Christine Benz: Hi, I'm Christine Benz for Morningstar.com. As the year winds down, Morningstar likes to take a look at how some of the biggest mutual fund shops have performed. Joining me to provide a look at the past year at Fidelity Funds is Katie Reichart. She is a senior analyst with Morningstar.
Katie, thank you so much for being here.
Katie Reichart: Great to be here. Thanks.
Benz: Katie, we periodically do these reviews of some of the big firms. You head up our coverage of Fidelity, so you took a look at how Fidelity's funds have performed as a group for the year to date. You looked at performance by asset class. It's early December, so let's take a look at some of these categories starting with U.S. equity.
Reichart: Well, a little bit more than half of the U.S. equity funds have beaten their category averages so far this year. So, that's pretty good. International-equity funds have actually done better--about 80% have beaten their averages.
Benz: So, even though it's been a disappointing year for international investors in general, the funds have had pretty good category performance.
Reichart: Exactly. And on the fixed-income side, about 70% of their funds are beating their averages. Allocation funds have also done quite well--about 95%.
Benz: Looking at the leaders, some of the funds that have performed especially well, can you highlight some of the best performers?
Reichart: Fidelity Overseas (FOSFX) has really been on a hot streak. It's up more than 9% through early December; the MSCI EAFE, by comparison, is not even up 1%.Read Full Transcript
Benz: What's responsible for that?
Reichart: Just really good stock-picking across all sectors. The manager has only been there about three years, but he has shown that he is quite good at stock-picking. The fund also has limited energy exposure, which, of course, helps in a year like 2015.
Benz: Is it also light on emerging markets?
Reichart: Yes, it is.
Benz: Turning to U.S. equity, which funds have been standouts there?
Reichart: Some of the large-growth funds have done really well, including Fidelity Growth Company (FDGRX), Fidelity OTC (FOCPX)--very strong performance there. Even on the small-cap side, we've seen top-decile performance for several funds, such as Small Cap Stock (FSLCX), Small Cap Value (FCPVX), and Small Cap Growth (FCPGX). There have been encouraging results there.
Benz: Where is Fidelity adding value on these funds? Is it in the realm of security selection or if they pick the right sectors?
Reichart: I think, overall, Fidelity has been generally light on energy, which has helped, but it mostly comes down to security selection.
Benz: When we look at laggards within the firm, you point to New Millennium (FMILX) as being a notably poor performer.
Reichart: Yes--and that's had a few things working against it. It's a large-growth fund, but John Roth does take somewhat of a contrarian bend to the fund. Having some more value in cyclical places hasn't worked out well this year. A larger energy stake--he's been a little early there. So, we've seen bottom-decile performance for the year so far.
Benz: Looking at some of the widely held funds, Contrafund (FCNTX) might not be among the firm's very best performers, but it's still having a really good year.
Reichart: Yes, it's had top-third performance this year for its category, and it's continuing to do very well with top holdings like Facebook (FB) and Amazon (AMZN) working out well.
Benz: How about Low-Priced Stock (FLPSX), another fixture in a lot of people's 401(k) menus?
Reichart: That's one where Joel Tillinghast incorporates value leanings and a small-cap tilt. Obviously, those parts of the market haven't really been in favor this year, but it's been holding up pretty well. It also has a meaningful international stake, at about 40% of assets. And I know as those international markets sold off earlier this year, he was looking for some good opportunities.
Benz: In terms of Analyst Ratings, Morningstar analysts look at funds based on a whole gamut of different factors. Let's look at some of the Fidelity funds that saw upgrades in 2015.
Reichart: Well, we saw Fidelity Diversified International (FDIVX); that rating was raised from a Neutral to a Bronze. It has a longtime manager in Bill Bower. The fund had gotten really big earlier in the 2000s, and performance for a while was pretty mediocre; so I think we were a little bit cautious, but we've seen the fund really turn around in the past few years. He has adapted quite well to an analyst team that's been built out over the past five to seven years.
Benz: A related question: We were talking about Overseas performing so well; are you concerned about asset growth at that fund, given how strong performance has been?
Reichart: For now, it still seems like it has a pretty manageable asset base, but it's something we'll definitely keep an eye on.
Benz: In terms of other notable upgrades, Fidelity Short-Term Bond (FSHBX) got an upgrade.
Reichart: Exactly. That one went from Bronze to Silver. It's a pretty conservative fund, and I think that's what you want when you're looking for a short-term bond fund. So, I think it's recognition of Fidelity's strong efforts on the fixed-income side and good risk management.
Benz: I've got it in my Fidelity model bucket portfolios. Let's talk about the downgrades--some of the most notable ones that occurred in 2015.
Reichart: We had a handful of downgrades, and one was Fidelity Leveraged Company Stock (FLVCX), which went from Silver to Bronze. It has a longtime manager; but obviously, as its name suggests, it invests in a lot of companies with a lot of leverage. I think this downgrade was just recognition of some of the volatility that the fund has experienced and how investors have used it.
Benz: It's a hard fund to own because it does tend to be very, very volatile.
Benz: Let's take a look at manager changes. We like to look back on the year prior. It's been a pretty quiet year for the domestic-equity lineup, but there have been a few more changes on the fixed-income side.
Reichart: On the fixed-income side where turnover has been historically quite low, we saw Pramod Atluri leave and one other manager, Kim Miller, who is going to be leaving as well. So, it's a little higher than normal, but the one thing I would say is that all those funds are team managed, and I think that minimizes the impact of any one manager's departure.
Benz: Let's take a quick look at Fidelity's corporate-culture grade. It stayed the same in 2015, correct?
Reichart: Yes, it remained a B. I think we continue to be encouraged by improving analyst and manager tenure at the funds after years of higher turnover there. I think we've seen some of the equity funds handle market hiccups a little bit better in the past couple of years. And of course, fixed income remains a very steady part of the business.
Benz: Why not an A?
Reichart: Well, I think when you look at performance overall of the funds as well as other factors like manager tenure, they are just not quite at the level of other firms that receive an A.
Benz: Katie, thank you so much for being here to provide the recap.
Reichart: Thank you.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.