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How Fidelity Funds Stacked Up in 2013

Christine Benz
Katie Rushkewicz Reichart, CFA

Christine Benz: Hi, I'm Christine Benz for

In a strong equity market, Fidelity Funds held their own in 2013.

Joining me to provide a recap of the year in Fidelity Funds is Katie Reichart. She is a senior fund analyst with Morningstar.

Katie, thank you so much for being here.

Katie Reichart: Thanks for having me.

Benz: Katie, let's discuss the headlines. You looked at the median percentile rankings for Fidelity Funds. How did they stack up both in terms of equity as well as their fixed-income fund performance?

Reichart: 2013 overall was a very strong year for Fidelity. On the equity side, there were a lot of big gainers. On the domestic equity side, the average fund was in its 40th percentile of its category. International equity, 34th percentile. And then fixed-income, of course, had some more challenges on an absolute return basis. But the market definitely favored its more conservative style. So, the average fixed-income fund was in the 39th percentile.

Benz: And I know on the equity side, we usually think of Fidelity as being somewhat growth-leaning in a lot of its funds, so that probably played to its strengths last year as well?

Reichart: Exactly.

Benz: Let's drill into some specific funds within the Fidelity lineup. You brought a list of funds that performed especially well relative to their peer groups. Right at the top of the list would be Fidelity Biotechnology. Let's talk about how that fund's positioning really worked out quite well for last year.

Reichart: It was up more than 65%, so it was a huge gainer for Fidelity and within its category, too. A lot of those picks actually also filtered into some of [Fidelity's] diversified funds. You look at Fidelity Growth Company. It has a very big biotechnology stake. Some picks like Regeneron and Isis Pharmaceuticals did very well for the fund. Growth Company was up 38% for the year.

Benz: Fidelity OTC is another one that you said performed especially well relative to its peers. I'm guessing it had significant technology exposure as well as perhaps some of this biotech exposure, too?

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Reichart: It did. It invests in stocks on the Nasdaq and over-the-counter markets. So, its large tech stake and stock-picking within that sector really helped it. It was up about 46% for the year. And 2013 was a bit of a redeeming year because the fund was on the other side of things in 2012 and didn't do quite as well.

Benz: In terms of funds that disappointed a little bit but still had strong gains in absolute terms, you would [mention] Fidelity Low-Priced Stock, a fund that is widely held in so many 401(k) plans. Let's talk about what worked against that fund in terms of performance.

Reichart: It was up 34%, so certainly nothing to complain about, but it did hold a 13% cash stake, so that certainly weighed on returns. It lagged its Russell 2000 benchmark by about 4 percentage points, but it still has very solid long-term results.

Benz: I want to touch on another fund that is very widely held, Contrafund. How did performance work out for Will Danoff in that fund in 2013?

Reichart: He was just ahead of the peer group norm. He was up about 34% for the year, but he did beat his S&P benchmark by about 2 percentage points. So, decent.

Benz: Let's turn our attention to fixed income. You mentioned that 2013 was a tough year for core fixed-income funds with that interest rate hiccup that we had in the mid-summer. Let's talk about which Fidelity funds performed especially well against that backdrop and which disappointed a little bit.

Reichart: If you look at the muni funds, across the board they were top-quartile. Those funds are run very conservatively, so they thrive in environments like 2013. That was coming off a year like 2012 where they didn't do quite as well. But they're just dependable funds. They hold up like investors would expect them to.

Benz: Even though they didn't have strong absolute returns, they really did quite well relative to their peers?

Reichart: Exactly.

Benz: Let's discuss Fidelity Capital & Income Fund, which is actually a pretty aggressively positioned fund. It had a tremendous year in terms of absolute returns as well as relative performance in 2013.

Reichart: That fund was up about 10%. So, it was in the top decile of its high-yield category. It really got an edge because it holds more equities than its typical peer. I think it was almost 15%. So, that certainly gave it a boost in the type of market we had last year.

Benz: I'd like to look at some of the developments at Fidelity Funds in 2013. One of the big ones is that they did a little bit of asset allocating in the target-date lineup, made some changes to make the funds more equity-sensitive. Let's talk about what was going on there.

Reichart: Fidelity Freedom Funds had been more conservative relative to some of its peers, and that's held it back the past several years in performance. Fidelity really was a pioneer of target-date funds in the '90s, and they've lost some market share along the way just with performance and some more innovative competitors coming up. So, they've really invested heavily in the asset allocation group the past couple of years. They did a lot more research. They decided that it's a good idea to up the equities for many of those funds. The change really brings them more in line with their biggest competitors, T. Rowe Price and Vanguard, and they made those changes late in 2013. So we didn't really see much of an effect yet, but I think those funds will hold up a little better in strong markets like we had in '13.

Benz: I guess, on the flipside of that, some investors might be concerned that maybe Fidelity came a little late to the party. After this big equity market rally, you're giving me more stocks; thanks a lot.

Reichart: Right. Exactly. But given the outlook for bonds, that [move] could still be very important.

Benz: There were some manager changes as well within the Fidelity lineup. Some of these, you think, are pretty notable. Let's talk about a few of those.

Reichart: First, Fidelity Dividend Growth, which had been a Silver-rated fund run by Larry Rakers. He never really took a traditional dividend approach to the fund. It was more of a growth fund, and he'd done very well there, but Fidelity recently has decided to try to make its funds align with their investment objectives. So, Larry Rakers is going over to the asset allocation team, and they brought on Ramona Persaud to run Dividend Growth. She runs Global Equity Income at the moment, which is a relatively new fund. So, you can definitely expect that fund to have more of an income-dividend feel to it going forward.

Benz: So, more of a focus on income-producing securities and maybe in turn a higher payout than it has had historically.

Reichart: Right.

Benz: Fidelity Advisor Capital Development is another fund that saw a manager change in 2013. Let's talk about what was going on there.

Reichart: It had mediocre results under Harlan Carere for the past several years, so they brought in Matt Fruhan, who has a stellar record at Fidelity Large Cap Stock, and he's going to run this fund similarly to Large Cap Stock. That's an upgrade for shareholders, but investors should be aware that his style is a little more large-blend-oriented than large-growth-oriented. So, if you bought it to fill a growth part of your portfolio, you might want to reassess that.

Benz: Katie, thank you so much for being here to provide this overview of what was going on at Fidelity Funds in 2013.

Reichart: Thanks, Christine.

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