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Fidelity's 2012 Leaders and Laggards

Sat, 12 Jan 2013

Relative to their categories, Fidelity's stock funds generally fared better than its fixed-income portfolios last year, but several funds in both camps have good long-term prospects.

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Video Transcript

Christine Benz: Hi. I am Christine Benz for Morningstar.com. In a strong equity market overall, many Fidelity equity funds notched very good performance. Joining me to share some color on the year-end Fidelity funds is Katie Reichart, she is a senior fund analyst with Morningstar. Katie, thank you so much for being here.

Katie Reichart: Thanks for having me.

Benz: So, the headline is, if you had a core-type fidelity equity fund or a core bond fund, chances are you are seeing that you had positive returns in 2012, but you are here to kind of discuss relative performance. How these funds did relative to their category peers? So, let's start with kind of the headlines. Domestic equity and international equity generally had pretty good performance in relative terms.

Reichart: Yes. There certainly were pockets of strength and weakness, but across the board, the average diversified domestic-equity fund had a category rank of 34 in 2012, and for international equity it was 36, so pretty good. Fixed income was a different story. The average category rank for taxable-bond funds was 53 and for municipal-bond funds was 60.

Benz: So, [the latter two categories were a] touch below-average there. So, let's drill into some of the specific asset classes. Let's start with domestic equity. You noticed that one of the biggest small-cap winners or one of the biggest winners within the firm's overall lineup, was Fidelity Small Cap Discovery. Let's talk about what went on there. And I know that we have it at Silver Analyst Rating currently, so we like it long-term, as well. Let's talk about that particular fund?

Reichart: That fund did really well in 2012. It was up 24% and in the category's top 5%. The manager Chuck Myers has done really well in the past several years. Some of his bets that he made early on coming out of the financial crisis on homebuilding stocks, those really paid off in 2012, but just generally, his stock-picking has been quite good.

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Benz: And then the flip side, looking at sort of a notable laggard within the firm's lineup, this fund made it into the black, Fidelity Advisor Small Cap, it gained 6% you said, but obviously, didn't do as well in relative terms. What's the story there and also what's the long-term outlook for that fund?

Reichart: That fund was in the bottom decile of the category and manager Jamie Harmon takes kind of an eclectic approach, so he won't always look like peers or the benchmark. In 2012 financials' underweighting hurt and he had probably about 8% in cash; that was certainly a drag in the type of market we had. But we generally are still very favorable on the fund long term. It's Silver rated and actually as a vote of confidence Joel Tillinghast of Fidelity Low-Priced Stock named Harmon one of the managers to oversee that fund during his sabbatical. So, I think we certainly would stick with it long term.

Benz: So, Jamie Harmon was entrusted to run the big mothership of small-caps there, mid-caps now I guess. Switching over to international equity in terms of notable leaders within that camp, you mentioned that Fidelity Overseas really distinguished itself last year. What's going on with that fund?

Reichart: That fund actually had a new manager, Vincent Montemaggiore, come in January 2012, and he had a really strong first year out of the gates. The fund was up 25%, the MSCI EAFE was up 17%, and the fund beat most of its category peers. He just did pretty well on stock-picking across the board in Europe and picks like Christian Dior really worked out.

Benz: And then Fidelity Emerging Markets was not as strong in terms of relative performance, but had strong absolute performance though.

Reichart: Right. Yeah. It was up 14%, but that still put it in the category's bottom quartile. The big story here is that the fund actually did change managers in October after a string of longer-term middling performance. That fund's rated Neutral now just until we wait and see how the new manager fares.

Benz: Switching over to the bond funds, Katie, you mentioned that it wasn't a particularly great year for Fidelity's core taxable and muni funds. Let's talk about why that isn't completely surprising to our analysts who cover those funds?

Reichart: Fidelity's core fixed-income funds on the muni and taxable side tend to be a little more conservative than peers by not taking on a ton of credit risk or interest-rate risk, and last year's market obviously rewarded funds that took on a lot of credit risks. So, they're doing what you would expect, they're still doing well, and long-term we are very favorable on them.

Benz: And it's not as though we had a lot of bottom-quartile performers there. It's more sort of just...

Reichart: Right. It's more just kind of middle of the road categorywise.

Benz: Now, switching over to discuss some of the big finds that didn't jump onto either the leaders or the laggards list. I would like to cycle through a few of them, Fidelity Growth Company. I know Steve Wymer was nominated for Fund Manager of the Year in 2012; he didn't win it for the domestic-equity category. But let's talk about that fund; it's obviously, widely held.

Reichart: He had a great year. I mean he's had a great career, and a lot of his winners in 2012 are stocks he has held for a while, like Regeneron. Salesforce.com did well and also a lot benchmark picks like Lululemon and Discover. So he is continuing to really do well with kind of a very flexible all-cap approach.

Benz: So even though he runs a very large fund, he is able to delve into some of these off-the-beaten-path picks?

Reichart: Exactly.

Benz: How about Fidelity Contrafund? I know that that is one that appears in many of our viewers' portfolios. Let's talk about what kind of year it had last year?

Reichart: Sure. Well, size hasn't really slowed it down too much. It was slightly ahead of S&P 500 Index last year, and manager Will Danoff just continues to consistently do well against the benchmark and peers.

Benz: Then Fidelity Low-Priced Stock is another biggie that appears in a lot of investors' portfolios. How about that fund last year?

Reichart: It also had a great year versus its mid- in smaller-cap benchmarks and its mid-blend peer group.

Benz: Katie, I wanted to talk a little bit about flows. I know that's not central to what we're talking about today, but Fidelity in terms of asset gathering, how has it done over the past few years? You hear about some of the other players--Vanguard is doing very well on the asset-gathering stakes, American Funds is losing a lot of assets. Where has Fidelity fallen in terms of picking up new assets?

Reichart: It's definitely not at the level that Vanguard or T. Rowe Price has been in terms of getting assets. For 2012, it did see some inflows mostly on the target-date and fixed-income sides, while some of its equity funds were seeing outflows. So, it's not too bad and certainly not a case like American Funds that has just been bleeding assets. But it's not necessarily as robust as some other big top fund companies.

Benz: Well, thank you so much for being here. It's been a great snapshot of how Fidelity funds have performed. Thank you.

Reichart:  Thank you.

Benz: Thanks for watching. I am Christine Benz for Morningstar.com.

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