Fidelity's 2018 Winners and Losers

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. After a strong 2017, some of Fidelity's largest funds are having a year to forget so far in 2018. Joining me to provide a recap of the past year at Fidelity is Robby Greengold. He is an analyst in Morningstar's manager research team.

Robby, thank you so much for being here.

Robby Greengold: It's my pleasure.

Benz: Robby, let's talk about performance across the Fidelity lineup starting with domestic equity. You averaged, or you took a look at all of the funds in aggregate and saw that the typical fund is underperforming its peer group so far in 2018. What's working against the firm's lineup?

Greengold: It's quite a reversal from last year. As you said, 2017 was really excellent, particularly for the large-growth space. But this year, through mid-December or so, about two thirds of the large-growth funds have been underperforming their category averages.

It's really due to the positioning from last year kind of carrying on this year, some of the large stakes that they've had. Some of their excellent stock-picking from last year, particularly in the technology and consumer spaces. Some of those names have rolled over. You think of a name like Facebook, Nvidia--those are names that are down roughly 20% this year through mid-December and that's had a big impact on some of the really big funds at Fidelity such as Fidelity Contrafund.

Benz: Let's talk about that one. That one is widely owned. I know a lot of our viewers pay attention to it because they own it. Some of the technology stocks I would assume those have been problem spots for the portfolio?

Greengold: A bit. The fund hasn't been a total disaster, Contrafund. It's just kind of middling this year. The really large stake in Facebook is a notable detractor. The fund continues to own it. Manager Will Danoff still continues to have conviction in the name, but it's hurt this year.

Benz: Growth Company kind of a similar story? I know that's always a very aggressively positioned fund. I am guessing the some of the same themes would hold there, but maybe even be amplified.

Greengold: Right. Yeah. Manager Steve Wymer, he did really well last year holding a big stake in Nvidia which did really well. But this year, as I say, it's come down and that's hit the fund a little bit. But we rate both funds Silver. It's pretty short period to be measuring them, but this year hasn't been so great.

Benz: Let's talk about Low-Priced Stock while we're on the topic of large funds. It's not a growth fund, but it too has not had its best year.

Greengold: Right. We've talked about some of these stocks that haven't been doing well, but still when you look at the market's performance, growth stocks still are in favor or they have been in 2018. That's not the focus of Low-Priced Stock. Joel Tillinghast, he's more of a value investor and his style has not worked well in this environment.

Benz: Certainly, the bifurcation between growth and value, when you look at the whole year, growth has really outperformed even though it's been lousy lately.

Greengold: One other thing is that Joel Tillinghast uniquely positions his portfolio with a relatively heavy stake in Japanese equities that's been a disadvantage this year.

Benz: Let's look at some of the allocation funds, these are the funds that blend stocks and bonds together. How are Fidelity funds doing relative to their peers within that category?

Greengold: It's kind of middle of the road. Doing a simple analysis, about half of the allocation funds are beating their category averages, half of them are underperforming. You look at a fund like the Fidelity Freedom Target-Date Series--that has not done particularly well this year. It's tough to point to a single detractor.

Benz: You think international overweighting there may have hurt a little bit.

Greengold: They had a relatively high stake in international stocks which have done relatively poorly when you compare that to the U.S. market. But then you have a fund like Fidelity Puritan which has done quite well in 2018, and that's because they have been overweight equities, relatively light stake in fixed income. It's now a Neutral-rated fund, previously Silver. But it's done well because of their positioning.

Benz: Let's take a look at fixed income. That marketplace, too, has been pretty tumultuous, it's been tough sledding for a lot of funds there. But the firm's funds, the firm's fixed-income funds are actually doing a little bit better relative to their peers.

Greengold: It's true. More often than not these fixed-income funds at Fidelity are holding up relatively well during a tough year for fixed income. We continue to like that team quite a bit.

Benz: You hinted at one of the downgrades. The Fidelity Puritan getting downgraded from Silver to Neutral. Let's talk about that, because you noted that performance has been quite strong.

Greengold: We thought very highly of the manager, Ramin Arani, who unfortunately isn't going to be with the fund anymore. His successor, Dan Kelley, he's a bit of an unknown. He has shown bouts of success managing some equity funds, such as Fidelity Trend, but this is kind of a new area for him. He hasn't managed an allocation fund before. Right now, our conviction needs to build in his ability to execute on this strategy. So, for now it's Neutral.

Benz: I remember Ramin Arani was around when I was an analyst. He's certainly been around the firm for a while. Fidelity Advisor Small Cap another fund that has received a downgrade to Neutral from Bronze. What's going on there.

Greengold: Its another manager departure that is a loss for sure. Jamie Harmon, who had been managing that fund for a long time, he'll be stepping off next year. His successor will be a manager named Jen Fo who doesn't have much of a management track record. She's been at Fidelity for quite a few years now, but mostly as an analyst. It remains to be seen where she takes that fund.

Benz: On the upgrade side of the ledger, Fidelity Small Cap Discovery was already a medalist, it was at Bronze, it's going to Silver. What do you and the team like there?

Greengold: Our confidence is building in that manager there, as it is at Fidelity International. Those are two funds that we've upgraded from Bronze to Silver. It's simply the result of us getting to know these managers better and our confidence in their skills, really just becoming bolstered there.

Benz: Let's talk about fund flows. Starting with active equity, it looks like Fidelity is still in redemption mode there.

Greengold: Continuous redemptions, particularly in the large cap equity space no surprises there, but that's not …

Benz: And not a problem exclusive to Fidelity by any means, it's really industry-wide.

Greengold: Right, right. Fidelity continues to experience heavy redemptions in their active space, their actively managed funds. They continue to gain share in the passively managed space. The Fidelity 500 Index fund which we rate Gold, for example, that continues to attract assets. Fidelity is pretty aggressive on pricing.

Benz: Well, certainly with the zero priced ETFs that it launched this summer, I mean that's the ultimate expression of that.

Greengold: Yes, in August they launched their first two zero expense index funds, and then they launched a couple of more in September. That approach has really just captivated the industry.

Benz: And driven prices down across the industry or helped drive prices down further. Robby thank you so much being here to provide this recap.

Greengold: Thank you Christine, I appreciate it.

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