Christine Benz: Hi, I'm Christine Benz from Morningstar.com. As 2014 winds down, many Fidelity funds have enjoyed solid or better performance. Joining me to provide a recap of the year at Fidelity is Katie Reichart. She is a senior analyst in Morningstar's manager research group. Katie, thank you so much for being here.
Katie Reichart: Thanks for having me.
Benz: Let's start by discussing some of the fundamental things going on at Fidelity--some of the news coming out of Fidelity over the past year. Manager changes have definitely cooled down relative to years passed, and you think they are doing a better job on the transitions when managers leave. Let's talk about a recent manager change, though, that did in fact prompt a downgrade of the fund when the manager switch was announced.
Reichart: Fidelity Small Cap Value (FCPVX) was recently downgraded from Silver to Bronze. Chuck Myers had run it for several years. He is handing that off to his comanager Derek Janssen, and Myers will actually still be around next year helping out. So, by the time Janssen is running it solo, he'll have been with Myers for about three years. So, that certainly is a different tact from what Fidelity has taken in years past. We did downgrade it, though, because Janssen doesn't have his own record running money, and so we're just being a little cautious there.
Benz: You and the team also spend time evaluating a firm's corporate culture. You grade them based on their corporate culture. In 2014, you did make a change, upgrading Fidelity's corporate culture. Let's talk about the change you made and what prompted it.
Reichart: They were upgraded from a C to a B for corporate culture, and I think they've just taken a more thoughtful approach with certain things like manager transitions. They have put a lot more emphasis around creating better value and equity-income teams. I think that will help the investor in the long run. Then, of course, their fixed-income efforts continue to be very strong. So, there is recognition of that, too.Read Full Transcript
Benz: As I mentioned at the outset, the firm's funds, when you look at their performance relative to their peer groups, it was actually a pretty good year for Fidelity in aggregate. I'm hoping you can take this asset class by asset class. Starting with domestic equity, it was a pretty tough year for active management, and Fidelity is pretty well known for having a lot of actively managed funds, but they actually did quite well relative to their peer groups.
Reichart: They did. About two thirds of Fidelity's domestic-equity funds beat their category averages.
Benz: And in international, was there kind of a similar percentage?
Reichart: There was a very similar trend there.
Benz: A little less impressive when you look at fixed income. And we really like the fixed-income piece of the Fidelity lineup, but performance wasn't quite as strong. Let's talk about the number and also what you think drove that performance level.
Reichart: More than half beat their peer group, so I think that's good. And I think with Fidelity's fixed income, it tends to be a little more risk-conscious, and I think long term that works out well, but not necessarily every year.
Benz: And then the Fidelity family also has a big presence in the multi-asset-class funds. Let's discuss how those funds did relative to their peer groups.
Reichart: About 60% beat their category averages, so that's good. And they have recently made a lot of adjustments in their target-date series. So, we'll be watching those developments closely.
Benz: So, drilling in a little further, let's take a look at some of the funds--especially the larger funds that have generated really strong performance this year. You mentioned Fidelity OTC (FOCPX) and Blue Chip Growth (FBGRX) are both having good year so far, at least through late December.
Reichart: Yes. Those are both funds that have beaten their peer groups and also their benchmarks in a year when it was kind of tough to do that. They have done very well with a lot of tech and consumer names--Keurig Green Mountain (GMCR), Facebook (FB), Apple (AAPL), and even some airline picks. I'd also throw in Fidelity Growth Company (FDGRX) run by Steve Wymer. He has had a pretty good year as well, with some of those same names and the health-care stake there certainly helped.
Benz: Fidelity Puritan (FPURX) is another very large fund that's also having a really good year. Let's talk about the drivers of performance there.
Reichart: That's a Bronze-rated moderate-allocation fund, and the manager overweighted equities, which was certainly the right call, and he did pretty well with some growth picks as well.
Benz: Over on the fixed-income side, Fidelity GNMA (FGMNX) and Government Income (FGOVX) have both had strong years relative to their peer groups. What has driven performance there?
Reichart: Just good old mortgage selection. And I would say more broadly on the taxable side, I think they don't make a lot of big duration bets and I think that that's helped in a year where some managers have made some calls that have gone wrong.
Benz: Over on the flip side, looking at some of the firm's funds that haven't performed as well, at least in relative terms, they have had decent absolute performance. [Let's talk about] a few of the biggies here on this list of funds that haven't had their best year so far in 2014. Let's talk about Contrafund (FCNTX). This is one that appears in so many people's portfolios.
Reichart: Well, it's up over 7%, year to date. So, it hasn't done terribly, but it just hasn't gotten as many stock picks right and it has just looked a little sluggish. It's been around the middle of the large-growth category this year.
Benz: Also, Low-Priced Stock (FLPSX) not having its best campaign. Let's talk about that issue.
Reichart: Well, it has a big foreign stake--about a third of its assets. So, that's been a big headwind. And Joel Tillinghast hasn't been seeing a lot of good values in the market nowadays, especially in small caps, which is the area he likes to dig into. So, he has a lot of cash, and that's been a headwind, too. But he is coming up on his 25-year anniversary, and I certainly wouldn't bet against him for the long run.
Benz: Has Fidelity articulated a succession strategy for him?
Reichart: They have a group of managers running a small sleeve of that fund right now. It doesn't total a huge percentage of the assets, but I would expect that that might signal--
Benz: That they are thinking about it.
Reichart: --that they're thinking about it, and perhaps it would be one of those people or team of people.
Benz: I know size has always been an issue with this fund. Let's talk about whether you think size is potentially going to drag on performance.
Reichart: It is challenging, especially in a market where there's just not a lot of good buying opportunities. And you see that with the cash stake that's grown and has been a drag. So, it is still open to new investors. I don't think it has seen a ton of inflows, but it is a concern.
Benz: More broadly, Katie, I'm wondering if you can talk about Fidelity in terms of the fund flow sweepstakes. We've seen these very strong flows going into passively managed products--Vanguard being a big beneficiary of that. How does that affect Fidelity? I assume that they have been seeing, potentially, some redemptions on some of their actively managed funds. Has that affected the extent to which their funds are resourced? Historically, it's been a very well-resourced firm from the standpoint of analysts and so forth.
Reichart: I'd say Fidelity certainly has seen some headwind, since they are known as an active equity shop. They haven't seen very strong flows. But from a resources standpoint, they haven't felt any pain, and I haven't seen any unexpected turnover in the investment staff.
Benz: And another thing: You noticed that quietly Fidelity has a super index fund lineup of its own.
Reichart: People think of them as an active shop, but they have the Spartan funds, which are Gold-rated and great index options. They've partnered with BlackRock to roll out some passive ETFs, and they have also launched a couple of actively managed fixed-income ETFs recently.
Benz: Katie, thank you so much for being here to provide this wrap-up.
Reichart: Thanks for having me.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.