Target-Date Deep Dive: Fidelity

Susan Dziubinski: Hi, I’m Susan Dziubinski with Morningstar. This is our second video in a series taking a deep dive into some of the more popular target-date providers. Because target-date strategies are the default option in many employer-sponsored retirement plans, they are key players in many investors’ portfolios. Today we’re diving into Fidelity’s target-date series with Jason Kephart. Jason is the strategist in Morningstar’s multi-asset manager research team.

Jason, thanks for being here.

Jason Kephart: Thanks for having me.

Dziubinski: Today we're taking a look at Fidelity. How does Fidelity rank in terms of assets among target-date providers?

Kephart: If you pool all of Fidelity's target-date fund assets together, they're the second biggest. They've got about $365 billion in total assets. And that's about 13% of the overall market share. But they do have a couple of different series. And what we're seeing is a big shift from Fidelity Freedom--which is kind of its flagship series, it was the first one to launch--to Fidelity Freedom Index. I think a lot of this is being driven by fees. Fees are really driving a lot of flows in target-date funds. And you're seeing this shift within the house at Fidelity of a lot of assets moving from the higher-cost Fidelity Freedom series to the lower-cost Fidelity Freedom Index series.

Dziubinski: Let's talk about the different series available at the house that you referred to. One's an index option, one's an active option, the Freedom one, are there others and how are they different?

Kephart: They've also got a blend series, which is, as you'd expect, some active, some passive. The fees come kind of in between. And the idea with any blend series is you want to keep costs low but you don't want to give up all your potential upside from active management. If you really believe in those active managers. In the blend series, you'd be a little more picky on where you want that active exposure. Fidelity Freedom, it's all active, so you get the firm's really well-known equity managers and--I don't know if they're as well-known--their bond managers, but we hold them in very high regard. We think they're some of the industry's best. And in the blend series, you give up a little bit of the active equity, but you're keeping a lot more of the active bond exposure. And that really keeps costs in check but also gives you a lot of that potential upside.

Dziubinski: So the Freedom series is still the largest series right now. So what would you say are the benefits there? Is it largely the strength of their active management?

Kephart: It is. That's the bet you're making when you're picking that over Fidelity Freedom Index, which is essentially a bare-bones, index-only version of it. So you'd expect performance to be driven mainly by the security selection of the underlying managers. And also, within the blend series and the active series, the target-date managers will do some tactical bets. For a while they were overweight emerging-markets equities versus their glide path. Where in Fidelity Freedom Index, you see much more like a Vanguard, where you're just getting cheap, broad exposure with minimal or no tactical bets or anything. One thing we do like that they do in Fidelity Freedom Index is they layer in a little long-duration, high-quality bond exposure. Long duration is one of the best defenses against equity market sell-offs, like significant ones, like we saw in the first quarter of 2020, fourth quarter of 2018, or financial-crisis-type situation. That's been proven to be really good insurance. And we like that they include that in that series, whereas the other index-based series like Vanguard or BlackRock LifePath Index don't get as nuanced on the bond side.

Dziubinski: Of these three series, the Freedom series, the index series, and then the blend series, what are sort of the drawbacks of each of them or the negatives? Maybe that's too strong of a term, but maybe things that investors should be aware of?

Kephart: Yeah. I think with Fidelity Freedom, one of the challenges we've had in getting more confidence in the series is there's a lot of overlap in the active equity sleeves. They have a lot of managers with overlapping mandates and exposures. So, you lose a little bit of that active management there, because there are just so many overlapping securities that kind of offset each other or kind of wash each other out. I think that's been our one qualm with the Fidelity Freedom series. It is also around 50 basis points, so it's kind of on the higher end of target-date fund expenses. Fidelity Freedom Index, we like a lot. It's at around 9 basis points for its cheapest share class. And it's kind of like a Vanguard situation, where you are going to get very broad exposures that should really help you grow your nest egg over time at a really low cost, and very few surprises. With Fidelity Blend, we don't cover that series yet, but it's on our radar. You'll probably see us initiate coverage soon. But that's one where you get almost the best of both worlds. We tend to like these blend strategies because they do deliver some active management with very low costs, which I think does give you an edge over the long run, especially when you have bond managers like Fidelity's.

Dziubinski: Well, Jason, thank you so much for your time today and for the deep dive into Fidelity's target-date series. We appreciate it.

Kephart: Thanks for having me.

Dziubinski:: I'm Susan Dziubinski with Morningstar. Thanks for tuning in.