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By Christine Benz and Christopher Davis | 06-28-2012 02:00 PM

Fidelity's Standout and Up-and-Comer Equity Funds

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?

Davis: 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?

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