Will This Fidelity Experiment Work?

In recent years, Fidelity has tried a few approaches to fund management that aren't in keeping with its long history of focusing on star managers such as Peter Lynch. For example, some of its stock funds are now run by teams of half a dozen or more portfolio managers who control separate chunks of assets (a practice American Funds has used with great success for decades). 

Another trend at Fidelity that's gaining steam is a move in the opposite direction: Rather than sharing the load at a single fund, solo fund managers are increasingly being given a second fund to run with a different mandate. Most of the additional assignments among current Fidelity equity-fund managers have been doled out since Brian Hogan was named president of the equity division of Fidelity Management & Research in April 2009. He's a big believer in this approach; he managed large-value offering  Fidelity Blue Chip Value (FBCVX) from 2003-06 and  Fidelity Worldwide (FWWFX) from 2002-05 and says the multiple mandates made him a better, more well-rounded investor. 

Taking On Bigger Workloads 
The latest examples include Scott Offen, who was tapped to run large-value fund  Fidelity Equity-Income II (FEQTX) at the end of October and still manages  Fidelity Value Discovery (FVDFX) and Fidelity Advisor Equity Value (FAVAX); James Morrow, named manager of  Fidelity Equity-Income (FEQIX) in October and still skipper of  Fidelity Advisor Diversified Stock (FDTOX) (as well as  Fidelity Advisor Equity Income (FEIRX), which he took over in April); and Jeffrey Feingold, who took over  Fidelity Magellan (FMAGX) in September and continues to run  Fidelity Trend (FTRNX) and Fidelity Large Cap Growth . 

To varying degrees, Offen's and Morrow's new charges require them to look at stocks through a different lens than they had until recently. That's in contrast to many multiple-assignment managers, who either apply the same investing strategy to companies of a different size or run a more- or less-concentrated version of their current strategy. At Value Discovery and Advisor Equity Value (which are managed identically), Offen has a lot of flexibility--he can buy stocks of any size, doesn't have to limit sector bets versus benchmarks, and doesn’t have a dividend requirement. Value Discovery and Advisor Equity Value have landed in the mid-blend and large-blend categories since he began managing them in 2002 and 2006, respectively. With Equity-Income II, Offen now runs a more traditional value fund--much like the equity portfolio of  Fidelity Strategic Dividend & Income (FSDIX), which Offen has managed in a large-cap-heavy, dividend-focused style since late 2010. (He previously ran it similarly to the other two funds.) Offen must keep Equity-Income II's sector weightings within 3 percentage points of those of the Russell 3000 Value Index, and he's charged with generating a dividend yield 50% higher than the S&P 500's before expenses. Portfolio information for Equity-Income II since Offen took over and reshaped the fund isn't available yet, but based on Strategic Dividend & Income's equity sleeve, the portfolio will likely have a distinctly different look from those of his two blend-oriented charges. 

Morrow, meanwhile, has managed Advisor Diversified Stock since 2006, mixing primarily growth and cyclical plays (it's a large-blend fund and previously landed in large-growth) going through short-term struggles. For eight months, he's also run Advisor Equity Income, a fairly traditional large-value fund. Its equity portfolio looks significantly different from Advisor Diversified Stock's; the fund owns 180 stocks and shares only 76 of them with Advisor Diversified Stock. True, the fund also owns the convertible debt of some of Advisor Diversified Stock’s other holdings, but Advisor Equity Income’s convertibles sleeve (which is run by comanager Adam Kramer) comprises less than 5% of assets. Morrow will now ply the same value-and-converts approach at the much larger Equity-Income. 

In Feingold's case, the additional workload shouldn't be as substantial. Trend and Large Cap Growth have virtually identical portfolios. At the end of October, six weeks after Feingold took over Magellan, that fund had about 76% overlap by assets with Trend, and 137 of its 196 holdings in common with Trend. But Magellan’s $16 billion asset base will make it difficult for him to invest substantially in the mid- and small-cap stocks that helped drive his success at the other two funds (which have just $1.2 billion between them). 

Other multiple-assignment managers include John Roth, who's run the all-cap  Fidelity New Millennium (FMILX) for five years and took over  Fidelity Mid-Cap Stock (FMCSX) in February 2011, and Tom Allen, who has managed  Fidelity Advisor Mid Cap II (FIIAX) since 2004 and took the reins of Fidelity Advisor Global Capital Appreciation (FGEAX) in February 2010. About half the holdings in Roth's two funds overlapped, while Advisor Global Capital Appreciation held only a third of the stocks in Allen's Advisor Mid Cap II charge. 

Stretched Too Thin? 
Fidelity's culture makes these assignments different--and arguably more challenging than they would be at most other firms. While managers at other shops have regularly run funds with different mandates, Fidelity's managers typically steer a fund alone. And while they have a huge research team at their disposal, those analysts serve a large number of managers with a wide variety of investment styles. Many fund managers work at smaller, more focused shops, where more help may be available for a particular investing style, or in teams where the workload can be spread out. At American Funds, some managers are asked to run different styles at multiple funds. But most of those skippers run fairly concentrated portfolios and don't need to keep track of 200 or more stocks. For their part, Fidelity managers such as James Morrow say they're not overly taxed by their new assignments. Then again, fund managers tend to be a driven, confident bunch willing to take on big workloads--one reason why fast-growing funds often close their doors too late or not at all. 

There is at least one certain benefit to Fidelity's strategy: It should result in fewer portfolio-manager changes at its funds. Too often at the firm, a manager replacement at one fund has triggered several more changes as managers are shuffled around to ever-larger funds. Fewer managers changes means fundholders don't endure as many strategy shifts, which result in higher transaction costs and often bigger capital-gains distributions. (Hogan is also addressing this issue with the aforementioned team-management strategy.) 

Approach With Caution 
But will Fidelity managers' additional assignments affect returns? There's not much history to go on at this point. At Fidelity Blue Chip Value and Fidelity Worldwide, Hogan eked out slight victories over the typical large-value and world-stock funds (an annualized 0.2 percentage points at each fund). He lagged his benchmark at the value fund but beat the global benchmark with Worldwide. Tom Soviero, who has managed  Fidelity Leveraged Company Stock (FLVCX) since 2003 and  Fidelity Convertible Securities (FCVSX) since 2005, and managed  Fidelity Advisor High Income Advantage (FAHDX) from 2000-10, has beaten his typical peer at each charge--and by a wide margin at the first fund. But his performance at each looks modest on a risk-adjusted basis. Finally, the managers who have been given another mandate during Hogan's tenure as president have short track records at this point. Tom Allen has struggled mightily at both Fidelity Advisor Mid Cap II and Fidelity Advisor Global Capital Appreciation since taking over the latter in February 2010, but that's only a 22-month stretch. 

Ultimately, investors shouldn't automatically shy away from these funds. Keep in mind, though, that successful multimandate skippers need to be especially good at managing not only money but also their time.