Consistency Key With 529s

Janet Yang: Hi, I'm Janet Yang, a fund analyst with Morningstar. Today I have with me Andrew Dierdorf with Fidelity's 529 portfolio management team. Very recently Fidelity started offering multifirm investment options, and in the industry, they're commonly known as open architecture plans.

Before, Andrew, we get into kind of the details on the Fidelity multifirm offerings, can you maybe give us kind of a high-level overview of why investors are interested in open architecture and these multifirm options?

Andrew Dierdorf: Sure. I think historically with our 529 portfolios, we've really had two flavors. One is a Fidelity-only option that had active-managed funds in it; and second was a Fidelity index strategy that had passively oriented or index funds in it. I think we heard from our customers, both individual participants as well as our state partners, that there is a real interest in having the open architecture option, as well, a best-in-class kind of multimanager approach toward building the portfolio. So, it's really all about client choice, and fortunately at Fidelity we're in a position where we can deliver these different options to meet the client demands and meet the participant demands in terms of the interest that they have for different types of portfolios.

Yang: Even with strong shops such as Fidelity, it’s hard to have all investments kind of firing on all cylinders at once. We found when we've talked to investors and advisors that they are interested in multifirm, open architecture plans because they will allow them to have access to best-in-class managers and theoretically give them better returns, better performance. So, our research has actually shown that there is kind of a disconnect between reality and theory. A lot of times on average the open architecture options are underperforming their closed architecture options. Some of that might be fees. Sometimes they're usually more expensive. Can you maybe go into what your kind of return expectations are for the Fidelity options versus the multifirm options?

Dierdorf: Sure. I think at a very high level the objective for the multifirm portfolios, the Fidelity active portfolios, and the Fidelity index portfolios, they are all very much the same, in that participants when they open a 529 account or start investing for college savings are really trying to help their beneficiaries get to college savings successfully, accumulate as much assets as possible while being very conscious of risk and particularly downside risk along the way. So, for a return expectation, the way we build the portfolios is very similar across all three strategies. We're trying to deliver that return to get the college savings in the most thoughtful and risk-conscious way possible.

I think one big difference with multimanager [strategies] is that the universe of managers that we can pick from is a lot lighter, a lot broader, and so you have a lot more options for diversification. And when we think about how we deliver that return over time, the multimanager, the multifirm product gives us more diversification in different parts of the portfolio, more diversified strategies that hopefully will produce some more consistent and risk-conscious performance streams over time.

Yang: Could give us an example of where you chose a Fidelity option and where maybe the non-Fidelity option was the better way to go?

Dierdorf: Yes. I think a good example of the first point where we chose a Fidelity option is in the money market space. With money market funds there is the highest standard in terms of trust, management, and confidence when you invest in the money market fund; that stability of the net asset value is so important. We have great pride on our money market team at Fidelity; we have great conviction in what they do. That trust element is so important, and we've seen that kind of play out in the last couple years as money market funds have continued to come under more and more scrutiny. So, for the multimanager product, the active product, and the Fidelity index product, we have the Fidelity money market fund as one of our anchor holdings in the portfolio across all three.

Conversely, in the U.S. equity space, we've taken a much more diversified approach toward portfolio construction. The Fidelity active option has Fidelity managers in the portfolio. The multifirm portfolio has some Fidelity managers but also a number of other managers from outside firms. So, it's a lot more diversified in the types of managers we have, the types of strategies that they have, and how they'll perform in good markets and bad markets. Again, coming back to the idea of more consistent performance over time, I think having these different managers in the U.S. equity portfolio should deliver that more consistent performance stream over time.

Yang: Thank you very much, Andrew, for your time today. For Morningstar.com, I'm Janet Yang. Thanks for watching.