Christine Benz: Hi I'm Christine Benz for Morningstar.com. Fidelity is an enormous player in the 401(k) space. Joining me to share some Fidelity stock-fund ideas is Russ Kinnel. He is director of manager research for Morningstar.
Russ, thank you so much for being here.
Russ Kinnel: Good to be here.
Benz: Russ, I think a lot of people look at their Fidelity 401(k) plans and they might see some very low-cost index funds, also stalwarts like Fidelity Low-Priced Stock or Fidelity Contrafund. Why would one even need to look beyond those types of holdings?
Kinnel: That's a good question. Certainly those [funds that you mentioned] are probably the ones you would start with, but I think it's worth knowing some of the funds that are not quite as well-known. One, they might not all be available in your 401(k); maybe some of these are. Two, these are smaller funds where the manager should be there for a while and really has a potential to actually outperform. There are a few things going there, but I think these funds stand out on their own.
Benz: Let's start with the first one, and that's Fidelity Large Cap Stock. It has the highest ratings of these four funds on your list. Let's talk about what you think is the thesis behind that particular fund. Why should people give it a look?
Kinnel: That's right. We rate it Silver. [Fund manager] Matt Fruhan has a really strong record going back to 2005, and we think it is a nice mix of value and growth. He is a little more opportunistic, and by that I mean he'll buy either value or growth stocks when they're a little beaten up. He's done an outstanding job of doing that. He's beaten the index, so obviously, if you think he can maintain that, that's one reason to own it instead of an index fund.
Benz: One knock against some of Fidelity's larger funds--Magellan, several years ago, for example--was that they were very indexed like. Should people be concerned about that as they look across some of these funds?
Kinnel: For sure. These mostly are very diffuse portfolios; you usually get that at Fidelity. So there are hundreds of names, 200, 300 names, in the portfolios. So, it's not going to be a really focused fund that does something really different, but managers can still add value. We've seen over the years many funds have been able to beat the index even with a large portfolio, even with a fairly high R-squared. So, I don't think that's the end of the world.
I think it's more about, is this a manager who can really pick stocks well? Fidelity has done a decent job over the last few years of building up their analyst and their portfolio manager staff, and now I think there are a few good funds that are kind of flying below the radar.
Benz: Another fund on your list that you think investors should look at is Fidelity Blue Chip Growth. This is a large fund. I think it's a good bet that it does appear on a lot of 401(k) menus. We recently moved it from a Neutral Morningstar Analyst Rating up to Bronze. What gave us the confidence to do that?
Kinnel: Manager Sonu Kalra started at this fund in '09, and before that he had a very good record at Fidelity OTC. So, you put them together, it's about 10 years of a good record. That's really what attracted us to it.
The fund is a standard kind of growth-at-a-reasonable-price fund, just like you'd expect from the name. It's large caps; they're growth stocks. A lot of the usual suspects, but again, he's done well with a pretty large portfolio.Read Full Transcript
Benz: Then Fidelity New Millennium. This is a fund that in the past had been kind of an interesting fund; we both covered it in the Neal Miller days where it was a themey mid-cap growth fund, very aggressive, but also very good. John Roth has been the manager for several years now. You think he's done a really good job, and you would hold it forth as one of the best options in Fidelity's equity fund lineup.
Kinnel: Yes. This is a really good fund. I think John Roth is viewed within Fidelity as maybe one of the top managers that people don't really know that well. He was recently named an assistant portfolio manager with Will Danoff on Advisor New Insights, and his strategy is very much like Danoff's. You see opportunistic growth names, an occasional blend or value name. He is really trying to get ahead of the curve, and he's just done an outstanding job at this fund.
He took over Fidelity Mid Cap, as well, so he's got a lot on his plate. But this is really a strong large-growth fund. We rate it Bronze. And I think within Fidelity, you see that John Roth's star is continuing to rise.
Benz: The last one that you wanted to touch on is kind of an off-the-radar pick. The ones we've mentioned already are funds that are large and have a fairly good presence. This one is one that you're keeping an eye on. You think it's an interesting strategy, and it's a manager you've long followed. This is Fidelity Focused Stock.
Kinnel: I'm really intrigued by this fund. We don't rate it yet, so it's more of a watchlist fund as you say it; it's not a buy yet. But manager Steve DuFour, people may remember him from Fidelity Equity Income, too--where he had an OK record but was not great--now he's reinvented himself as this growth manager running Fidelity Focused Stock. It's a focused portfolio, but what's really unusual is very high turnover, like 200%. He'll shift in and out sectors rapidly.
So far, he's had outstanding performance. I'm really interested. You don't see a lot of high-turnover focused portfolios. You don't see a lot of managers shifting from value to growth the way DuFour has. It's a really intriguing fund, but obviously that turnover and that focus means there are some real risks there. The other three we talked about I think that make nice core holdings; this is definitely not a core holding.
Benz: Anytime you hear that a manager has shifted styles, isn't that kind of a red flag for you? Why are you okay with this?
Kinnel: He did it through different funds. He used to be on Fidelity Equity Income II (now known as Fidelity Equity Dividend Income). Now he's is on Focused Stock.
Benz: His mandate is different.
Kinnel: Right, so his mandate is different. It's different from a manager whose got one mandate and then changes over to something else. He is doing what's expected of him. I think that's different. But maybe this is just what he's better at; maybe after years of trying to do equity income he realized he's really a growth manager and this is what he's really passionate about. And it seems to be working.
Benz: Russ, thank you so much for being here to share these picks.
Kinnel: You're welcome.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.
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