The Best of Fidelity's Brokerage Platform
A contrarian guide to No Transaction Fee funds.
A contrarian guide to No Transaction Fee funds.
A version of this article appeared in the July 2006 issue of Morningstar's Fidelity Fund Family Report, our monthly newsletter dedicated to helping Fidelity investors find superior long-term investment opportunities. To review a risk-free trial issue of our Fidelity Fund Family Report, click here. Fund Family Reports on Vanguard and American Funds are also available.
Like many of you, I have a Fidelity brokerage account. Also like many of you, I don't use it just to buy Fidelity funds. A single fund company can't excel in every market niche, and in any case, I think it makes sense to diversify among fund families.
I have picked through the No Transaction Fee (NTF) funds on Fidelity's platform, which you can buy without paying a $75 fee, and will share my favorites with you here. Of course, Fidelity provides its own fund picks from outside the family. Some of these are great, but I think their selection process, which screens funds by their three-year risk-adjusted returns (Sharpe ratio), is too backward looking.
By now you know that my colleagues at Morningstar and I adhere to the contrarian school of investing. We believe that the funds poised to outperform in the future are often the very ones that have struggled in the recent past. I'll therefore emphasize funds and fund groups that I think can go from laggard to leader. And I'll select funds using factors I think are predictive, such as experienced management, sound and consistently applied strategies, and low fees. In the interest of sharing the largest number of picks with you, I'm not going into great detail on each fund. For that you'll have to read individual analyst reports.
Domestic Large Cap
Let's start, as good contrarian investors should, with the most down-and-out broad fund group. Since the bear market that started in 2000, small has beaten large, and foreign has pounded domestic. That tide will turn eventually. In fact, it may be turning as we speak.
I've already identified the Fidelity large-cap funds that I think make especially good picks for the coming years, foremost among them Dividend Growth (FDGFX). Fidelity's brokerage platform also has several excellent large-cap funds from outside the family available NTF. You won't find ABN AMRO/Montag & Caldwell Growth (MCGFX), Dreyfus Appreciation (DGAGX), or Mosaic Investors (MINVX) on Fidelity's Fund Picks list because they've lagged over the past three years. But all three boast experienced management teams, run concentrated, blue-chip-heavy portfolios, and pay more attention to valuation than most peers. They're also reasonably priced. I think the next few years will look a lot better than the last few for each.
I was also excited to see that Clipper Fund (CFIMX) is available NTF. This fund recently came under the management of Chris Davis and Ken Feinberg of Davis Selected Advisors. The duo, who took home Morningstar's 2005 Domestic-Stock Manager of the Year Award, has successfully run large-blend fund Selected American Shares (SLASX) for years now. And they've significantly lowered the expense ratio at Clipper.
When it comes to aggressive-growth investing, I have four favorites. First, it's hard to deny the talent of Tom Marsico. Both Marsico Growth (MGRIX) and the more concentrated Marsico Focus (MFOCX) are available NTF. I wish these funds were cheaper, and I'm getting concerned about how much money Marsico is running, but he's adept at spotting companies benefiting from broad trends. Nor can you ignore Marsico's former employer, Janus. Despite scandal and bear-market troubles, there's still a lot of talent at that shop. Janus Fund , run by the thoughtful and disciplined David Corkins, is the pick of the litter, in my view. A third great large-growth pick is Constellation Sands Select Growth II (PTSGX). Chesapeake Core Growth (CHCGX) is a fourth appealing growth fund (you'll find it listed under Gardner Lewis Asset Management). Though the fund is a little pricey for my taste, I love the research-intensive process, the fund's fine long-term record, and the fact that managers Whit Gardner and John Lewis, as owners of the shop, aren't likely to go anywhere anytime soon.
Large value has had a good run, but there's a superb NTF fund that I think will prosper if growth comes back. It's not on Fidelity's Fund Picks list because performance has stunk in recent years, but Oakmark I (OAKMX) (or the more focused Oakmark Select I (OAKLX)) will look better when high-quality stocks come back into favor. Manager Bill Nygren, winner of the 2001 Morningstar Domestic-Stock Fund Manager of the Year award, is one of the best in the business. Ron Muhlenkamp's eponymous Muhlenkamp Fund (MUHLX), which blends macroeconomic analysis and excellent value-sensitive stock-picking also has core holding potential. For classic value hounds, I like Sound Shore (SSHFX) and Weitz Value (WVALX). Both funds require a $10,000 minimum, but you're getting disciplined, value stock-picking processes, proven management, and low fees.
Smaller-Cap Funds
Many of the best of these funds (including Fidelity Small Cap Stock (FSLCX)) have closed to new investors, after years of stellar gains. I'd take that as a sign to approach this asset class with caution.
But I still think it makes sense to have smaller-cap exposure in your portfolio. Among small-cap NTF funds, I like Neuberger Berman Fasciano . This is an offering that's posted poor relative returns in recent years. But I have a lot of respect for manager Michael Fasciano's process. This fund is likely to be a better all-weather vehicle than some of the hot shots that have ridden the small-cap wave. Fees are reasonable and the fund's asset base remains nimble.
You can't ignore arguably the best small-cap shop around, even if several of its funds have posted big gains. Royce Value Service (RYVFX) and Royce Value Plus Service (RYVPX) both have superb management teams and proven processes, and will likely hold up well if small caps slow down.
The rest of my domestic-stock picks are mid-cap funds. Wasatch Heritage Growth is a great contrarian pick--a mid-cap fund that has struggled out of the gate but is advised by a high-quality shop. Less contrarian but equally stellar is Buffalo Mid Cap (BUFMX), run by Kansas City-based Kornitzer Capital Management. On the more aggressive side is Turner Mid Cap Growth . And for mid-growth fans with $10,000 to invest, my favorite of the bunch is Brandywine Advisors .
If you're looking for something less aggressive, I have a great NTF pick: FAM Value (FAMVX). The fund has lagged in relative terms and therefore isn't singled out by Fidelity, but it's a terrific offering. The managers at little-known Fenimore Asset Management pay close attention to valuation, build their portfolios without regard to indexes or peers, and look for secular growers, which will help if cyclicals fall from favor.
Mid-value is the least contrarian hunting ground in the mid-cap space. I'm not sure Fidelity Fund Pick Janus Mid-Cap Value (JMCVX) can continue its hot streak. But this fund, subadvised by a boutique called Perkins, Wolf, McDonnell & Company that specializes in turnaround stories, is a winner. I also like TCW Value Opportunities (TGVNX), a flexible value fund that is willing to delve into busted growth stocks.
I want to mention two superb NTF funds that fall into mid-cap categories but are really all-cap funds that can serve as something of a one-stop shop, at least so far as market-cap diversification is concerned. They are from the two different ends of the style spectrum. The first is Third Avenue Value (TAVFX), run by the octogenarian Marty Whitman ($10,000 minimum). The second is the growth-leaning Marsico 21st Century (MXXIX), run by Corey Gilchrist, who has a more flexible asset base than Tom Marsico.
Foreign
One of my favorite foreign offerings, Harbor International (HIINX), is a Fidelity Fund Pick. Another stellar option is lesser-known UMB Scout Worldwide . Run by the low-profile James Moffett since 1993, this fund boasts a superb long-term record built on patient and creative stock-picking. It's also reasonably priced, reminding investors that they need not pay a premium price for a foreign fund.
Artisan International (ARTIX) is another winner. But since Mark Yockey won Morningstar's International Fund Manager of the Year Award in 1998, the fund has attracted lots of assets. It's still a great fund, but not quite as dynamic as it once was. I think of Harbor International Growth (HIIGX) as Artisan International five years ago. The creative James Gendelman of Marsico Capital Management still has the flexibility to buy plenty of mid-cap and emerging-markets stocks. Plus, that fund has a good tax situation because former management incurred lots of losses.
Like their domestic counterparts, foreign small-cap funds have been on a tear, and many of the best are closed. But one of my favorite funds in this space is still open, is available NTF, and should hold up well if the asset class slows. That's Westcore International Frontier , which has a solid management team, a sober strategy, and, uniquely for this group, a flexible asset base. A second pick in this space is Forward International Small Companies . I also like the all-cap Artisan International Value (ARTKX). Like foreign small caps, emerging markets are coming off a long rally, but for strong-stomached, long-term investors SSgA Emerging Markets is a solid fund.
Other Fund Types
When it comes to fixed income, it's hard to beat Fidelity. There are two NTF standouts, though. Loomis Sayles Bond (LSBRX) is tremendous total-return fund that goes anywhere--high grade, low grade, domestic, and foreign. I have a similar level of conviction in Metropolitan West Total Return (MWTRX).
I'm not a huge fan of many sector or regional funds because I think they're hard to use and often unnecessary. That said, I would point out that several offerings run by the excellent Asia-oriented boutique Matthews are on Fidelity's NTF platform.
Asia has been hot lately, though, so I'm wary. And I'd be similarly cautious about alternative asset classes like real estate and gold. For long-term investors, though, I'm a fan of the recently reopened Third Avenue Real Estate Value (TAREX) and American Century Global Gold (BGEIX). Finally, for socially responsible investing types, you can't do much better than Pax World Balanced (PAXWX). It's pretty much a one-stop fund.
Like you, I'm always on the look out for more good NTF funds. If you think I missed a gem or disagree with one of my picks, by all means let me know at dan_lefkovitz@morningstar.com.
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