changes and refinements to its equity fund lineup and also the team that underpins those equity funds. Let's talk about some of the changes that they have made to-date.
Davis: We recently headed out to the Boston mothership to get a progress report, and I think the big takeaway from them, and that we got was an emphasis on consistency, actually having funds with defined strategies. For example, they are making their equity-income funds actually equity-income funds. Previously, Fidelity Equity-Income had a yield that was less than the S&P 500, so you could hardly say that that fund was focused on dividend yield. So, now, if you buy a fund like that you are actually getting what you think you are supposed to be getting.
Benz: But the sweet spot within Fidelity's lineup has really been funds that are a little bit amorphous, right?
Benz: And Contrafund, arguably their best equity fund, you never quite know what the fund will invest in.
Davis: Right. Manager Will Danoff is a really great manager, and he has just a really keen sense on the quality of the management of the companies he invests in. He always says he is looking for very entrepreneurial managements. That's a very amorphous goal, and he is really good at it, but I don't know if a lot of the other folks are going to be good at it, or it is going to take them a long time to be good at it. And so rather than trying to find the one in a million investor that could replicate what Will Danoff is doing, it makes sense to have a really defined strategy and knowing where you get your edge from.
Benz: So, some of that truth-in-labeling.
One thing I know that you've been following, Chris, is this build-out in the analyst team, and it's something that they've undertaken several years ago. Do you think that it's starting to bear fruit?
Davis: Just a little bit of background: In the mid-2000s, they pretty much doubled the size of their analyst team within a couple of years, and the speed of that build-out was way too fast, and I think that you can imagine at any organization, imagine any place you work, if it was twice as big overnight, there is going to be a lot of cultural conflicts.
I think some of the people who didn't mesh very well with the culture are gone, and now analysts have been around for a while. For example, 10 years ago, or even 5 years ago, they didn't have an analyst with more than 10 years experience. Now they have several. And so, the portfolio managers have much more confidence in the research that they are getting from the analysts. They know how the analysts think, and the analysts now know how the portfolio managers think. And it ends up, I think, in a more robust dialogue between them.
Benz: So, some of those connections have been built.
So in truth-in-labeling funds, adhering more to their stated names or mandates or whatever it is. Beefing up the analyst staff, and giving them a chance to gel with management. What are things that you think should still be on Fidelity's to-do list when they are thinking about their equity lineup today?
Davis: Well, you still see plenty of instances wherein a new manager comes in and the fund strategy is completely upended. For example, Jeff Feingold recently took over Fidelity Magellan, which is a marquee fund for them. Investors have a completely new portfolio. So, if you bought Magellan for its relatively eclectic portfolio under its previous manager, now you have more of a standard-issue large-growth fund under the new manager. And were Feingold was, at Fidelity trend, now you have another type of approach. So, I'd like to see more consistency in style. That would be a really good thing.
In addition, I think Fidelity needs to be better in managing capacity. When we were visiting, one small-cap manager told us he was confident that he could run twice as much in assets as he does currently, and he is running a lot of money as it is now. So, you don't want to kill the golden goose.
Benz: Which funds in particular do you ... hope Fidelity is keeping an eye on asset size and hope that maybe they'll put the brakes on in time to preserve the fund's flexibility.
Davis: Well, I think the funds maybe we're most concerned about would be Fidelity Small Cap Value and Small Cap Discovery, run by manager Chuck Myers, and he is an example of a manager with a really defined strategy. Unlike many managers at Fidelity, he is a real Warren Buffett-esque type of investor…
Benz: And generally quite good performance there...
Davis: Yes, quite good performance, and so that performance hasn't gone unnoticed--especially in a Fidelity lineup that is kind of strewn with a lot of middling performers, it really stands out, so it's attracted a lot in terms of assets.
And Contrafund, Will Danoff runs about $100 billion between Contrafund and an advisor version of his fund. So, he ran a little bit more in 2007, but the fund was actually closed then. So, I think, Will Danoff, the manager, has a lot of confidence in his ability to handle that much money, but really very few single managers have ever run that much money successfully.
Benz: So, it sounds like Small Cap Value, Small Cap Discovery, and Contrafund are on your shortlist of managers you really like and funds that you like within the lineup.
Are there any other funds that you see as notable standouts within Fidelity's equity lineup?
Davis: Well, Fidelity Growth Company, I think, is an underappreciated gem, and it's hard to say that when the fund has around $40 billion in assets...
Benz: ... And can you buy that one or is it closed in some fashion?
Davis: You might have it as part of your 401(k) lineup, but no, you can't call up Fidelity and invest in it. But Manager Steve Wymer is really an exceptional large-growth manager and has made a lot of money for shareholders over the past 10 years, and few growth managers can really say that.
Benz: ... So those are established standouts. How about up and comers--funds that people should keep on the radar that you think have talented management teams?
Davis: Well, Fidelity New Millennium has manager John Roth, and he had really big shoes to fill. Neal Miller was his predecessor, and Miller was just such a wide-ranging, eclectic thinker.
Benz: I used to cover the fund. I certainly remember our freewheeling interviews ...
Davis: He was known for having a stack of magazines this high just getting ideas from all over the place, and I think Roth has a more button-down standard. His portfolio is less eclectic, but he's delivered solid results thus far.
And Fidelity Blue Chip Growth, which I personally cover, you've had really strong performance there. Manager Sonu Kalra has done well, and I think he has a background that is amenable to the style that they use at the fund.
Benz: So he's a technology manager?
Davis: Yes. He used to run Fidelity OTC, which covers Nasdaq stocks. So, he has a lot of experience trafficking in a lot of the large-growth names that he covers in his fund.
Benz: Chris, thank you so much for sharing your perspective on the family. I know it appears in so many 401(k) lineups, people really have a vested interest in how they're doing with their equity funds. So, we appreciate the update.
Davis: Well, thank you.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.