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By Christine Benz and Katie Rushkewicz Reichart, CFA | 04-02-2015 02:00 PM

3 Upgrades for Fidelity Funds

We recently raised our Analyst Ratings for Fidelity Overseas, Intermediate Bond, and the Freedom Index target-date funds.

Christine Benz: I'm Christine Benz for Morningstar.com.

Fidelity has made some changes at the top in recent years. Joining me to discuss these and other recent developments at the firm is senior analyst Katie Reichart.

Katie, thank you so much for being here.

Katie Reichart: Great to be here.

Benz: Let's discuss some of these changes at the top, starting with new CEO Abby Johnson.

Reichart: Abby was named in late 2014 to succeed her father, Ned Johnson, who remains as chairman. I think the change was expected. She'd taken on increasing responsibilities over the years. She is overseeing a lot of the business lines, and it seemed like a natural ascension.

Benz: Let's talk about what's going on in some other parts of the company. There is a new head of fixed-income investing.

Reichart: Nancy Prior is now the head of fixed income, and she replaces Charlie Morrison, who is now overseeing the whole asset management division. The asset management division has seen a bit of turnover in that role the past decade, but I think Morrison is a good fit. He is a Fidelity veteran; he started as a bond analyst in the '80s, ran some money, and then eventually ran the successful fixed-income department. I think it is hopefully a good move.

Benz: Let's talk about some of the fund manager changes. Fidelity Blue Chip Value had a manager change. The value-oriented part of the shop is an area that you and the team have been watching closely in recent years.

Reichart: Yes. Fidelity is obviously known as a growth shop, and they have put more efforts into the value side of the business in recent years. That's resulted in some management changes. Blue Chip Value was previously run by a manager who followed a very deep-value strategy, owned a lot more speculative fare than you might expect at a blue chip value fund.

Sean Gavin took over in late 2014. He has had a good record at Fidelity Value Discovery. So, hopefully, he can tone down the risk a little and make it a little easier for investors to own.

Benz: Did Value Discovery have a similar complexion to what you expect this Blue Chip Value Fund to have?

Reichart: Yes, I would anticipate that.

Benz: There have also been some changes in ratings over the past quarter. Let's discuss some of those. They are all upgrades, the three that you want to discuss. Let's start with Fidelity Overseas and talk about the factors driving its recent upgrade.

Reichart: Fidelity Overseas was upgraded from Neutral to Bronze, and its manager has only been in place for about three years-- not too long. But we've been very impressed with his thorough bottom-up process. It's value-oriented, quality-driven, and the fund has earned strong risk-adjusted returns versus its category and the MSCI EAFE.

Benz: Why not rate it even more highly? You're going to watch this manager a little longer, is that the idea?

Reichart: Exactly. He doesn't have a big track record elsewhere, so we're a little cautious, but we try to be forward-looking. We do want to recognize that he has a good process, and we'd expect the fund to outperform in the long term.

Benz: Fidelity Intermediate Bond is another fund getting an upgrade. Let's talk about that ratings change.

Reichart: There wasn't anything specific driving it--just that it ticks a lot of the boxes we like to see, so we upgraded it from Bronze to Silver. It has low expenses, a solid management team, and a good risk-conscious process. The fund doesn't take a lot of interest rate risk or invest much in high yield. So it can lag at certain parts of the cycle, but over the long term it's a very strong choice for conservative bond investors.

Benz: I know we have always been very enthusiastic about Fidelity's muni funds, but it seems like slowly but surely we are liking the taxable-bond lineup more as well.

Reichart: I think they have very good efforts in place, and they have a strong team and a strong process.

Benz: Another lineup of funds that saw their new ratings come into effect were the Freedom Index Funds--not to be confused with the Freedom Funds that consist mainly of actively managed funds. Let's talk about the rating in place there.

Reichart: We initiated coverage on those for the first time in 2014, and the Freedom Index Funds are now rated Silver. They benefit from low expenses; in 2014, it was actually the cheapest target-date lineup out there.

Benz: Even cheaper than Vanguard.

Reichart: A little cheaper. We'll see if that holds true going forward.

Fidelity has capable indexing operations, and they have put a lot of resources into their asset allocation team the past couple of years. That's resulted in some glidepath changes, notably making the lineup a bit more equity-heavy. That's helped recently. We'll see going forward how it works.

Benz: If this lineup is even cheaper than Vanguard's, and we've had Vanguard's target-date lineup at Gold for a long time, why not lift this fund to Gold from the get-go?

Reichart: The performance score for this index series is currently rated Negative just because it was lagging peers for a long stretch, and that was mostly due to the conservative nature of the glidepath.

Benz: So they were less equity heavy than a lot of their peers, and that hurt them.

Reichart: Exactly.

Benz: And they ramped up the equity weightings, when? Last year?

Reichart: Last year. They put a lot of research into that and changed some of their capital market assumptions, and they did miss out on a big part of the bull market.

Benz: Katie, thank you so much for being here to share your insights. A lot of people own Fidelity Funds. They always like to hear what's going on at the firm. Thank you.

Reichart: Thanks for having me.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.

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