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By Christine Benz and Christopher Davis | 04-19-2012 10:00 AM

Checking the Scorecard on Fidelity Funds

Morningstar senior fund analyst Christopher Davis sizes up performance and stewardship at the fund family and discusses some of his favorite Fidelity funds.

Christine Benz: I'm Christine Benz for Morningstar.

Although, Fidelity has been eclipsed by larger rivals such as Vanguard, it still remains the fund industry's third-largest player based on assets under management.

Joining me to discuss how the firm stacks up on various measures is Christopher Davis. He is a senior fund analyst with Morningstar.

Chris, thank you so much for being with me.

Christopher Davis: Well, thanks for having me.

Benz: You have focused on Fidelity for many years for us, Chris, and you recently prepared kind of a scorecard that looked at the firm relative to other big fund companies on a variety of measures. One of them was performance, and that's obviously one that investors often focus on when evaluating a firm. What did you find in general when you looked at performance?

Davis: Well, Fidelity fares OK relative to the other big firms in terms of performance, especially if you look at more recent performance--say over the past three years--most of the funds ... performed well post-financial-crisis, but if you incorporate what happened during the financial crisis in performance, a lot of the funds, especially on the equity side of the house, don't look so strong.

Benz: So, why was that? Why did they not fare as well when you incorporate some of that bear market performance?

Davis: Well, a lot of the funds just weren't ready for the bear market. They were exposed to the most economically sensitive sectors. Many managers had big bets on energy stocks, industrials, basic materials, technology--all of these areas that really got creamed in the financial crisis. I think there just wasn't enough of a focus on risk control.

But on the bond side of the house, things are managed really differently there. You have a much temperate, more cautious way of managing money, and they navigated the financial crisis very well.

Benz: So, you would say it's sort of opposite sides of the coin. So, on the fixed-income side a little more cautious, fared well during the bear market, but more recently, even though we really like the bond funds, they have not fared quite as well as more aggressively position fixed-income funds?

Davis: Right. If you look at their performance relative to their peers, it's not bad, but it's more middling, and I think as a bond investor, you might be willing to live with that, because the whole idea of investing in bond funds is to preserve the capital and the money you have, and I think that's what these funds are particularly good at. So, they keep you in the hunt when times are good, but really save your behind when times are bad.

Benz: How about international equity? Is the story relatively similar to what has been going on with domestic equity?

Davis: I think that they have been consistently middling. So, if you look before the financial crisis and after the financial crisis, really you've looked at middling performance. They didn't fare particularly well during the crisis, and coming out of it, not so much as well. I think that's been a real weak spot at Fidelity.

The performance scorecard looked at funds on an asset-weighted basis. So we were looking at the performance of the biggest funds--they counted more than the smallest funds. And so big funds like Fidelity Contrafund and Fidelity Growth Company, they've been really strong performers. So, this measures how the average Fidelity investor has done, but if you look at how most Fidelity funds have done, you'd probably see a bit different picture.

Benz: So, Chris, if Fidelity obviously appears on a lot of 401(k) menus and investors have to choose among the firm's lineup, if I ask you to just, off the top of your head, give us your favorite Fidelity funds, not just in terms of performance, but in terms of whole picture, what are the first names that come to mind for you?

Davis: Well, I don't know if these are earth-shattering revelations. ... A lot of people have figured it out already. If you look at Fidelity Contrafund, which is pushing $100 billion in assets, I think that's still a really strong fund. Fidelity Low-Priced Stock, more than $30 billion in assets, but you really have two of the best money managers in the business there.

Fidelity Growth Company is a very popular staple in 401(k) plans, but I think people don't appreciate the charms of that. This is a relatively aggressive growth fund that has looked good over the past decade, which has been the worst period for aggressive growth investors, perhaps ever.

Benz: And fixed income, I know that there are some standouts there. I know that Morningstar, as a whole, likes the muni lineup quite a bit?

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