Growth Stocks Lift Many Fidelity Funds in 2017

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Amid a strong environment for growth stocks, several large Fidelity funds have notched very strong returns. Joining me to discuss these and other developments at the firm is Katie Reichart. She's an associate director in Morningstar's manager research group.

Katie, thank you so much for being here.

Katie Reichart: Thanks for having me.

Benz: Let's talk about some of the funds that have delivered really strong performance so far this year, in part because growth investing has come on so strong.

Reichart: Fidelity Growth Company is one that certainly jumps out. It's at the top of the large-growth category. Steve Wymer takes a little bit more of an aggressive approach. A lot of tech names in there that have done really well, but some of these like NVIDIA, which was a huge winner in 2017, he's owned that since 2008, so it really shows how he's able to go down the market-cap spectrum, buy some of these promising names. Hold on and then see the results, even years later.

Benz: Contrafund also having quite a good year.

Reichart: Right. It's up a lot versus its S&P 500 benchmark. Will Danoff's done really well with some of the tech names like Facebook and Amazon, but then others like Estee Lauder have done well, too.

Benz: Low-Priced Stock, not a growth strategy, certainly. Let's talk about what's been working well for that fund.

Reichart: Joel Tillinghast is obviously a value investor. He kind of goes across the board and looks for value everywhere. Some of the larger-cap names that he's owned for a while, like UnitedHealthcare, have paid off this year. Some of his international picks too, especially in Japan have done really well.

Benz: What's interesting to me Katie, you always run performance asset class by asset class looking at how funds have done relative to their category peers. It's interesting you just talked about how some of the big funds have performed very, very well, but when you look at all of Fidelity's diversified domestic equity funds, just so-so performance so far in 2017.

Reichart: Yeah. I'd say you'd see about 42% of diversified U.S. equity funds beating their category averages, so not great.

Benz: They have a lot of funds.

Reichart: They do.

Benz: I think that dilutes things a little bit.

Reichart: Agreed. I think it kind of bogs down when some of the other funds might not be having as good of year in other areas like some of the core or value funds.

Benz: Looking better though on an asset-class basis, international equity, fixed income, and allocation--the funds in all of those groups are beating their peers here.

Reichart: Yeah, 60% to 70%.

Benz: Let's talk about some of the funds that have experienced recent ratings changes from Morningstar's analyst team.

Reichart: On the fixed-income side, we saw longtime manager Bill Irving move over to the Asset Allocation Group at Fidelity. That's one where our analyst put some of his funds under review. Two of them came out with the same rating as before, Mortgage Securities and Ginnie Mae maintained their ratings. But the government income fund that he was one of the managers on was downgraded from Gold to Bronze. It wasn't necessarily just because of his departure, because I think the fixed-income team handles those changes very well, but also partly its expenses weren't as competitive against some peers. Expenses have kind of trended down in the peer group.

Benz: We brought some funds under coverage and they received new ratings. Four funds receiving medalist ratings. Let's talk about those.

Reichart: First, Small Cap Growth is rated Bronze. Patrick Venanzi has run that since 2011. He's executed pretty well. Small-cap has been an area where Fidelity's done fairly well, but it is a higher-turnover strategy, so investors should be careful in taxable accounts of that one.

Benz: Hold it in a tax-sheltered account if you're interested in it. Select Health Care, Select Technology, and Real Estate Income also coming online with new ratings. Health Care at Silver, and Tech and Real Estate both at Bronze.

Reichart: I think Health Care and Tech are really Fidelity's bread and butter on the equity side. They just have very strong teams, especially in Health Care. That analyst team has been very steady, so they've just made a lot of good picks over time, and in Technology, too. That manager's been running the fund for over a decade, so he's pretty experienced.

Benz: There have been some manager changes. Let's talk about Fidelity OTC. That's a large fund that saw a significant manager change in September.

Reichart: Yeah. Gavin Baker left Fidelity, and he had a really good record, so I think it is unusual, obviously, to see that type of departure, but I think there could have been some personnel issues there that have been reported. I think the takeaway is they're bringing in Chris Lin to run it, long term. Temporarily he's going to run it with Sonu Kalra, who used to run this fund several years ago, as kind of a joint effort while Chris Lin gets up to speed. It's kind of almost like two transitions. There'll be another hand-off down the road. The good thing is Chris Lin was the sector head for Technology, so that obviously makes him well-suited for the role in that respect, given the hunting ground for that fund.

Benz: Right. And I know you and the team don't just stop by looking at who is the named manager. You also try to keep tabs on the staff supporting the managers. Let's talk about some changes in the analyst ranks that you've been watching.

Reichart: I think one thing that Fidelity has done a better job at over the past decade is getting experienced analysts in certain seats, especially at the sector head level. I think that's really helped provide some consistency. This year we saw two changes. One was Chris Lin taking on this promotion, so that's explainable. The other was on the consumer side where there was a change at the sector head level. I think that's just something we watch, as well as turnover within those sectors. We saw somewhat of above-average turnover at the analyst level in the consumer sector and cyclicals and on the energy team. That's just something we're watching because sometimes those moves can be a little disruptive.

Benz: Another manager change that had been much more expected had to do with the fixed-income side. Let's talk about that, because we like Fidelity's fixed-income shop quite a bit.

Reichart: Christine Thompson is retiring as CIO after a really long and great career there. She named two co-CIOs, Jamie Pagliocco and Robin Foley. It's been very well telegraphed. It's a really steady team there, and I think they plan well for these types of changes, so no big concerns there.

Benz: How about flows, Katie? I know Fidelity actually has quite a good suite of passive products. Investors have definitely been gravitating in the passive direction. How is Fidelity doing on the flows front?

Reichart: Year to date they're seeing inflows as a whole. That's largely driven by some of these passive funds, and then also on the fixed-income side. They've been really competitive on price for their passive offerings, so that's important. But they are continuing to see outflows from the active equity side of the floor. Partly just this environment.

Benz: It's just been a tough environment for active strategies. Katie, thank you so much for being here.

Reichart: Thanks for having me.

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